達美航空 (DAL) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Delta Air Lines fourth quarter and calendar year 2007 financial results conference call.

My name is Lacey, and I'll be your coordinator.

At this time, all participants are in a listen-only mode until we conduct the question-and-answer session, following the presentation.

(OPERATOR INSTRUCTIONS)

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

Please proceed.

Thanks, Lacey.

And good morning, everyone.

Thank you for joining us to discuss Delta's fourth quarter and full year 2007 financial results.

Speaking on today's call are Richard Anderson, Chief Executive Officer; and Ed Bastian, President and Chief Financial Officer.

Also joining us for Q&A are Glen Hauenstein, Executive Vice President of Network and Revenue Management; Mike Campbell, Executive Vice President, Human Resources and Labor Relations; Steve Gorman, Executive Vice President, Operations; and Hank Halter, Senior Vice President and Controller.

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 use 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.

Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events.

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

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

We will also discuss certain non-GAAP financial measures.

You can find the reconciliation of those non-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 each participant limit themselves to one question plus a follow-up.

With that, it is my pleasure to turn the call over to Richard Anderson.

Thank you, Jill.

Good morning, everyone.

And we appreciate all of you joining us today.

2007 was a good year for Delta.

The company successfully emerged from bankruptcy, relisted on the New York stock exchange, and continued the largest international expansion in Delta's history and for that matter I believe in any airline's history.

We signed a joint venture agreement with Air France and won our first route authority to serve China.

We continue to dramatically improve operations and believe we will rank first among network carriers in DOT on-time performance and departure performance for 2007.

These accomplishments were really made possible through the diligent efforts of all of the people of Delta and to them we are very thankful for their efforts and appreciate very much their support and commitment to continued improvement in 2008.

Their commitment to making Delta a leader is the Delta difference.

We thank them for their hard work in 2007.

We're pleased to announce that we will be delivering $158 million in profit sharing to our employees in a few weeks.

And I would also note that over the course of 2007, a really important contributing factor to our fine operating performance, we paid out a total of 23 shared rewards to our employees for beating goals in various operating measures.

So once again thanks to all of our employees.

Let's turn really quick to our financial performance and Ed will go into this in some detail and of course we have Hank here with us to answer all of your questions.

The results we released this morning demonstrate both the momentum in the business, and we're going to give you guidance on 2008, and the significant challenge we face from higher fuel prices.

For the full year 2007, we reported $625 million in pre-tax profit, excluding reorganization-related and certain items, which was an increase of $1.1 billion from 2006 despite nearly $300 million in higher fuel prices.

Our international expansion strategy contributed to a 6% unit revenue gain last year while at the same time we reduced mainline nonfuel costs by 5%.

We generated free cash flow of $1 billion in 2007, while also strengthening the balance sheet, and this is very important, we maintained a 43% debt to total capitalization ratio, while investing more than $1 billion back into the business.

For the December quarter we reported break even operating results and a pre-tax loss of $105 million.

We were ahead of our full-year plan through October, but the steep run-up in fuel price added $370 million in additional expense for the quarter.

We expect high oil prices will continue to be an industry-wide challenge and it is important for us to build a business model that is successful at high fuel prices.

We've taken a proactive approach and have aggressively reduced our domestic capacity 4 to 5% in 2008.

I believe that is going to be 1 to 2% in 1Q '08.

And we're cutting nonfuel costs by over $400 million through targeted productivity initiatives.

And as usual, we work diligently to make sure that we recapture as much of the fuel price run-up as possible in our pricing.

Later in the call, Ed will give you some guidance on our expected financial performance, capacity, and how we're specifically addressing the fuel environment.

I would like to take just a few minutes to discuss our strategic priorities for 2008.

Our priority in 2008 is to run a great airline and continue to close the RASM gap that Delta has versus the industry.

We will lead in on-time performance across the industry among the network carriers.

Our baggage performance will move to the top tier in the industry.

Our customers will receive a safe clean on-time courteous experience on Delta with a real emphasis on serving our premium passengers.

We believe that providing a high quality product, particularly to our premium passengers, will support the RASM premium that is necessary for our continued progress.

We will continue to position Delta effectively in the global marketplace.

International capacity was only 20% of the overall Delta system with a lot of wide bodies flying around in the domestic system when we started the transformation back in 2005.

