達美航空 (DAL) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Delta Air Lines second quarter 2007 financial results conference call.

My name is Rob and I will be your coordinator.

At this time, all participants are in a listen-only mode.

We will conduct the question and answer session following the presentation.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Neil Russell, the Director of Investor Relations for Delta Air Lines.

Thank you, Rob, and good morning, everyone.

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

Speaking on today's 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 begin, please note this call 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 transmission of this recording.

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

Today's discussion contains forward-looking statements that represent our beliefs, our 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 these 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 non-GAAP financial 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.

Good morning, and thanks to all on the line for joining us today.

At the time of our last call in mid-April, Delta was preparing to emerge from bankruptcy.

The three months since are notable for important developments for our employees, our customers, and our investors.

On the morning of April 30th, Delta emerged from bankruptcy.

We used that opportunity to unveil a new look and feel for our brand, consistent with the direction the airline is now headed.

Then on May 3rd, Delta returned to the New York stock exchange with its historic ticker symbol, DAL, coming full circle to the place where Delta first listed its stock 50 years ago.

The 20 months spent in bankruptcy protection was by no means a source of pleasure.

It did, though, harden the commitment of Delta people to become again a leader in this intensely competitive industry.

We have not only transformed all aspects of our company, financials, operations, products and corporate leadership, we have also developed a focus, a discipline and a vision that positions Delta well for the intense competition typical of this industry and the inevitable business cycles that require leanness and discipline.

On the financial side, this morning we announced a $1.9 billion pre-tax profit for the quarter.

This includes a one-time gain of $1.5 billion associated with our emergence from bankruptcy.

Excluding reorganization and related items, Delta's pre-tax income was $373 million, a nearly $200 million improvement over the same period last year.

This performance was driven by the restructuring efforts with both revenue improvements and cost reductions contributing to the increase in pre-tax income.

Ed and Jim will provide additional details on that later in the call.

With respect to our operation, our people are continuing to deliver a safe, clean and on-time operation.

In fact, for 9 weeks this quarter and 26 of the past 34 weeks, Delta led the network carriers in on-time performance.

Passengers are recognizing the difference as well.

For the second consecutive year, Delta earned a ranking in the top two among network carriers in the JD Power customer satisfaction survey.

The improvements in Delta's financial, operational and customer service performance are due in no small part to the dedication and determination of the Delta people who maintain their focus on delivering superior customer service.

Because of their efforts to transform and save this fine company, we are pleased to announce that we accrued $79 million under the Delta profit sharing program this quarter.

The results of this quarter expected top-tier financial performance, and exceptional customer and operational metrics are proof that the plan is working.

We are focused on the future.

With continued cost discipline and realizing our revenue potential, which will unlock the value of Delta for our shareholders, which includes our employees.

And speaking of the future, I would like to spend a few moments on that topic, as it relates to my successor.

Given the magnitude of this decision, our new board of directors is taking a deliberate and disciplined approach in the selection process, with a decision likely by the end of the summer.

It's important to remember that we have seven brand-new board members who are learning both the industry and Delta.

When the board is ready and a successor chosen, it will be my time to retire, having had tremendous honor to serve alongside the Delta people over the past four years.

I want to give special praise today for our finance, accounting and investor relations people.

Moving out of Chapter 11 with fresh start accounting is a complicated and frequently confusing time for analysts and investors, but our people have brought clarity and transparency and they have done it with great speed, as you can see by Delta's early report today.

Now I'm going to turn the call over to Ed Bastian, our Chief Financial Officer, to discuss the quarter's financial performance.

Thanks, Jerry.

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

Before I review our second quarter performance, I need to provide a few details on the presentation of our numbers.

With our emergence from bankruptcy on April 30th, we implemented fresh start accounting.

As a result, we are a new reporting entity from that date.

Therefore our results for the quarter are split into the predecessor company results for the month of April, and the successor company results for May and June.

To allow for comparison of our ongoing performance, however, we are presenting combined financial results of the predecessor and successor companies for the second quarter of 2007.

It is these combined results that we'll discuss throughout the call.

As Jerry mentioned, this morning Delta reported a pre-tax profit of $1.9 billion for the quarter, which includes the one-time gain of $1.5 billion due to our emergence from bankruptcy.

Excluding reorganization and related items, Delta's pre-tax income was $373 million, a $194 million improvement over last year.

Our net income was $274 million.

Using the 394 million fully diluted shares post-emergence, that net income equates to $0.70 per share.

This compares to first call consensus for Delta of $0.59 per share.

Jim and I will go into more detail, but it's important to note that these positive changes come from both revenue improvements and cost reductions.

As expected, the momentum of our restructuring continues.

Now, for the details.

The $194 million improvement in pre-tax income was driven by four major factors, not including fresh start accounting, which I will summarize separately at the end.

First, our network and revenue improvements contributed $150 million, made up of $220 million in revenue enhancements, offset by $70 million from the cost of international and regional capacity growth.

This was the result of a 5% unit revenue improvement on one point higher capacity.

In a few minutes, Jim will go into more detail on our revenue performance.

The second source of improvement was from net cost reductions of $75 million.

This represents the year-over-year benefit of restructuring initiatives, offset by certain targeted investments back into our business.

Restructuring benefits included: savings from fleet, airport and contract renegotiations, reduced employee benefit costs resulting from the termination of our pilot pension plan and lower non-operating costs driven by both higher interest income on our improved cash position and lower income cost from reduced interest rates.

These savings were partially offset by investments in our operation, due to the increased demands from a very busy summer, particularly: head count increases at JFK, higher irregular operation costs, and improvements we're making to our baggage systems.

