達美航空 (DAL) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines' first quarter 2007 financial results conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

Neil Russell, the Director of Investor Relations for Delta Air Lines.

Please proceed, sir.

Thank you, operator, and good morning, everyone.

Thank you for joining us to discuss Delta's first quarter 2007 financial results.

With me in Atlanta and speaking on today' call are Jerry Grinstein, Chief Executive Officer; Ed Bastian, Chief Financial Officer; and Jim Whitehurst, Chief Operating Officer.

Also joining us for Q&A are Glen Hauenstein, Executive Vice President of Network and Revenue Management; and Mike Campbell, Executive Vice President of Human Resources and Labor Relations.

Before we being, please note, this call is being transmitted live via the Web and is being recorded.

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

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

Today's discussion 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 in a material manner from the forward-looking statements.

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

We will also discuss certain non-GAAP financial measures.

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

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

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

Thank you, Neil.

And good morning, everyone.

Thank you for joining us today.

It's been almost two years since hosting one of these calls.

The fact that we're talking to you today about results for the first quarter reflects the tremendous amount of work that has been accomplished by the entire Delta team over the last 18 months.

And the results we announced this morning reflect this change.

Delta's first quarter operating income was $155 million and the operating margin was 3.7%, an improvement of 8 points or $330 million excluding special items.

Last week, we announced that the Company received overwhelming support approving our plan of reorganization, with over 95% of ballots cast in favor of our plan.

That fact sets the stage for our confirmation hearing, scheduled for Wednesday this week, April 25.

We are confident that the process will move smoothly towards Delta's emergence from bankruptcy on April 30.

And shortly afterwards, we will once again be trading on the New York Stock Exchange under the ticker symbol DAL.

So this is a very meaningful time for everyone here at Delta.

As we prepare for a successful emergence from Chapter 11, there is tremendous momentum building from the transformation and restructuring that is continuing to move ahead.

Let me summarize these changes.

Financially, we reduced costs, renegotiated contracts with our vendors, streamlined the fleet, and upon mergence will have significantly reduced our debt.

Our plan calls for net debt to be down by more than half by the end of the year to $7.6 billion.

The end result; best in class CASM, best in class balance sheet.

In our network, we rebalanced our capacity mix, by maximizing existing assets, to grow our international business.

At the same time, we have expanded our domestic footprint and increased fees for these international markets.

Operationally, we have vastly improved our on-time and customer satisfaction performance.

Delta is taking dead aim at being tops in customer satisfaction.

In addition, Delta's product as been enhanced by upgrading aircraft interiors, adding in-seat entertainment and using technology to improve our customers' experience.

This is a continuing and ongoing process.

Delta's approach to its restructuring was not typical of most companies.

It was not simply to cut costs and go back to doing business as before.

From the start, Delta's plan was to re-engineer the business top to bottom.

It is clear, we and our coworkers have accomplished that goal but achieving that goal is just the beginning.

We believe these changes are building value for our future shareholders.

In fact, we expect to emerge at the end of the month with the second highest market cap in the industry.

Our plan for 2007 calls for an estimated $800 million in pre-tax income, excluding reorganization items and fresh-start adjustments.

There is very little history of companies exiting bankruptcy and expecting to post results like this right out of the gate.

So, it's a good time to pause, to say thank you to the entire Delta team, from the front line to the back office.

It is real privilege to work beside these people every day.

These accomplishments, positioning Delta as an industry leader, could not have been done without each and every one of our Delta team members.

They have stepped up at every critical moment.

It would be understandable after all we have been through for the people of Delta to be too preoccupied to give their all but the energy and focus that the people of this great Company give each and every day is on our passengers and not on other distractions.

We are much stronger financially, operationally, from a product perspective and in our relationships with our people.

And Delta is ready to return to its place of leadership in this highly competitive industry.

Let me take a moment to acknowledge our current Board members and thank them for their commitment to help position Delta for the future.

They gave enormously of their time and wisdom as the Company worked through Chapter 11.

It is also a good time to welcome our new Board members, which was announced a few weeks ago.