With the good work of Glen Hauenstein and Lee Macenczak and our network planning, pricing and marketing departments, we're continuing robust international expansion, including a more than 20% -- or 20 international destinations announced for 2008, and expect that this summer up to 40% of our capacity will be deployed internationally.

The international expansion has been successful.

We've been pleased with the revenue growth and profitability of the new international routes, and we will continue to be strong across the Atlantic, as we go to unique destinations in Asia, the Middle East, and Africa.

Many of the -- about two-thirds of the expansions that we have in 2008 are unique for U.S.

flag carriers where we don't have other U.S.

flag carriers in those markets.

Our joint venture which we signed in October with Air France will make our international portfolio even stronger.

By the end of 2008, we will have full code share with Air France across the Transatlantic.

The first phase of the joint venture will begin in April and will include a combined 19 daily flights and more than 4,500 seats per day, giving customers more travel choices across the Atlantic.

And you got to remember the joint venture between Air France and Delta gives us the number one position across the Transatlantic.

In addition, we are making very significant investments in improving the international business elite product.

While we have significant initiatives under way to offset the cost of fuel, we're not doing that at the expense of the customer, and we have a very robust plan to reinvest and redeploy our resources for the premium business travelers, particularly international.

Our continued international expansion and product improvements combined with a very judicious approach to domestic capacity position us to achieve our goal of 98% of industry average RASM in 2008 and a full 100% of industry average revenue in 2009.

The key to the continued international expansion is JFK.

In December, the DOT took a big step in the right direction to address congestion, reduce delays at New York airports including JFK, and capping through a slot mechanism the number of operations in New York.

We received 400 slots as part of the DOT plan, which is the largest portfolio at JFK.

And when you combine with that with the largest portfolio at LaGuardia, it gives us the number one position in New York.

It will enable us to continue our international growth strategy.

It doesn't hamper us in any way.

And we will be able to fly our complete schedule this summer, including continued international expansion, and launching Heathrow operations from Atlanta and JFK in March.

Finally, I'm going to give you a brief update on consolidation.

In November we announced that we had formed a special committee of the board of directors to work with management to review and analyze strategic options for Delta.

The process is ongoing.

We are committed to working in the best long term interest of Delta shareholders, employees, customers, and the communities we serve.

But out of respect for that process, we will not comment on any specifics.

So in closing, we believe we are uniquely positioned as the leader in the industry.

We have a lot of upside in this business and a lot of opportunity both on the revenue and the cost side.

Delta has a very talented work force, a great set of network assets, a very flexible low-cost fleet plan, and a financial plan that is working.

And I would emphasize to you, a financial plan that faces the reality of oil prices and commits the company to making our airline run well regardless of the volatility in fuel.

Our goal is to be the best place to work, the best airline to fly, and the best investment for our shareholders.

We significantly strengthened our financial and operating position in 2007 and we have a lot of opportunity as we continue to optimize the airline in 2008.

I would like to turn the call over to Ed to discuss the detailed financial results for the quarter and then we will take your questions.

Ed?

Thanks, Richard.

Good morning, everyone.

Thank you for joining us today.

For the December quarter, we reported break-even operating results and a pre-tax loss of $105 million.

On a base of 396 million fully diluted shares, this equates to a net loss after tax of $0.18 per share.

Our full year pre-tax income excluding reorganization and certain items was $625 million, a $1.1 billion improvement from the full year of 2006.

Our full-year results include $158 million in profit sharing accruals for the Delta employees.

I would like to thank our people for their dedication and commitment and congratulate them on a job well done.

Operating margin was flat in the fourth quarter, reflecting the higher fuel prices that Richard had mentioned.

This is in line with the guidance we gave you in December.

Full-year 2007 operating margin excluding reorg items was 5.8%.

We were able to grow unit revenues by 6 points while reducing mainline nonfuel costs by 5 points.

Our fourth quarter results were impacted by noncash emergence related items which increased pre-tax income by a net of $65 million.

Fresh start accounting changes drove a benefit of $94 million, while we recorded share-based compensation expense of $29 million.

These emergence-related changes increased consolidated passenger RASM by $0.0015, and increased mainline fuel nonfuel CASM by $0.0014.