We also incurred costs attached to our rebranding effort and in the quarter also had a $16 million asset impairment charge on our retired flight simulators.

The third source of improvement in the quarter was fuel price, which was $2.05 per gallon and $0.09 lower than last year.

This reduced our fuel cost by $60 million year-over-year.

Note, however, that this excludes a $0.04 negative impact from fresh start accounting, as we will lose the accounting -- excuse me -- benefit of gains on our hedges post emergence.

As a result, our all-in fuel price for the quarter was $2.09.

And fourth, offsetting these revenue and cost improvements was profit sharing expense of $79 million, as Jerry mentioned.

Delta's profit sharing plan pays 15% from first dollar to its employees, excluding its senior management.

Also included in our results for the quarter are two non-cash emergence-related items.

First, fresh start accounting changes drove a $13 million increase in pre-tax income.

This $13 million consists of first, a $42 million increase in operating revenue from the change in accounting for the frequent flyer program, this was partially offset by a $36 million increase in operating expenses from the elimination of the fuel hedges and also increased amortization on intangible assets.

And, in addition, we had a $7 million decrease in interest expense due to the revaluation of our debt obligations.

In addition to those fresh start accounting changes, we also recorded $26 million in share-based compensation expense related to management equity emergence awards.

All in, these changes, both fresh start accounting of positive $13 million and a negative $26 million driven by the share-based compensation expense, resulted in a negative impact on profits of $13 million.

These emergence-related changes increased consolidated passenger PRASM by 0.11 cents, it also increased main line CASM by 0.12 cents, or roughly a full percentage point a piece.

Note that these amounts will grow somewhat in subsequent quarters, as our June quarter only had two months of fresh start and management equity compensation reflected.

During the quarter we booked $99 million in tax expense, but due to our significant NOL carry-forwards, this is strictly a non-cash expense.

For this reason, we're focusing our discussion on pre-tax income.

As a result of our cost reductions and lower fuel prices, main lane CASM decreased by one point year-over-year.

Excluding fuel, profit sharing expense and the negative impact of the fresh start accounting, main line CASM decreased two points to 6.81 cents.

In the current fuel price environment is more important for us than ever to remain vigilant about our hard-won cost structure.

We will not let our exit from bankruptcy divert from us this focus.

We remain committed to our plan of continuing to drive down our mainline non-fuel unit costs.

EBITDAR for the quarter was $843 million, reflecting an EBITDAR margin of 17%.

This is $72 million higher than it was last year.

Turning to our balance sheet liquidity position, we ended June with $3.4 billion in unrestricted cash, driven by a very strong free cash flow in the quarter of $1.1 billion.

Key components include first cash flow from our core operations produced $900 million.

Second, approximately $800 million came from reductions in restricted cash, including the return of the holdback associated with our Visa, MasterCard processing agreement.

Cash uses for the quarter included $400 million in emergence-related outflows, which include cash paid to our employees upon exit from bankruptcy and to fund the tax withholdings on their equity distributions.

In addition, we put $173 million back into our business through capital expenditures, including $119 million for aircraft parts and mods.

These four components resulted all in, in a free cash flow of $1.1 billion for the quarter.

As it relates to debt activity, we closed on a $2.5 billion exit financing facility, consisting of a $1.5 billion in term loans and a $1 billion revolver.

We used the $1.5 billion term loan proceeds to replace our $2 billion DIP loan, thus paying down $500 million of the DIP through cash.

This was the primary driver of our $594 million in net debt maturity payments in the quarter.

Wrapping all that together, our ending liquidity balance grew by $700 million from the start of the year, not counting the $1 billion undrawn revolver we now have available to us.

Looking ahead at third quarter guidance and noting that all of these projections include the impact of fresh start accounting and management equity incentives, we expect our operating margin, including profit sharing costs, to be in the range of 6% to 8%.

Our main line non-fuel CASM, excluding profit sharing to be down one to two points year-over-year and our fuel cost per gallon to be approximately $2.28, all in, including the impact of fuel hedging and the negative impact of fresh start accounting.

Regarding fuel hedges for the third quarter, we've hedged 21% of our anticipated consumption utilizing heating oil collars with an average cap of $1.80 per gallon.

We currently have no fuel hedges in place beyond the third quarter.

With respect to CapEx for 2007, we now expect our total CapEx for the year to be $1.2 billion, which is higher than the $823 million previously estimated.

The major driver of this change is aircraft spending, including deposits on a new mainline 777 aircraft.

It also includes the acquisition of 25 CRJ-100s, which we currently own on lease.

By purchasing these aircraft as compared to lease, we will reduce the total cost of ownership on the aircraft.

And, finally, 14 -- the purchase of 14 CRJ-900s for Comair flying.

As we previously announced, these aircraft will swap out 14 CRJ-100s at Comair, which will exit the fleet beginning in September.

As a result of these changes for the third quarter, we expect CapEx to be approximately $450 million, of which $300 million of that will be in cash.

For the full year 2007, we expect EBITDAR to be $2.8 billion and free cash flow to be approximately $1.6 billion.

These 2007 estimates are in line with our previously established business plan targets.

Also for 2007, we expect our mainline non-fuel CASM for the full year, excluding profit sharing to be down 4% to 5%.

This is lower than the planned 7% reduction, due first to two points of impact due to the fresh start impact, and one point from targeted investments back into our business.

Turning to our stock performance, since emerging from bankruptcy, the stock has performed about as we expected, with some technical pressure from creditors who are nontraditional holders selling their shares.

We also understand the pressure on the stock price that comes from having 33% of our stock withheld for disputed claims.