We look forward to working with them when they take their positions upon our emergence.

And with that, I'm going to turn it over to Jim Whitehurst, our Chief Operating Officer, to discuss the revenue and operating performance for the quarter.

Thank you, Jerry, and good morning.

Our March 2000 quarter revenue results were ahead of plan.

In particular, for the month of March, revenue performance showed considerable strength, driven by higher yields and record load factors.

As a result, our passenger revenues for March 2007 quarter were up 6.5% on the capacity increase of 2%, driven by strength across all entities.

These numbers exclude an $83 million accounting adjustment that was made in the March 2006 quarter.

Domestic revenues were flat year-over-year on 5% lower capacity.

Lower capacity was offset by a 5% increase in yield and a 0.8 point increase in load factor.

This drove a 6% increase in domestic RASM.

International capacity was up 24% year over year and represented 31% of total capacity for the quarter.

International revenues were up 32%, outpacing capacity growth, and resulted in a RASM increase of more than 6%.

The new markets we've entered are performing very well and that is reflected in these numbers.

One of the cornerstones of our business plan is to close our RASM gap to our peers.

We talk a lot about this and we are making real progress in this area.

That is something we want everyone to know.

Consolidated length of haul adjusted passenger RASM for the March 2007 came in at 95% of the ATA reporting carrier's average.

Consolidated domestic length of haul adjusted passenger RASM came in at 99% of average in months of February and March.

Both of these numbers are records for Delta.

Our goal continues to be to reach 96% of industry average for 2007 and to be at industry parity by 2009.

Closing the RASM gap is built on four key principles; domestic capacity, rationalization, international expansion, targeted growth via fleet additions and the power of the Atlanta hub.

You can see these principals at work in our March quarter performance.

In the first quarter of 2007, domestic capacity was down 5% year-over-year and we expect it to be down 2% to 4% for the full year compared to 2006.

This follows a 13% reduction in domestic capacity that we implemented in 2006.

On the international front, Delta continues to have a competitive advantage due to our ability to expand international service with our existing fleet.

We expect to complete the transition of eight 767-400 aircraft from domestic to international service by the end of the second quarter.

This will largely fund our international growth for the balance of the year.

Building on our international expansion, we've recently announced new routes from Atlanta to Prague, Vienna, Seoul and Lagos.

And from our hub in JFK to Tel Aviv, Pisa and Bucharest.

We'll also be adding frequencies to London-Gatwick and Shannon from JFK.

In addition, we remain focused on improving our JFK facility, a key component of our international operations.

Looking ahead, we will take delivery of 10 ETOPS 757 aircraft in the back half of 2007 to be used in strategic markets, mostly international.

And last but not least, the Atlanta hub is a powerful component in our network.

An interesting fact to consider is that we have a 5 to 1 service advantage over the next largest carrier in Atlanta.

We continue to find opportunities in Atlanta and we will have a record number of departures here this summer.

Turning to our operational performance for the quarter.

Our employees continue to deliver excellent operational results and remarkable customer service.

We continued the momentum from January and February and had strong operational performance in the month of March, despite our weather challenges.

Looking at February year to date DOT results for on-time, the latest period reported, Delta placed first of the network carriers.

And based on the exchange data with our competitive set, we expect to have a similar result in March.

We continue to focus on other key operational metrics, in particular, improvement in baggage handling and operational performance at our contract carriers are our key operating priorities for 2007.

We are very close to achieving our goal of returning Delta to the top of industry in customer satisfaction.

Now looking ahead to advanced bookings.

At a system level, May through July looked load factors are well ahead of last year.

Domestic advanced bookings are strong and in addition, capacity reductions are driving additional loads.

On the international side, advanced bookings are where we would expect them to be given our continued growth and our desire to manage yields for the summer.

In Latin and Pacific markets, advanced bookings are behind last year though yields in these entities are looking particularly compared to last year.

And now I'll turn the call over to Ed to talk about our financial results for the quarter.

Thanks, Jim.

Good morning, thank you for joining us today.