Turning to revenues, our fourth quarter revenues improved $437 million year-over-year.

Our international transformation continues to drive strong revenue gains.

For the full year, revenue was up $1.4 billion, compared to 2006.

This increase is industry leading.

Delta's consolidated unit revenues improved in the December quarter by almost 6 points, driven by better yields in both international and domestic systems.

International passenger RASM increased 14% on 13% capacity growth, as a result of strong demand for our improved international product and increasing yields.

For the month of December alone, our international passenger RASM was 100% of industry average, a more than 10 point improvement from just one year ago.

Domestic passenger RASM increased 4 points on flat capacity and a nearly 5 percentage improvement in yield.

Capacity discipline, pricing actions, and the continued regauging of the domestic network contributed to the growth.

Delta's length of haul adjusted RASM was 95% of the industry average for the full year of 2007.

In the December quarter, other net revenues improved $72 million driven by higher passenger fees and charges, an increase in SkyMiles revenue, and fresh start adjustments that I alluded to earlier.

Turning to cost, the sharp run-up in fuel, unfortunately, overshadowed our strong efforts in managing our nonfuel costs.

Main line CASM increased 4% for the quarter.

Excluding fuel, however, main line CASM decreased 6% year over year to $0.0679.

As I mentioned previously, fresh start accounting impacted mainline ex fuel CASM by $0.0014.

So excluding that impact, if were you to do an apples-to-apples basis on our mainline ex fuel CASM, it would have decreased 8 full percentage points.

For the full year, main line nonfuel CASM ex profit sharing was down 5 points compared to 2006.

We're proud of our efforts here, especially in a year that saw most of our competition experiencing higher nonfuel unit costs.

We appreciate the hard work of the Delta people, the best employees in the industry.

While we continue to aggressively manage nonfuel costs, we were limited in our ability to manage the sharp run-up in fuel that we saw this quarter.

Higher fuel, including prices paid under our contract carrier arrangement, increased our operating expenses by almost $370 million compared to the December quarter of 2006.

While we hedged 21% of our fuel consumption, we still paid an all-in fuel price of $2.61 per gallon.

This is $0.54 higher than it was in the December 2006 quarter.

Our hedges drove approximately $40 million of cash savings during the quarter.

As you will hear in our 2008 guidance, we are moving quickly and aggressively to make the necessary changes to our business model to address the current fuel environment.

EBITDAR for the quarter was $346 million and $2.5 billion for the full year.

On our last call, we told that you we expected to hit our EBITDAR plan for the full year of $2.7 billion.

That assumed an estimated fourth quarter fuel price per gallon of $2.36, as compared to the $2.61 per gallon that we actually paid.

Excluding the run-up in fuel prices, our results actually exceeded our full-year plan.

Strengthening our balance sheet and liquidity continues to be a top priority.

For 2007, we generated $1.8 billion in operating cash flow, reinvested over $1 billion of that back into the business, and ended the year with $3.8 billion in unrestricted liquidity.

We received additional liquidity from three transactions during the quarter.

First, you will remember that in late October, we issued $1.4 billion in new EETC debt.

The proceeds were used in part to refinance approximately $1 billion in existing secured aircraft debt.

In addition to generating liquidity, this transaction enabled us to lower our effective interest rate and smooth our debt maturity schedule in the succeeding years.

Second, in mid December, we received $156 million under a new agreement that allows us to finance aircraft pre-delivery deposits.

And last, we received $83 million related to the AIR Inc.

sale and $42 million from the sale of seven CRJ-100s.

During the December quarter, we had break even cash from operations and invested approximately $400 million in capital expenditures.

Approximately $300 million of that amount was for aircraft, parts, and mods, to improve Delta's international product and position the airline for continued international growth in 2008.

Now I would like to turn the call to expectations for the March 2008 quarter, and full year.

For 2008, we are targeting flat earnings to our 2007 pre-tax earnings of $625 million, despite needing to cover roughly $1.3 billion in expected higher fuel prices.

We are focusing on top line growth and expect to grow operating revenue by 8%.

We will also maintain our discipline with respect to our cost leadership position.

We expect the business to generate more than $1.6 billion in cash from operations, sufficient to cover debt maturities and nonaircraft CapEx, and also increase our unrestricted liquidity.