To that end, we have settled a number of aircraft claims and continue to work towards settlement with other claim holders.

We expect to make a distribution of roughly 20% of what has been withheld at or around the end of this month.

In summary, we're pleased with the results announced today, but even more excited to us -- even more exciting to us is the pipeline of opportunity that we have built over the last few years.

The momentum of our structuring will continue to drive margin improvements for several years to come.

And now I'd like to turn the call over to our Chief Operating Officer, Jim Whitehurst, to give more details on our revenue and operational performance.

Thanks, Ed, and good morning.

As you know, over the last two years, Delta's undertaken a dramatic rebalancing of our network, shifting wide bodies out of the domestic arena and into international.

This strategy continues this quarter and we remain committed to maintaining the momentum.

As a result, domestic capacity was down 5% year-over-year.

We are continuing to focus the network on -- to increase connectivity and improve our feed to our international systems.

International capacity was up 15%, as we continue to capitalize on our first mover advantage and new markets in Africa, Asia and Europe.

On the fleet and network side, in the quarter we completed the transition of eight 767-400 aircraft from domestic to international service there.

There are 13 remaining 767-400s in the domestic system that we plan to move to international service in the next two years.

Also during the quarter we confirmed an order for an additional Boeing 777-200LR, which will be dedicated to our Asian expansion.

On Monday, Delta filed applications to serve Atlanta to both Shanghai and Beijing by 2009.

These two routes will fill critical voids in the air travel market linking the 65 million people of the southern United States to the world's fastest growing economy in China.

Despite serving more worldwide destinations than any other carrier, Delta is the largest U.S.

international airline without nonstop service to China.

We believe we have the strongest route case for the new China services and an award would certainly make Delta a more formidable international competitor.

Also as a result of the Open Skies agreement, we intend to start service to Heathrow in March.

We are currently in negotiations for Heathrow slots and should have an announcement on that soon.

On Monday, we took delivery of the first of 13 extended range 757s, which will go into service this September, the first flying JFK to Shannon.

The others will operate on our domestic system until next summer, when we will have them reconfigured for international service.

And, finally, this quarter we announced an order for 14 CRJ-900 aircraft to replace 14 50-seaters currently at Comair.

These aircraft will be flown in a two-class 76-seat configuration, which will provide a more consistent, enjoyable experience for our passengers across the Delta system.

Now, turning to this quarter's revenue performance, our June 2007 quarter revenues result -- were on plan and were driven by higher yields and record load factors.

Our passenger revenues for June 2007 were up 6% on a capacity increase of 1%, driven by strength across all entities.

These numbers include the revenue increase from fresh start accounting.

Excluding that impact, Delta's passenger RASM increased 5%, in line with our plan and still outpacing the industry average.

In the domestic system, passenger RASM increased 6%, driven primarily by increased load factor, and strong demand continues to drive record load factors going forward.

On the international side, passenger RASM increased 10%.

Yields increased significantly as expected, as many of last year's new markets continued to mature.

As we said, one of the cornerstones of our business plan is to close the RASM gap to our peers, and we're making real progress in this area.

Consolidated length of haul adjusted passenger RASM year to date through May came in at 96% of the ATA reporting carriers average We expect June results in the next few days and we expect that to show a similar trend.

For the month of May itself, on a length of haul adjusted basis Delta's consolidated system's results were at 98% of industry average, Delta's best performance relative to its competition since 2002.

Also in May, consolidated domestic passenger RASM exceeded 100% of industry for the first time since regional carriers were included in the ATA reporting.

Again, this is on a length of haul adjusted basis.

As a reminder, our business plan target was to reach 96% of industry average for 2007, and to be at industry parity by the end of 2008.

Clearly these results show we are on track to meet those goals.

Turning to our operational performance for the quarters, our employees continue to deliver a safe, clean, on-time operation.

In every month this year through May, Delta placed first among network carriers in D.O.T.

on-time performance rankings.

Data for June indicates that in spite of significant weather and air traffic control challenges, we will maintain a very strong ranking.

For that, I would like to sincerely thank my Delta coworkers for their outstanding efforts during this busy summer season.

For the year we've also added baggage performance and regional carrier operating performance to our focus list.

While neither of these is currently performing to where we want them to be, we're clearly making progress and are on track to meet our goals this year.

While there are occasional operational disruptions throughout the system, New York is a particular concern.

We're working very closely with the port authority and the FAA to help redesign New York's air space in an effort to relieve congestion and extensive delays caused by an outdated air traffic control system that cannot respond to growing customer demand.

It's no secret that the 1950's era system has reached full capacity and the controllers are working with antiquated tools.

It's time for the FAA to move swiftly to increase capacity where it can and it's time for congress to overall the ATC system and its funding mechanism.

Without both of these long overdue actions, air traffic delays and cancellations in this busy air space will not improve.

But in the absence of modernization, we are doing all we can to minimize the impact on our customers and our operations.

Now, looking at capacity going forward, in the third quarter, we expect system capacity to be up approximately 1% to 3%, consolidated domestic to be down 1% to 3%, and consolidated international to be up 13% to 15%.

For the full year 2007, we expect system capacity to be up 2% to 4%, consolidated domestic to be down 2% to 4%, and consolidated international to be up 16% to 18%.

These changes are consistent with our transformation plan, as we continue to reduce domestic capacity by moving wide body aircraft to international markets, and using two class 50-seat regional jets to replace one class 50-seaters.

Looking at advanced bookings, at a system level, advanced bookings are solid for late summer and early fall, with August, September and October all booked higher on a year-over-year basis.

Domestic advanced bookings are strong and capacity reductions continue to drive additional loads.