There's no doubt these are extraordinary times in Delta's history and we're glad to be sharing this story of Delta accomplishments, as well as our view towards what 's ahead in the near future.

Clearly, the magnitude of change that is occurring here is dramatic.

A good way to measure the progress is in the two-year snapshot.

Over the last two years, passenger unit revenues are up 20% from the March 2005 quarter levels.

Mainline non-fuel CASM, x-special and reorg.

items, is down 10% compared to the March 2005 quarter.

And our net debt will be reduced by more than half as a result of our restructuring.

In fact, if you utilize current fuel prices against March 2005 results, we would have lost $1 billion in that quarter.

Given our current quarter break-even results, we have realized a $1 billion quarterly improvement in just two short years.

While break-even results for our current March quarter are not yet where we want them to be, it puts into context just how far we have traveled in a relatively short time frame.

Looking forward, we are well positioned to build on this momentum as our restructuring continues to take hold.

The financial results we announced this morning are ahead of our plan and reflect the changes that have occurred, driven by the hard work and dedication of the entire Delta team.

Turning to our financial performance, For the March 2007 quarter, Delta reported a net loss of $130 million.

Excluding reorg.

items, Delta's reported net loss was $6 million, essentially break-even and better than the guidance we provided last month to you due to improved revenue performance.

On a pre-tax basis, our results improved by $371 million versus the same period in 2006.

An important note to consider, if all our of interest income, some of which gets excluded as reorg.

items, had been included foreign the period, as it will be upon emergence, we would have reported a net profit of $32 million for this quarter.

Operating income for the March 2007 quarter was $155 million, reflecting a 3.7% operating margin.

This is our fourth consecutive quarter to report an operating profit.

In last year's March 2006 quarter, we recognized $1.7 billion in special and reorg.

items, consisting of $1.4 billion in reorg.

item, and a $310 million net charge for certain accounting adjustments.

This net charge decreased total operating revenue last year by $189 million and increased operating expenses last year by $121 million, which affects several lines of our year-over-year P&L comparisons.

Walking through the $371 million pre-tax improvement for the March 2007 quarter.

These were driven by two primarily factors.

First, an increase in network contribution of $138 million.

This is made up of a total revenue increase of $236 million, offset by the cost of capacity of $98 million.

Secondly, net cost reductions of $235 million in the quarter, consisting of $171 million, driven by the restructuring of employment-related costs; $34 million from aircraft rent and depreciation, driven by renegotiations in the restructuring; and $33 million in FAS 133 gains recorded in non-operating expense.

Consolidated all-in fuel costs per gallon for the quarter was $1.93, which include fuel taxes and the impact of our fuel hedging.

Mainline non-fuel CASM declined in the March 2007 by 9% to $0.0706.

Turning to our balance sheet and liquidity, we ended the quarter with $4 billion in cash and short term investments.

$2.9 billion of which was unrestricted.

In that restricted category, approximately $700 million was related to our credit card hold-back.

EBITDAR for the March 2007 quarter was $518 million, reflecting an EBITDAR margin of 12.5%.

This is almost $300 million and 7 points higher compared to the prior year.

Free cash flow for the quarter was $461 million.

Let me walk you through the components of that.

The operations generated $874 million of cash in the quarter.

These results funded a $311 million increase in restricted cash, which relates to our credit card hold back.

In addition, we had investing activities of $102 million.

That consists of CapEx for the quarter of $155 million, including $131 million for aircraft, mods and parts.

This was offset somewhat by asset sales related to investments and grounded aircraft.

In addition, during the quarter, we made debt maturity payments of $226 million.

And as a result, our ending cash balance grew $235 million during the quarter.

Now, let me turn my comments to guidance.

In the second quarter, we expect system capacity to be up 0% to 2%.

Consolidated domestic capacity to be down 4% to 6%.

And consolidated international to be up 14% to 16%.

For the full year of 2007, we expect system capacity to be up 2% to 4%.

Consolidated domestic capacity to be down 2% to 4%.

And consolidated international to be up 16% to 18%.

We expect mainline non-fuel CASM to be down 2% to 4% in the June 2007 quarter, and down 5% to 7% for the full year.