For the full year, we expect an operating margin in the range of 4 to 6%, our main line nonfuel costs to be flat year-over-year, and our fuel costs per gallon to be approximately $2.67 all in including the impact of fuel hedging.

Please note that all of these projections include the impact of emergence-related items and fresh start accounting.

For the first quarter 2008, we expect operating margin to be in the range of negative 2 to 4%, our mainline nonfuel cost excluding profit sharing to be up 4 to 6% year-over-year which includes about a 2 point impact from fresh start accounting, and our fuel cost per gallon to be approximately $2.74 all in including the impact of fuel hedging.

Regarding fuel hedges, as of January 22, we've hedged 26% of our anticipated consumption for the first quarter, utilizing heating oil, call options with an equivalent jet fuel equivalent cap of $2.77 per gallon.

For the second quarter, we've hedged 31%, with an average jet fuel equivalent cap of $2.72.

And we have also hedged 15% and 10% of our anticipated consumption in the third and fourth quarters respectively, with average jet fuel equivalent caps at $2.70 and $2.69.

With respect to CapEx for the first quarter, we expect net CapEx to be approximately $500 million, which includes over $400 million for aircraft, parts and mods, and we expect net CapEx of $1.5 billion for the full-year 2008, which includes $1.3 billion in aircraft, parts and mods.

Turning to capacity, because of our flexible cost effective fleet, we have the ability to recalibrate the business in this higher fuel price environment rather efficiently.

We're moving aggressively to reduce domestic capacity beginning this month, while retaining the flexibility to quickly make further adjustments as the domestic economic outlook warrants.

In the first quarter, we expect system capacity to be up 1 to 2% year-over-year, with consolidated domestic down 2 to 3% and consolidated international up 10 to 12%.

For the full-year 2008, we expect system capacity to be up 2 to 3% year-over-year, with consolidated domestic capacity down 4 to 5% and consolidated international capacity up 17 to 18%.

Looking at advanced bookings, at a system level, January advanced bookings are ahead of last year.

And we're seeing no softening of close-in demand.

And for February and March, due to the shift of the Easter holiday, we have purposefully kept advanced bookings slightly behind last year, as we switch to a more of a yield bias.

The domestic capacity reductions we announced last year are having the anticipated effect of firming up our advanced yield.

So in conclusion, our results show that in spite of higher fuel costs, we have built a very strong financial foundation.

We remain committed to maximizing revenue growth and sustaining best in class cost.

And we'll continue to rationalize domestic capacity while focusing on our profitable international expansion.

Our strategy, combined with the power of the Delta people, positions us to run the best airline in the industry.

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

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

Please proceed.

Yes, hi, I'm wondering if I can ask a question on capacity and the question is how much capacity would you think the industry would need to take out to get a RASM number that would fully offset this fuel cost?

Glen?

Significantly more than they have.

The answer is probably another 4 to 5 points of capacity would have to come out.

Bill, this is Ed.

Our view, in terms of domestic capacity rationalizations and changes that we're making in the pricing environment, is that we in 2008 are expecting to cover roughly 50% of the higher fuel price through the capacity rationalization within Delta and covering the rest of it through other cost initiatives in the business, to give you a proxy of a template we use.

Okay.

It depends, I guess we have carriers with different fuel hedging positions moving forward, and so I think everybody is trying to look at their own internal capacity, and you see United in January took a significant amount of capacity out, as we're moving capacity down through the first quarter, and anticipate being down 4 to 5%.

The industry hasn't gotten there yet, but I don't see anybody growing, which is a good thing, in a stable environment.

So I think as we move through the year, we will see traction on the yield side of the equation.

And Bill, it is Richard.

One other point, which is we built a flexible plan for 2008.

When we saw the fuel price run-up last October, November, we reacted very quickly.

And we've actually built a couple of different plans -- business plans, for 2008, to allow the airline to flex down further if demand warrants or other economic conditions warrant.

So we are going to be very yield focused as we go forward in 2008 and be very judicious about pulling down capacity if it is necessary in the environment.

Okay.

And if I can ask a question on the cost guidance, I guess plus 4 to 6% in the first quarter, but flat for full year, what are the drivers that get us to a flat number for full year?

What are the cost areas where --

Several things, Bill.