On the international side, advanced bookings are are ahead of last year for August and October and flat to last year for September.

We're seeing particularly strong demand in Latin America.

In summary, overall we expect the remaining summer traffic to be strong and load factors to be higher than last year.

To conclude, echoing Ed's comments earlier on the call, we are certainly pleased with this quarter's results.

We continue to close the RASM gap and at the same time improve our customer service and run a solid operation.

But if we learned anything over the past two years, it's that we must always strive to be better.

So as good as today's results are, we know there's an even brighter future possible for us.

On the network side, we'll continue our international expansion and push for the high profile additions of Heathrow and China.

In our operation, we continue to focus on safe, clean and on time, but include improvements in our baggage and regional carrier operations.

And on the customer side, we're making targeted investments on those things our customers value and will pay for, like in=flight entertainment and lie-flat seats.

Because of this, I think you can see why we're optimistic about the future.

So on behalf of Jerry, Ed and the entire Delta team, we would like to thank our coworkers for their hard work and dedication and determination that have gotten us to where we are, and we would like to thank our customers.

We truly appreciate your loyalty and your business.

That ends our prepared remarks.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) All questions will be taken in the order in which they are received.

(OPERATOR INSTRUCTIONS) Sir, give me a moment while I gather up your first question.

Sir, I have your first question today coming to you from Mr.

Robert Barry.

Hi, guys.

Good morning.

Good morning.

I guess I had a question about the domestic PRASM performance.

I was curious what the puts and takes were there, because it looks like the performance is good and you're certainly outperforming some of the peers, but you're also taking out a lot of ASMs and RASM growth isn't that much more than what would be implied by simply taking out some of the domestic supply.

So are there other pressures you're seeing on pricing or mix that are being offset by factors like moving a lot of the planes out of the U.S.

market or other revenue initiatives?

Well, for starters, we continue to look at our stage length, even our domestic stage length is increasing.

So, in total our domestic being up 6% is still at the top of the industry.

Now, granted, we are relatively shrinking, but if you look, the relative amount of shrinking has decreased over time and we've remained at the top of the industry on domestic passenger RASM, so I wouldn't say we're at all concerned about it or see any relative weakness there.

As we go forward, our relative domestic shrinking will -- it has declined and is continuing to and we still remain at the top.

So, I don't see any particular concerns there, but you do also need to look at stage length, or length of haul.

And just to follow up on that, how would you characterize the pricing and fare environment?

I know there have been a couple of fare hikes now that I think for the most part have stuck.

At the same time, there's always a lot of noise because there's sales going on.

So on a net-net, I mean, do you think that you have gotten any pricing year to date, or have sales and retrenching on price hikes kind of offset that couple of public price hikes that we've seen?

Well, let me start off saying that the couple of months ago, there were some others talking about domestic weakness and they are now -- those same other airlines are now saying things look reasonably strong.

We've seen it relatively strong all the way through.

We continue to see reasonably strong environments.

Obviously, the higher load factors, and as we said, higher advance bookings give us a bit of confidence as we go forward.

Now, we're certainly seeing benefits from the fare increases that -- that we and others have put through, but as you said, there's enough sale activity that even Southwest fare increases, it doesn't drop directly to the bottom line.

That said, I think we're still seeing relative traction year-over-year in our ability to price.

Okay.

Thank you.

Thank you, sir.

We're going to go to a Mr.

William Greene

Yes, hi.

I'm wondering, Ed, if I could get a little bit more color on the CASM guidance.

At the first quarter call, I think you said it would be down 5% to 7% and now we're 4% to 5%.

How much of that is fresh start?

I'm trying to think about how much was comparable.

What would it have been if we had kind of used that former metric?

Did it change at all?

Are you talking about the second quarter or the full year, Bill?

Yes, the full year guidance.

For the full year, the plan -- is I think was 7% reduction in nonfuel CASM.

We're now saying we think the full year's going to be in the 4% to 5% range.

A good two full points of that is due to fresh start accounting.

Fresh start accounting is going to have a bigger impact on the CASM guidance going forward than it did in the second quarter because we only had two months in the second quarter.

And probably one -- and one point of that reduction is driven from increased operational investments we needed to make back in the airline, part of the -- Rob's question earlier and Jim's discussion on the domestic scene is we are seeing very, very high load factors.

If there's one thing we see in the plan, load factor's even higher than what we had planned for.

So that clearly is driving in increased costs back into the operation.

I would say 4% to 5%, including fresh start all in, is our target.

And so when we look kind of at the forward plan that you had put out, then a similar kind of reduction is what we should expect for forward years beyond '07?

Well, I think -- yes, certainly with respect to fresh start accounting, that's correct.

I mean you're going to see -- for example in the third quarter based on the guidance we just gave, I think we're looking at .23% in terms of CASM impact for the September quarter.

So, I think on a go-forward basis, two full points of the fresh start accounting impact is what you should expect.

But we're going to continue to strive to get that full kind of economic nonfuel CASM target to where we told you it would be.

Okay, and then can we just talk -- if I could ask you to talk a little bit more on the fare stuff.

How much of the June performance do you think was effected by the timing of the holiday?

Will we see a sort of impact in July, or do you think this strength is continuing through?

This is Glen Hauenstein.

I think what we saw is that the 4th of July being on a Wednesday really ruined that whole week for business travel.

Having said that, we did significantly higher pulldowns, anticipating that, so we were relatively pleased with our performance for the first week of July.

And moving forward, we do see some yield strength that we didn't see in the second quarter in the domestic arena, so we're optimistic about that as we move into the more heavily business travel season starting post Labor Day.