Our non-fuel CASM reductions are being driven by net reductions in expense of $740 million for the year.

We expect the second quarter operating margin, excluding profit sharing, to be in the range of 11% to 13%.

These projections exclude profit sharing and fresh-start adjustments.

Including profit sharing for the second quarter, we are looking at an operating margin of 10% to 12%.

We expect fuel cost per gallon to be approximately $2.09 for the June quarter and $2.08 for the full year.

And those projections include fuel taxes as well as the impact of our fuel hedges.

Regarding fuel hedges, for the second quarter, we have hedged 48% of our anticipated consumption, utilizing a combination of heating oil swaps and collars, with an average floor of $1.71 and an average cap of $1.91.

In the third quarter, we have hedged 21% of anticipated consumption, utilizing heating oil swaps and collars, with an average floor of $1.76 and an average cap of $1.94.

With respect to CapEx, for the second quarter, 2007, we expect CapEx to be approximately $175 million, which includes $80 million for aircraft spending, including mods and parts.

For the full year of 2007, we expect total CapEx to be approximately $820 million, including $538 million for aircraft spending, which includes mods and parts.

We expect free cash flow for the full year to be approximately $1.2 billion, and we expect full year EBITDAR of $2.8 billion.

We are in the final stages of completing the analysis required to determine fresh-start adjustments that will impact our emergence financial statements.

We plan to file an 8-K by the end of this month that will describe those adjustments, as well as their impact on our financial statements.

We have heard you loud and clear on the need for this and we will get it to you.

Generally, we expect to see a decline in our plans projected 2007 pre-tax income income of approximately $100 to $150 million related to fresh-start adjustments, as well as certain other changes in accounting policies.

In addition, we plan to make changes in the presentation of certain items on the income statement, including fuel taxes, as well as how we report Delta's maintenance in-source business.

These changes are simple reclassification items and have no bottom line impact.

And finally, upon emergence, we will record non-cash compensation expense related to incentive based stock awards.

We expect this expense to approximate $100 million for the balance of 2007, $70 million in 2008, and $40 million in 2009.

Again, we'll be issuing an 8-K by the end of this month to update our impact from these accounting matters.

At our investor conference last month, I also promised to provide clarity about the utilization of our existing NOL's.

We have been able to complete more analysis and wanted to share with you some of our conclusions.

Based on expectations of taxable income through 2007, as well as final settlement of all bankruptcy-related claims, we expect to have NOL's totaling approximately $10 billion when this case is concluded.

As a result, we expect these NOL's to fully offset taxable income at least through 2010.

However, NOL's are limited to offsetting 90% of AMT income.

This results in cash tax payments of approximately 2% of net income beginning in 2008.

The intricacies of fresh-start accounting will require us to record tax expense on the books going forward, even though we will not be paying these taxes.

Because we'll recognize fresh-start accounting adjustments and tax expense that are non-cash in nature, in the future, we'll be sure to provide cash earnings as well as book earnings.

In closing, it's hard to believe than a little more than 18 months ago our outlook was anything but certain.

But the entire Delta team has worked incredibly hard to turn this Company around.

And if it's not clear by now, we are very proud of what we've accomplished and about what that means for Delta's future.

Looking ahead, the focus for 2007 will remain on execution of our plan.

From the people to the product to the financials, make no mistake, we believe in our plan, we expect to achieve our plan and we expect to reclaim our place as the leader in this industry.

That concludes our quarterly conference call.

And at this time, we're happy to take your questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of William Green with Morgan Stanley.

Please proceed.

Yes, good morning.

Ed, I'm wondering if you talk a little bit about the mainline CASM guidance that you're using for 2007?

At the investor day, I think you talked about it dropping 7% x-fuel, and now it's 5% to 7%.

So can you talk about what the change is behind that?

You're talking about non-fuel, Bill?

Yes, non-fuel CASM.

I think at the investor day, you said it was down 7%.

Now, it says here now down 5% to 7%.

We're obviously -- as we're coming out of bankruptcy we're going to have certain costs that are going to be affecting our numbers.