One is that we're going to be lapping the fresh start accounting, so that you still have in the first quarter the negative impact of fresh start accounting in 2008 first quarter that you didn't have in 2007 first quarter.

But as we get into the second quarter, those numbers actually lap, and so that is one source of it.

Secondly, the capacity that we took out that we announced for the domestic system, we took it out pretty quickly here within a matter of weeks as Richard said, so that is having a negative impact on the short term CASM that we expect.

Over the course of the year, we would be able to better manage the full cost out of the network.

And the third area is as we continue to ramp up for some international expansion, typically first quarter we're running higher costs getting ready for that.

That will certainly manage into the balance of the year.

So higher start-up costs, internationally, getting headcount ready and getting the product where it needs to be.

Thanks for your help.

You're welcome.

Our next question will come from the line of Gary Chase with Lehman Brothers.

Please proceed.

Good morning, everybody.

Good morning, Gary.

Just a couple of cost questions.

First, for Richard, in your prepared remarks, you mentioned something about productivity initiatives, and then I think you gave a number, but I don't know, we didn't -- we couldn't catch it all here.

Could you just elaborate a little bit on that?

Tell us what you're after, and what the ultimate target is?

We have $400 million of productivity improvement built into the 2008 plan.

And it covers a wide variety of initiatives across the enterprise and those initiatives are more focused on the overhead side of the business rather than the product side of the business.

You saw earlier this year that we announced that we closed the remaining city ticket offices so we're rationalizing our distribution network.

We have initiatives underway to move our self service preferred check-in up 10 points.

We have other initiatives underway to move more of our distribution to delta.com.

We have productivity initiatives across the enterprise in terms of winglets on airplanes that help us on fuel.

We have a lot of reconfigurations going on, on our fleet, to make sure that we have the most fuel efficient LOPAs in the industry.

And we have a very significant effort underway to realign our marketing and promotional spend and our free ticket usage.

I could go on, but I think you get a flavor that we've -- Ed and I have really basically, with the team, zero-based the airline, and have significant initiatives and productivity improvements on a head count basis across the enterprise.

And Gary, I know some of your questions on a modeling basis, some of that is revenue.

It is not all just cost.

So it's improved ticket collections, fees in airports, et cetera, as well.

And that is about round numbers the inflation you experience on an annual basis, right?

Well, yes, if you factor in not just inflation, but one of the big inflationary pressures we're experiencing is with the international expansion.

It is a much higher cost product and obviously a much higher lucrative product and higher revenue source, but it is more expensive product.

And so we are -- included in that $400 million of "inflation", it also includes the higher cost of the product and also upgrades that we're making to the product to better compete in the marketplace.

And just as a follow-up to that, if we try to do a little bit of squaring on your margin in the mainline cost guidance, and I guess we got to do a little bit of RASM assumption in there as well, but it feels like there is going to be some downward pressure on regional CASM.

Is that fair or are we misstating that?

I wouldn't -- I mean the regionals, we are --

Ex fuel, of course.

We have slowed the growth of the regionals fairly considerably.

It is going to put a little bit of cost pressure on us, by slowing that growth.

I'm not certain that there is any significant downward movement on regional CASM, no.

Okay.

Thanks, guys.

You're welcome.

And our next question will come from the line of James Higgins with Soleil Securities.

Please proceed.

Good morning, everyone.

A couple of questions.

Can you give us some color on performance of newer international markets, especially if maybe have has been -- you say you're seeing those slow down in your term demand, but there would be appear to be --

We're having a hard time hearing you, Jim.

I'm sorry.

Can you give us some color of performance on the newer international markets, especially heading into -- you're in the soft, seasonally soft period.

Jim, this is Glen.

How are you?

I'm fine, how are you, Glen?

Good, thank you.

I think we're really excited about the international performance through the off-season this year.

We've had double digit unit revenue increases, double digit increases on capacity, running through the entire offseason in Europe, and I think a lot of that is due to the demand shifting from U.S.

origin point of sale to Europe origin point of sale.

And an interesting fact is that we are now generating more than 50% of our Transatlantic revenues from an offshore basis versus onshore.

And with the currency exchange where it is today, we see an incredible demand coming this way, which is more than offsetting any domestic softness in outbound traffic.

So we're very excited about the results of the international, in particular, through the quarter, and through the January and February period, which traditionally is the lowest demand period of the year.