Okay.

Thanks for your help.

Sure.

Okay.

Thank you.

Sir, your next question is from Mr.

Gary Chase.

Good morning, everybody.

Good morning.

Good morning, Gary.

In the event that we don't have you on the next call, Gerry, let me take the opportunity to say congratulations and best wishes on retirement.

Thank you, Gary.

And now I wanted to ask Ed, you said the -- you're projecting a $2.8 billion EBITDAR number for the year.

Yes.

If I heard you right, is that inclusive of everything, fresh start, profit sharing?

That's all in there.

Okay.

And I guess what I'm really driving at is, I guess I'm a little surprised that the third quarter margin guidance.

I would have thought it would be closer to it 2Q given the international ramp and so on and so forth.

I know fuel takes a bite out of the quarter, but I thought it would still, even with the fuel change, be closer.

And further is if I believe the 6% to 8% margin in the third quarter, the fourth quarter has to be pretty strong, if I'm doing the math right, in order to get you all the way up to $2.8 billion for the year.

So, I guess I was just curious if you could give us some color on kind of what's happening here to the seasonality.

Because it seems a little bit -- well, it's different anyway than what I was expecting.

Well, certainly if you compare Q2 and Q3, fuel is definitely taking a much bigger bite out of the Q3 results.

Our fuel number for the second quarter was $2.09 and our guidance for the third quarter's $2.28.

So that's a pretty, that's a pretty hefty bite.

That alone, I don't have the calculator in front of me, that loan's probably going to be a good couple points.

2%.

Exactly.

With respect to revenue change, third quarter as compared to the second quarter, Glen, Jim.

Well, for starters, we are a little more seasonal even in the domestic arena in that schools in the southeast start back in early August, so we start to see a little more weakness just given where we are earlier than others.

Now, if you look at third -- second versus third quarter, July looks a lot like -- from a revenue perspective, obviously leaving the fuel piece out, July looks a lot like June and August looks a lot like May.

Then September is worse than April, just relatively once school's back in full session and just given the makeup of our network.

Generally, we think the third quarter is a little lighter than the second quarter and then you throw fuel in and that makes the bigger difference.

But it also sounds like you think the fourth quarter is going to be really strong, right, is that a fair statement?

I wouldn't say really strong.

I think it's going to come in in accordance with the plan we put out there.

One other thing, Gary, in the numbers, is fresh start accounting also is effecting that and it's going to have actually a, probably a bigger hit in the third quarter than second quarter, given that we've got the full quarter ramp-up.

That's also probably impacting the margin a little bit there, too.

Okay, and just one last one on that.

In the third quarter -- in the second quarter, you didn't quite have as much frequent flyer benefit as you thought you were going to have from the fresh start change, if memory serves.

I was just curious how the remainder of the year, do you expect to hit the full year target and how does that spread between the third and fourth?

Just so we can kind of parse out at least from a revenue perspective what's happening ex the non-cash.

Sure.

On the revenue front from the fresh start change, we're looking for the third quarter, again, these are forecast of roughly $60 million benefit, and in the fourth quarter, about $50 million.

So $150 million for the full year.

So, again, that is all non-cash and then we got the offsetting factors for both management compensation, as well as the higher amortization, as well as the loss on the fuel, the fuel hedge benefit.

Okay, great.

Congratulations to everybody again.

Thanks, Gary.

Thank you, Gary.

Thank you, sir.

Sir, your next question's going to come from Frank Boroch.

Mr.

Boroch, your line is open, sir.

Good morning, everyone.

I was hoping maybe Glen could talk about the international regions and if you're seeing any changes on the margin from the strength we saw in the second quarter.

The international regions are all performing really at the high end of what our expectations would be, including the new markets, who have all launched with really, really strong initial results.

Certainly leading the pack are some of the things that we're doing into Africa and we'll be adding to that portfolio.

We've already announced that we will be serving Nigeria starting in the fall and establishing ourself as the first mover and leader in Africa.

Also in the middle east, our Tel Aviv market's been doing incredibly well, as well as we just added Dubai and that's also off to a great start.

Our India services are continuing to be strong.

And the core Europe, which is really relatively flat in capacity year-over-year, is up quite nicely in unit revenues.

We're continuing to work.

One of the issues we have is the number of frequent flyers we have on, on the airplanes, and if you are a frequent flyer, you'll be happy to know that there are a lot of seats that we've had in the transAtlantic this summer, and we'll be working to manage those a little bit better next summer for even better performance, we think.

So, we see a lot of upside still on the international.

There's not a single market segment that's not performing well.

How much of that strength do you think is related to FX, and if you -- I don't know if you have for the second quarter the yield figures excluding the FX change.

The FX is a really interesting thing for us.

It's one of the few things where I think low dollar benefits, carriers on both sides of the Atlantic.

For us, though, it's not as big a benefit as you might think, because we are not strong in the European distribution systems, and the ex Europe fares are heavily discounted in order to achieve round trip -- filling the seats round trip throughout the season.

So for us, about 70% to 75% of the revenues are onshore, which means that FX is not a huge impact to us.

And as we try and move -- with the pound at $2 and you look at the fares that the U.S.

carriers are getting, we think there's upside potential if the foreign exchange rates stay where they are today.

Great, thank you.

Okay, thank you, sir.

Your next question is going to come from Kevin Crissey.

Hi, everybody.

Can you talk a little bit about what's happening in Los Angeles and JFK, if you would?

Operationally, I guess.

In what -- operationally?

Yes.

Well, JFK, we obviously had a tough month during June and in fact the reason Joe Kolshak's not on the call, is he's with executives from other airlines and the port authority today as we talk about ways to manage the air space there.