Those legal fees and expenses, that once we're out, will then start hitting operating costs that have been in the reorg.

items.

There will be certain cost attached to some branding initiatives, as well as some maintenance expense we're incurring.

So, going forward, we're certainly sticking to our plan.

We expect the full year, we are going to shoot for that 7%, but we wanted to provide a little bit of cushion for some costs that are going to be coming in.

Okay.

And then can you also talk a little bit about productivity on the labor line?

The FTE's, how should we think about those tracking going forward?

Have we got basically most of the productivity in the numbers now or is there more that you can do after exit?

Well, I think there is going to be more than can we after exit, once we're able to make investments for the future that have long-term paybacks.

As we have been through bankruptcy, we have been limited in terms of the return capability.

So, as you look for greater utilization of technology, looking forward, I do think there's going to be some continued ability to look at head count productivity.

The other thing, as we start to strategically grow, we'll get a certain advantage from being able to bring some juniority back in to the work force.

We've been crippled, as you know, by the increasing costs in seniority in our business.

And with -- a little juniority would help in the balance.

So, and then just last quick question on profit sharing.

That is going to be based on the reported pre-tax or the pre-tax before fresh-start?

The profit sharing estimates I gave you are without the fresh-start adjustments included.

And going forward you'll still calculate it that way, even after you start reporting fresh-start?

That's correct.

Thanks for your help.

Bill, just a little more commentary.

I know a lot of people will say, "hey, a carrier is never going to have a CASM lower than when it first emerges from bankruptcy." I think we're adamant, given where we have been, that we will not let cost creep occur.

Recognize, we had hurricane Katrina.

So, what can you get out in costs in the next six months?

Filing for bankruptcy.

How much costs can you get out in the next six months?

We have not gone through and done a lot of initiatives that have a little longer payback, be those things like winglets, be that technology infrastructure improvements, be that just fundamental process re-engineering at our airports.

Those things all have a longer than six month time fuse.

We now have the opportunity to go after those.

So we are adamant that we will offset any cost pressures as we go forward with some of the longer terms initiatives we'll have underway on the cost side.

Okay.

Thanks for your help.

And your next question comes from the line of Frank [Bullock] with Bear Stearns.

I was wondering if you could maybe talk about the demand environment and if you are seeing any discrepancy in performance in the first quarter?

The domestic and the international entities produce similar RASM growth performances.

And going forward do you see that parity continuing or is there some disconnect between newer markets and existing markets?

Thank you.

This is Glen Hauenstein, and I think the-- we do see a disparity moving forward between acceleration of the international marketplace as well as a relative flattening of the demand on the domestic side.

Of course, we have been able to offset that by the reduction in the domestic offering that we have had in terms of capacity.

So, I think what you're seeing for Delta, which may be a little bit different from the industry, is that we're quite comfortable with very strong domestic unit revenue returns as we go through the summer, as well as accelerating international unit revenues.

Okay.

And how would you compare domestically the markets that have been around for over a year versus some of the newer markets, say, how they have been performing?

Well, certainly the spool for international is a little bit longer than it is for domestic.

So, for example, we're just now eclipsing the big wave of internation expansion we had last summer for Dusseldorf, which is now the first month -- the first time we're encountering a month 13 on a new market.

The RASM for this month is up 45% in a market like Dusseldorf, year over year.

So, we expect to see much higher acceleration in the international.

The domestics, tend to be closer in spool, so three to six months.

You are probably at 80% to 90% of what you'll get as a final market.

I would say we're scratching our heads as well on -- relatively, our domestic looks like strong and we know a lot of other airlines have guided relative weakness.

Recognize we do have a fair amount of shrinkage in the domestic system.

So, we're still trying to understand how much of that is our relative move in capacity versus something else in the markets we're serving.

Okay.

Great.

Thank you.

Your next question comes from the line of Gary Chase with Lehman Brothers.

Please proceed.

Good morning, guys.

Ed, I wondered -- and I apologize, I just haven't had a chance to band out the math here.

I was kind of frantically writing to keep up with you.