And along the same lines, but focusing more domestically, you're obviously -- you guys do a lot of flying in and out of Florida.

Are you seeing any resistance on the leisure side to higher fares?

Or just any thoughts on that would be helpful.

We have seen actually the dramatic increases in fuel surcharges and fare increases after the fuel run-up in the fourth quarter.

And we have passed a lot of that through, and most of the traction is actually in the lower end buckets, not in the top end.

So the consumers seem to be absorbing that, a significant portion, particularly in the leisure markets.

Great.

Thanks very much.

And our next question will come from the line of Mike Linenberg with Merrill Lynch.

Please proceed.

I guess a couple of questions.

I guess to Glen, just right off the bat, it looks like in your capacity forecast, you were taking international up from previous guidance.

It looks like it is up a couple hundred basis points, and I'm just curious what is driving that.

Are you just seeing better performance in markets?

Or is it just maybe airplanes that are being delivered early?

Mike, I don't know what the previous guidance that you're referring to, but this is pretty much been our plan for the last year.

This is really our initial guidance for 2008, Mike.

If you are going back to the POR possibly, we've obviously had a lot of aircraft changes since then.

So no, I wouldn't say there is any specific new revelation we found on the international front.

This was the exact schedule we announced last fall that we're going to fly this summer.

Okay.

I'm going off the investor update from December 7th of '07.

It just has international up 15, and it looks up -- it is a couple hundred basis points.

So all right.

I guess it is probably just more rounding.

Just my second question, and this is to Glen, is over the last couple of months, we have seen some of the restrictions that had been attached to various fare segments, like the Saturday night stay restriction, and the minimum nights that were necessary to get a lower fare.

That has come back into the market.

And I'm just curious what your response has been, maybe the spread of that, how widespread is it?

And are there markets where you have it?

And maybe the competition doesn't?

Well, if you go back several years ago, you will remember the Simplifares experiment we did here at Delta.

And moving forward from that, we have pretty much tried to keep the fares as flexible as possible yet putting on restrictions that are consumer friendly yet revenue maximizing.

And we continue to adjust our position on that, and indeed, in certain markets, Saturday night stays seem to be the most effective that is also consumer friendly.

And we put Saturday night stays on some fares but we have kept the alternative of staying multiple nights at the same time.

So trying to maximize revenue while providing the most consumer-friendly options.

Okay.

Great.

And just one last one for Richard.

Richard, just your initial take on Lufthansa investing in JetBlue, just given your history at Northwest and the strong relationship that company had with KLM, what is your initial take on it, is it a slow evolution here?

Do you anticipate seeing more of those types of transactions, et cetera?

I think it is difficult to predict.

That transaction was very different than Northwest/KLM investment.

It is a relatively small amount of money.

And there's no joint venture agreement.

There's no code-sharing.

We don't really see that as that material to our business.

In order to really make -- create real value for shareholders from these relationships, you've got to do what we did in October, which is sign a full-fledged joint venture agreement with anti-trust immunity, and really get committed to locking the networks together.

So given the fact that JetBlue doesn't have any international business -- is essentially a domestic carrier, and it appears to be a relatively passive investment.

We don't really see that as very significant in our landscape.

And over the history of the industry at different points in time there have been investments by foreign flags, but under the DOT rules, it doesn't give you a lot of control, and the real value comes from what we -- the sort of arrangement that we now have with Air France.

Great.

Thanks a lot.

Did I answer your question?

You did.

Perfect.

Thank you.

And our next question will come from the line of Jamie Baker from JP Morgan Chase.

Please proceed.

When I look at SkyTeam as well as your own domestic triumvirate with Northwest and Continental, it appears that Continental might be the most valuable partner.

Now most consolidation scenarios seem to center around Delta and Northwest followed by United and Continental.

I'm not asking you to comment on this specifically.

But it does imply that Continental could defect from its current alliances.

In a scenario where Delta decides that Northwest is its optimal partner would it make sense for some sort of a new golden share in order to preserve Continental within the alliances?

Jamie, I'm not smart enough to answer that question.

That's usually the answer that I give.

I mean let's take consolidation off the table.

Would you and/or SkyTeam view the loss of Continental as material and might you want to prevent such as outcome?