We're clearly not achieving the published arrival and departure rates, and because of that we're having some fairly substantial delays, which have been very, very public.

And so we are working through those.

We've committed to the port and others that we will get a solution, and so we're working through what that is.

Now, naturally, it will be a little better in the fall because everybody pulls back a little bit in the fall, plus there's just -- you get rid of the thunderstorms, which throw a lot of variability in the system.

The FAA has said they will begin the implementation of the new air space in the fall as well.

So we're looking forward to a little bit of relief, but we need to use that time to work on a more permanent solution.

So by the time next summer comes around, we won't have what's going on currently.

We know it's tough for our customers.

We're doing our best to work through that, and we'll continue to do our best to serve our customers while we get that fixed.

L.A., from an operational perspective, we haven't had any material issues there.

So you're asking more what we're doing in terms of network?

Well, I just wanted to hear -- I guess that's a good -- go from that perspective, then.

L.A.

is actually operating quite well.

We've been pleased with our performance there.

We're clearly working to expand our overall feed there.

Delta serves more markets nonstop east of the Mississippi than any other carrier, but until a few months ago -- well, six months ago, we didn't have really a lot of short-haul feed to help make those work and over time build it so we can look at it as a Pacific gateway.

So, we have started doing some of that.

We've been very pleased with the results, both in Mexico, as well as the short haul north-south, and you'll see us continuing to work on that and, again, very pleased with those results.

Okay, and what is probably a little bit tougher question, your total value of the corporation at the moment is still significantly below what had been offered by US Airways.

Will it take a merger?

What's going to -- what's going to take you from where you are today to realize additional shareholder value?

Is it time, or what, what is it that you guys are going to do that's going to make the stand-alone plan more valuable than US Airways bid?

Well, Kevin, when we came out of bankruptcy, the valuation was $9 billion to $12 billion.

Excuse me.

That was put on the company.

And if you look at where the market on the stock today is, we're on the low end of that, probably slightly under that, around $8.5 billion.

Clearly, very different environment with respect to the fuel markets at the time the evaluation was done, fuel was in the mid 50s.

Today it's in the mid70s.

You do have the [M&A] premium that was priced in December, the multiple is not in there to the same extent, so, I think with respect to the business plan and the stand-alone strategy, yes, we're on target.

We're not going to comment with respect to speculation on consolidation going forward.

We are -- we are going to certainly do everything we can to enhance shareholder value.

Is it a criteria that's being looked at when considering a CEO, that someone that would come from a positive view on consolidation?

Kevin, we can't speculate on what our board is deliberating on.

No problem.

Thank you.

Thank you, sir.

Your next question will come from Mr.

Kevin -- Jamie Baker.

We'll go to Mr.

Mike Linenberg.

Yes, good morning, all.

Good morning, Mike.

Just the two questions.

Did -- Ed, I don't know if you threw out a number on the impact of congestion and delays for the quarter.

Since it was -- I think you or Jim indicated that it was a pretty rough quarter, what do you think maybe revenue or cost wise?

Well, certainly -- we didn't throw out a number and it it did impact us on the cost front.

We have dealt with it by needing to bulk up staffing at JFK.

We certainly had higher interrupted trip costs, higher baggage costs and the like.

Yes.

It's contributing in some of the -- one of the reasons why the costs are slightly below what the, in terms of the improvements where the plan had been.

So, it's not, it's not a number that would -- would be a headline grabbing number, but it's not a small number either.

Mike, let me break that into two components.

We have a massive cost associated with the current ATC system and the congestion associated with that.

The vast majority of that has built into our plan and has been built into our plan.

So, Ed's right in that if we look at for the quarter, if we look at our baggage delivery costs, higher op handling cost, crew credit time, etc., etc., they are up slightly, as well as we've added additional staff at JFK.

But if you actually looked and said what's our total costs associated with the congestion of the system, on an annual basis, it's hundreds of millions of dollars that's built into our block times, and other recovery mechanisms that we have to put in place.

I think the ATA suggests the total number's a little over $5 billion for the industry, and clearly we have a pro-rata share of that.

So it's hundreds of millions of dollars that's at stake and we really need to work on getting an air traffic control system too, that will allow to us free that up.

Agreed.

My second question, and this is maybe a question for Glen.

Given that when you look at carriers serving Columbus, you have one of the bigger service patterns and with some of our service out to the West Coast, you're sort of uniquely in a position to probably watch Skybus maybe a little bit more closely than others, and I realize they are a bit of a small company -- a net or small company for the industry today, but when you look at their order book and their aspirations, and, of course, you guys have a hub in Cincinnati, I mean what -- early on, what's the early read?

I mean, how are they pricing their product?

I mean, I'm sure you're being competitive with them.

You may even have people out there counting their passengers.

What's the early take on it?

Well, I will say that we're not competitive with them on their showcase fares, their $10 intro fares, but if you look, and I think this is the problem for low-cost carriers moving forward here, if fuel stays at $73, $74 a barrel, you can't charge the couch fares.

And so if you look at what their average fare value tickets are selling, so go out and search a month out to Bellingham, you're talking about $160, $150 each way, so you're talking about $320 round trip.

They don't sell connecting tickets, so if you're going anywhere else, you have to buy some of the two tickets, then you have to pay twice to have your -- your baggage checked.

And so to say we're not seeing an impact is really true, but -- and to say they really ought to recheck their business model, I think, because it's not really adding that customer value other than if you're one of those lucky 5 or 10 people per trip who gets the $10 fares that they sell six months in advance.