You said that with fresh-start you expect to report, I think, a 10% to 12% operating margin, which was inclusive of profit sharing and fresh-start.

Or was that just inclusive of profit sharing?

That was just inclusive of profit sharing.

Okay.

So 10% to 12% --?

For the second quarter, fresh-start obviously is only going to impact two of the three months in the quarter as -- effectively May 1.

We don't have the fresh-start number yet.

Okay.

So 10% to 12% was just impacted by the --?

10% to 12% -- the full year we're expecting -- or excuse me, balance of the year from May 1 through the end of the year, we're expecting fresh-start to be in the $100 to $150 million range.

Okay.

So that was May to the end of the year.

And then on top of that, in addition to it, the stock compensation that you talked about, which is exit related?

That's correct.

Both items obviously being non-cash.

And that's expensing the stock compensation that's part of the plan, and that's included in the 400 million shares, correct?

That's correct.

Just for Glen, or Jim, I think you said it and certainly we perceive it, there seems to be real acceleration in the international revenue trends, as we move in to the first part of this year.

And based on some of the commentary we've heard from you and some others, it sounds like if anything it's strengthening rather than stabilizing or moderating.

I was just curious for your thoughts on what might be driving that?

I think -- when you see what is happening with business, business is not going Miami or to Jacksonville.

Business is going internationally.

So, U.S.

business is occurring all over the globe now.

And the pace of which we are globalizing is accelerating, rather than decelerating.

We see international business demand as a core strength moving through the summer.

I also think a continuing weak dollar, frankly, help us here.

All our costs are demoninated in dollars but a substantial chunk, especially, of our European revenues are denominated in euros.

And given the relatively weak dollar situation, I think it both has a lot of people coming from Europe to the U.S., as well as just relatively with the exchange rate helping our RASM.

That's true for the industry.

For the Atlantic in particular, do you have a core Europe RASM number or can you give us a ballpark on what that was versus the rest of the system?

We can get back to you.

I don't have core Europe.

I have total Europe, including the new markets and that's a double-digit number.

Okay, guys, appreciate it.

Your next question comes from the line of Dan McKenzie with Credit Suisse.

Please proceed.

Good morning.

Glen, I'm wondering if you could just talk about where you're pulling capacity domestically?

As I look at the schedules for the summer, I'm seeing some capacity come out of Cincinnati but I'm not seeing capacity come out of the other markets.

And maybe I'm just missing something here.

I think we are returning to core strengths, so the areas that we are decreasing our exposure are in a lot of our point-to-point flying.

So, that is coming down.

Cincinnati is coming down.

Salt Lake is coming down.

But what is really driving it is not even number of departures coming down that much because what's driving it is moving the big domestic airplanes, the 300 seat 767-400's offshore and starting to drive down our gauge or our average gauge per departure on the mainline.

And then, given Delta's exit at DFW, where it was the number two hub competitor, as investors look at LAX ramp-up as a hub, what differentiates, say, Los Angeles from DFW, that leads you to believe that Delta is going to be successful there?

And just related to that, what percent of LAX flying right now is a percent of your total domestic flying?

Well, I think a couple of things about LA versus -- I wouldn't say that Delta is expecting LA to be its huge profit center this next year.

But what I would say is, very different than Dallas, is the markets that we have entered are markets that really, for the most part, don't have a competitor or have a weak competitor.

Whereas in Dallas, everything we flew was up against American.

So, if you look at our portfolio of what we're flying in Los Angeles, I think you'll find that there is a lot of uniqueness to it.

The other thing is that LAX has always been similar to New York in that it's been split between many carriers, as opposed to essentially owned by one carrier.

And so, as you look at the next biggest or who the big carriers are in LA, it's a much more even distribution than DFW ever was.

So I think those are things that, in the long run, are going to help us there.

LAX is a very constrained airport as far as growth goes.

And the fact is, we have one of the premier facilities in that airport.

And we have the room to grow, which is also unique to Delta.

So I think all of those things will help us.

And I think it's worth a look to see exactly what we are flying in LA and how much of that is actually unique.

And recognize, we serve more cities east of the Mississippi than any other carrier.

So in terms of the trans-con flying, we serve a lot of cities and those have been very successful.

At some point, building some additional feet on those makes absolute sense.

By the way, in terms of absolute flying, of our domestic system, LA is a little under 6% of our domestic capacity.

And that includes -- half of that is existing capacity going to our hubs.

Okay.

Great.

Thanks.

Your next question comes from the line of Jamie Baker with JPMorgan.

Please proceed.

Good morning, guys.

Quick question, is there going to be any change in how you report revenue after you emerge, particularly as it relates to the frequent flyer liability?

And if so, any guess for how that will affect the year-over-year comparisons?

Jamie, we are -- that's one of the open switches that we're still trying to reconcile with our accountants as to whether we'll be forced to go to the deferred revenue approach.

We're trying to avoid it and we're talking to them about it.

The numbers I gave you, $100 to $150 million full year, includes the expectation that we may have to go there.

Okay.

Even though that's not technically a fresh-start issue, that was folded in that amount?

Yes, in the policy changes, yes.

Okay.

Got it.

Thanks a lot.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Robert Barry with Goldman Sachs.

Please proceed.

A couple of follow ups on the international theme.

Clearly, having a large-gauge to throw at international is an advantage now.

Could you just recap how much more, you may have touched on this in the call, how many more large-gauge aircraft you have now domestic flying that you plan to move?

And then on top of that, I think you said there's 10, 75's coming?

And then beyond that, are there any options you have on large-gauge aircraft in '08 that you could also bring on for international?

Yes, I'll start on that.

After this summer -- we are moving, as we mentioned, eight 76-400's for this summer.

Post this summer, we'll have 13 767-400's flying domestically that over time we would like to move.

We have the 10, 75 ETOPS coming this year.

We also have three more coming in the first quarter of next year, for a total of 13.

We also have February/March deliveries of 777-200 LR's coming next February/March.

And then we have some options in years beyond, in '09 and in's 10.

So, we still have a fair amount of international capability.

The thing I want to emphasize and what really excites us about it is, we are -- the growth will be of two different gauge aircraft.

Our core international fleet is 59, 767-300 ER's.

The 400 gives us gauge flexibility, so we can now fly those in the summer to Europe, in the winter to Latin America.

And then certainly, the 75's will give us an additional gauge flexibility out of JFK for some markets we want to be in or for some smaller markets that we want to initiate service.

So, again, in total, 13, 76-400's, 13, 75's and five firm order 777's over the next three years.

Okay.

The 13, 76's that are left to move off domestic after the eight that going this summer, are those 13 coming this year?

Are they being moved this year?

No, the first conversion to those will be -- we're finalizing the number.

Obviously, we'll wait and see how the summer goes.

Five more of that 13 will be converted next fall and winter for initiation of international service next spring.

Got it.

And then finally, I think you had mentioned that you might be able to update us on your plans for Heathrow on this call.

Sure, we intend to start service on March 30, the first day that we get access.

We still are working with our partners and with other unaligned airlines as we are building a slot portfolio, but we would certainly like to initiate service from our major gateways to Heathrow as certain as possible.

So from Atlanta and JFK.

Certainly.

Certainly.

Heathrow is an important strategic market for us when we look into corporate accounts and our ability to compete effectively in winning corporate accounts.

Heathrow represents nearly 40% of the transAtlantic business travel and not being able to offer that in corporate deals does hamper us.

So for instance, if you look in New York, we currently, by far, serve more destinations than anyone else.

We have solid patterns of service to all the major business markets, yet we don't offer the largest single international market.

So certainly, it's a strategic market for us beyond the route itself, in terms of just our ability to compete effective in corporate accounts.

And so, we are aggressively working on it and we intend to be there the first day.

Got it.

And it is kind of a formality at this point that you'll get the slots and be able to start then or is there still some gray area there?

We feel very confident we'll get them.

I don't want to say it's a formality but we're working closely with our alliance partners and with others.

And we feel very confident we'll be ability to get the slots we need.

Okay.

Thank you.