Now, some of those markets aren't even generating demand to sell up, so we've seen some of them where you can actually get the $10, and you what the cost of fuel is, you know what they are paying -- what they are paying for the airplane, even if they are on a maintenance honeymoon.

And I really question whether or not that model, in this fuel environment, is sustainable.

Okay, very good.

Thanks.

Thank you.

Your next question's coming from Mr.

Dan McKenzie.

Hi, good morning.

Hey, Jim, really appreciate your comments on ATC.

I understand from the FAA that Atlanta actually is one of the first airports that was rolled out for RNP technology.

Yes.

I'm just wondering if you could provide some perspective to what extent that's been rolled out, how many of our aircraft has it been equipped, is it a couple, or is it several?

And a little bit about the cost savings in a you've been able to extract from that new technology.

No, we actually -- virtually all of our aircraft are equipped and are doing RNP.

The number -- I'm not sure if we've been public with the number, but it is in the tens of millions of dollars a year just for Atlanta with RNP.

Now, two things happened together, so it's hard to tease it exactly out.

RNP, as well as the fifth runway in Atlanta.

That combination allows us, first off to have much higher arrival rates in good weather, but it also gives us the ability to recover well after bad weather.

Historically, if we add, say, a thunderstorm and we had a ground stop for an hour, we backed up for the rest of the day.

Now, because we can do three simultaneous approaches, or departures, we can recover quite quickly, and it's one of the reasons our numbers look good.

Now, RNP on top of that means that we are flying more direct routes.

We can do much more efficient decent patterns that are much more fuel efficient, so we're seeing substantial fuel savings as well.

But, again, it's hard to tell how much of the more efficient approaches are because there's less holding over fixes because of the fifth runway versus RNP.

I will say RNP alone, we -- it's definitely eight figures, tens of millions types of benefit associated with it just in Atlanta.

So, we're thrilled and obviously working hard to make sure that we can roll it out more broadly as we go forward.

Good, and is New York one of the next markets that's being targeted for that, or can you provide some perspective if that's on the way for New York?

I have not seen the final plan.

The FAA a few days ago said that they would be rolling out an airspace redesign for New York.

I don't believe it's in the initial.

It's certainly in the plans.

I believe initially they are looking at increasing the number of fixes, which just will help us get more aircraft out, but, again, that was just announce add few days ago, so I haven't seen the full phasing.

As I said, Joe's up today working on that, and so we'll hopefully have some better clarity over the next few days.

Okay, great.

And then just a follow-up question for Glen or a separate question.

Just looking at transcon capacity, it does look like starting in September it ramps up and escalates pretty quickly here, and I'm just wondering if you could provide some perspective on what's driving that increase in demand.

Well, transcon had certainly been one of our strongest sectors on a year-over-year basis.

The demand seems -- seems very strong and I guess you're probably talking about the entry of Virgin into the marketplace this fall, and we'll see how that all works out.

We are very pleased with both our share increases, as well as our increase in the business traffic.

For years we flew that in a [song] configuration, as you know.

Last year we switched it to be a two-class airplane.

With that two-class airplane, we've been able to secure a significant number of corporate contracts that are really fueling the year-over-year improvements for us in the transcon markets, and this is by far the best year Delta has ever had in the transcon markets and we're hopeful that those customers and corporations will continue to fly with us through the fall.

Yes, another thing I think we're very pleased at is the amount of connecting traffic.

We're now able to flow on those segments.

Filling up 186 seats on a 757 with all local is a lot tougher than if we can get a reasonable portion of the plane coming from Buffalo, Rochester, Syracuse, etc., etc., as well as the international.

So, as we've built out the connecting complex in JFK, it has substantially helped the transcon services.

And let me add one more piece of flexibility that's coming online this fall.

Because of our commitment to have in seat video and all of the seats in the transcon New York markets, we have refrained from using the 737-800 into secondary markets and during off-peak time channels.

And this fall, starting I believe in August, as the kids go back to school, we will begin the reconfiguration project of the 737-8 -- 38 737-800s, which will include wing (inaudible) and the in-flight entertainment system and that will give us flexibility of gauge in the transcon markets that we hadn't had previously, and we think will provide a significant upside and RASM for us as we enter the leaner fall markets, particularly in the secondary markets.

Okay, great.

Thanks a lot.

Thank you.

We're going to go to Ray Neidl from Calyon Securities.

Yes, your Los Angeles build up on the west coast, I can understand why you're doing that in a weak part of the country for your system.

But how dependent upon that is you increasing your Pacific route authority, particularly that to China?

It's -- at this point it's really not.

We did not apply for any L.A.-China authorities, and we're pretty pleased with how it's doing on its own.

So the L.A.

buildup certainly over time will give us the feed that we need to build an Asian network from L.A., but even without that, we're very, very pleased with the results and it's certainly accretive for us.

Okay, great.

And your -- the status of some of your regionals, what would be the status of your ownership of Comair and your Mesa operation at JFK?

On Comair, Ray, we've said many times that we're going to look at whether ownership is the right strategy.

We -- we have no comments, again, no speculation as to our approach down that track.

It's -- at the end of the day, Comair's going to be an important part of the family, either in an owned capacity or potentially as a contract carrier.

But I don't want to you imply we've made any decisions by any means on that.

And Mesa, JFK with turboprops?

Those are gone this quarter.

We've clearly outstripped the demand we were expecting in a number of those feeder markets.

So, both in terms of getting the appropriate capacity, as well as improving the experience, we're going to jet operations in those.

So those aircraft will be out of JFK.

We also think it's part of what we need to do to help with air space as well.