And your next question comes from the line of Mike Linenberg with Merrill Lynch.

Please proceed.

Good morning, gentlemen.

This is Lily standing in for Michael.

My first question is regarding your regional operations.

Aside from the remaining 15 CRJ-900 aircraft that you will -- you're going to allocate, is that pretty much it in terms of work on the regional side, or are there any more growth or shift in gauge that's going to be anticipated?

Lily, this is Ed, we've got a fair bit of work yet ahead of us with deals that we've struck that we'll be rolling out here over the next couple of years.

Both upgauging aircraft from 40 and 50 seaters to 76 seaters, as well as work with some of our partners.

Also keep in mind that the ComAir restructuring impact is just starting to be felt this quarter in terms of the P&L, So that's probably the one part of the business throughout 2006 that we're most frustrated by was the length of time it took to get the regional restructuring done.

But it's largely done.

More announcements to be coming and more improvements to be seen.

But fundamentally.

if you look at the three-year -- or the plan through 2010, there's not substantial growth in the shell count in the regionals, it's relatively flat.

But there's a lot of churning ing as we take out 50-seater and less aircraft, replacing them with 70 to 76 seaters.

So, there's not shell count growth.

Our shell-count growth is really on the mainline.

But on the regional side there is a substantial shift to more comfortable aircraft with first class, especially on the 76 seaters.

Where we will have fist class on there, which our customers want.

As well as a more comfortable coach experience.

So there is a lot of churn as we upgrade the experience and the product but there's not a lot of change in the shell count currently anticipated in the plans for 2010.

Great.

And the second question is did you guys generate cash from ops every month this quarter or just for February and March perhaps?

We generated cash from ops each month this quarter.

Obviously, March was the largest.

But yes, each month we generate cash flow from operations.

Great.

Thank you so much.

And your next question comes from the line of William Green with Morgan Stanley, please proceed.

Hi, Ed, I just wanted to have a quick follow-up on the cost guidance again.

Do you have an estimated of what consolidated CASM will look like?

I do not have that in front of me, Bill.

We can follow-up offline with you.

Thanks.

Your next question comes from the line of Dan McKenzie with Credit Suisse.

Please proceed.

One last quick follow-up here.

Just relating to the comments about domestic demand being flat.

Is that flat across the entire U.S.

market?

Or is there parts where it's weaker, parts where it is stronger?

And then is that being driven by leisure or corporate or would you characterize it as just demand being flat because of more competitive -- more competitors pricing aggressively?

Or would it be demand flat simply because the economy is weak?

How would you characterize?

If you could just provide some more perspective, that would be terrific.

Well, let me start.

I'll have Glen walk into the details.

I wouldn't exactly characterize domestic demand as flat.

We have actually seen it be relatively strong.

Now, it's on a reduced capacity, so we're seeing, solid builds in load factors going forward.

So I wouldn't call it flat.

I think we were relatively pleased with that.

We're not seeing the same serging momentum we have seen in international but it's certainly better than flat.

Glen, do you want to talk about the regionals?

And to qualify what I was said earlier.

I was saying flat for the industry and that our demand -- because we feel like we're living in a parallel universe right now.

Our demand for domestic is incredibly strong through the summer but we hear everybody else saying that it's down.

So, we're assuming that the industry is kind of flat, just based on what we have been hearing, really, from you guys and from the other air carriers.

But I will say that ours is incredibly strong.

And every day we look and say, "Why are we living in this parallel universe?" And I'm attributing some of that to the fact that we're shrinking while some of the LCC's are continuing to grow and seem to have some problems finding good homes for their airplanes.

What we see is that those same carriers seem to be driving advanced leisure down a little bit.

Now, that seems to be softening out or firming up as we move into the summer when demand peaks and then what we see is very strong business demand.

In terms of regionally, all of our hubs are performing similarly.

In other words, reasonably solid increases in advanced yields in domestic system.

The only exception to that would be JFK, which is up very significantly in the overall demand profile.

Certainly, the advanced bookings are up very solidly.

So, all of them are up but JFK especially is leading the pack, up very, very strong.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.