So we'll have an all jet operation there in the next few -- by next month.

Okay, and as far as your future plans go for your fleets, I think had you been talking about the 787.

Any update there?

No.

We shouldn't speculate on any, any orders.

We clearly at some point will need to replace our 767s, but we're very pleased with their performance right now, and so nothing in the works right now.

Great.

Thank you.

Thank you.

Your next question's coming from Mr.

Jamie Baker.

Hey, good morning, everybody.

Good morning, Jamie.

An earlier question pointed out that your market cap right now is meaningfully below an offer you received late last year.

I don't want to beat a dead horse here, but you got certain airlines out there exploring ways to unlock value.

You've got certain airlines out there considering returning cash to shareholders.

You got certain airlines fishing around for merger partners.

I simply haven't heard anything other than stay the course as it -- as it relates to Delta making up for what appears to be a significant missed opportunity earlier in the year.

Is there anything else you can afford us in this regard in hopes of kind of whetting our appetite, if you will?

Jamie, first of all, I -- I'm not sure I would echo your thoughts with respect to missed opportunities.

And, secondly, as I said earlier, we're not going to comment or speculate on consolidation, but you know our status now.

We are in the midst of educating our new board, as Jerry mentioned, 7 of the 11 members are new.

As part of the education process, we're looking at our optimal capture structure with respect to cash position, leverage position.

We are building up a very strong balance sheet.

We're going to continue in the short term to hopefully improve that balance sheet.

We are looking at opportunities to enhance shareholder value.

We're committed.

That's certainly our number one charge here.

So the silence you hear from us is not wanting to get out in front of a new board, making some very important decisions amongst themselves with respect to the successor, as well as with respect to the optimal structure for this airline.

So don't -- don't read or not read anything into that.

And, Jamie, I would just add to that that this board is committed to reviewing any option that's in the best interest of Delta and its shareholders.

I appreciate that, Jerry.

As a quick follow up, I identified three possibilities and they are probably countless more.

As it relates to a possible divestiture of a frequent flyer program, returning cash, or M&A activity, is there any -- is any one of those simply abhorrent that you would like to take an opportunity to throw out as a uniquely bad idea?

Jamie, we stand by-- we're just not going to get into speculation on our future strategy.

Okay.

We really want our board to get -- to get in line with the strategy going forward and we're going through an education process and a transition process, and I think it's normal and I would ask you respect that.

And I do, I was actually just giving you an opportunity to kind of diss United, but if you don't want to take it, that's fine.

Thanks for the answer, guys.

I appreciate it.

Thanks, Jamie.

Thank you.

Your next question is from Susan Donofrio

Yes, hi, guys.

Couple left-over questions.

One is, I did see in late June that you applied for expanded antitrust immunity with the D.O.T.

and I'm just wondering if you have any sense of timing with respect to a decision?

Well, they haven't set the case down yet, Susan.

But I expect that it will be fairly soon, and the meetings that have been held have been very positive, and so I hate to put a time line on it, but I think that we'll have a good sense of it well before the end of this year.

Okay, and then my other question is, I know you talked a little bit congestion and its impact to the quarter.

I'm just wondering, was there any weather impact to the quarter?

Because I know some of -- other airlines have certainly indicated that.

Oh, certainly.

If you look at our IROP costs, our bag handling costs, over time, credit time, we certainly had an impact there, but at the same time, that's -- we need to make that up, right?

We're not going to give any excuses.

While it had an impact, it's our job running the business to make up for it and commit and hit our numbers.

So, while that certainly had an impact, we worked hard to offset that and I think we've done a good job of offsetting that.

Any quantification?

I think we pretty well offset it.

There's a little bit here and there, but nothing particularly material we weren't able to offset.

Okay, and then if I can just sneak in a last, when I look at '08, is there any preliminary capacity numbers that you want to share?

Susan, we're -- we're not giving '08 capacity guidance at this point.

I think the plan that we've got out there, the POR, calls for about a 3 point capacity growth in '08.

Right.

At this point --

You would stay with that?

We've not updated that from there.

Okay, just checking.

Thank you.

There's no reason to think it's going to differ materially from that at this point.

Okay, great.

And terrific quarter.

Thank you.

Thank you.

Thank you, and, sir, your last question today comes from Mr.

Bill Mastoris.

Thank you.

Ed, you had talked about the distribution to some of the unsecured creditors, and you had mentioned 20%.

You kind of faded out a little bit there.

Did you mean 20% of the remaining expected distribution?

What were you specifically referring to there?

Yes, Bill, 20% of the remaining expected distribution.

So, we have currently 33% withheld, 20% of that 33% is what we're expecting to release on or about the end of this month.

Okay, and the balance would be over how many installments and what type of timing would we be looking at there?

Well, the plan calls for the first interim distribution six months subsequent to going live, so this is going to be an added distribution above and beyond the plan.

So, I would expect the next distribution then would come out around the end of October.

We're in settlement negotiations with many of the lessors, as you know, this almost entirely relates to the TIA and SLV negotiations on the aircraft side.

I would hope after this interim distribution that it would spur others on to getting deals done, but as you know, we're also in the courts litigating at the same time.

Okay.

Now, you had indicated that at least as far as Delta's concerned, and this is excluding Comair, that $14.2 billion was kind of your upper end.

Do you want to refine that number any further?

I think the last guidance I gave, Bill, was back in June.

I think we reduced that by $250 million, so it's in the $13.9 billion range for the Delta pool.

Okay.

Thank you.

Sure.

Thank you, sir.

Thank you, again, ladies and gentlemen.

This brings your conference call to a close.

Please feel free to disconnect your lines now at any time.