I'm asking because everybody is so focused on the golden share going away but nobody seems to be asking whether it could in effect be preserved.

And I think in order to get the answer to that, you need to talk to Larry and Doug.

Okay.

So I don't want to put words in your mouth, but if that is the case, then it is not of material risk to Delta, that you could potentially shed that partner?

I agree that -- I mean I don't agree that is a natural follow-on from what I'm saying.

Obviously, all of the partners in SkyTeam are important, and we view the SkyTeam relationships that we have as very valuable, and we want to keep all of our partners in SkyTeam, including Continental, because they're an important part for Delta, both of our domestic code-sharing arrangements and our SkyTeam relationships.

Okay.

Well, that's helpful.

And secondly, just related to the full year top line guidance, when was the last time that you revisited that forecast?

I'm simply trying to measure what sort of U.S.

or global slowdown, if any, you might be anticipating.

The top line forecast, Jamie?

Yes.

For 2008?

Yes, the revenue forecast.

This is our forecast from the budget process that we just completed over the last 60 days, so I would say it is reasonably current.

So it reflects certainly current economic thinking based on -- assuming that you see and read the same papers and data sources that we all do.

Yes, we built this over the course of November, December.

Does it reflects some of the January concerns, over the last week or so, no, but it is still our best foot.

Got it.

Okay.

Thank you very much.

You're welcome.

And our next question will come from the line of Ray Neidl with Calyon Securities.

Please proceed.

Yes, just to go back a little bit to your domestic, or your flexibility with your fleet, you said that you had great flexibility in adjusting to whatever develops in the economy.

What does that include?

Does that include grounding some of your old narrow-body aircraft or does it include switching from mainline to more regional?

What flexibility do you have in switching more of your capacity to your regional partners and what flexibility do you have with their contracts?

Hey, Ray, this is Glen.

How are you?

Good.

How are you doing?

Good, thank you.

We have a lot of flexibility and I think you hit on the key items there.

One is we have already taken most of our commuter carriers under contracts with minimum utilization requirements down to those minimums.

So that was our first tranche, and then of course, if the economy continues to weaken we do have a lot of airplanes with very low ownership costs.

So we can change the utilization of the fleet, and I'm not saying we necessarily ground airplanes, but we certainly would fly less on Tuesdays, Wednesdays, and Saturdays, which are historically the laggards in industry RASM days.

So we have a very good plan and we've been modeling this for quite a while now, and back to October, when we had the first indications of some kind of potential domestic or international softening, we went through many different scenarios and feel very comfortable that we will be in a good position in any economic downturn.

Okay.

Great.

The majority of the capacity we pulled out as you probably know, is coming out of the regionals.

Not the main line at this point.

Okay.

Great, yeah.

And your program to switch to more international, I think you said you're about 40% now, I guess that is mainline capacity for international -- and what do you think your ultimate goal might be, 50/50, 48/52, something along those lines?

I think that is fair.

50/50, Ray.

Okay.

Great.

Thanks, guys.

Thank you, Ray.

And our next question will come from the line of Robert Barry with Goldman Sachs.

Please proceed.

A question on the domestic ASMs.

It was flat this quarter.

Why did we have that pause?

Because -- this is Glen.

How are you?

Good, Glen.

How are you?

We hit the trigger on capacity reductions back in October and really the first one we could impact was starting in January, and then trickling through February and March.

So we pulled the trigger relatively early.

Richard gave us explicit instructions that he saw some weakening in the domestic demand and felt very comfortable us taking it down in October and it takes a couple of months to rattle through the network, and without doing significant interruption over the holiday periods, in particular.

So passenger re-accommodate and we're always focused on the customer here at Delta and we wanted to make sure we were able to re-accommodate during the holidays and then spool down after the holiday period.

The other thing is we took delivery of the 757 ETOPs aircraft over the back part of 2007 and I think we had 10 or 12 of those flying in the domestic system in the fourth quarter which will eventually be sent overseas to Europe.

So that was also a part of the factor, was just the introduction of that aircraft into the fleet, but they're not long-term domestic aircraft.

And could I just clarify on the cash flow, I think you said $1.6 billion cash from ops, and then was it $1.3 billion or $1.5 billion, in total CapEx?

$1.5 billion.

So almost break even cash flow before financing?

Yes, we're looking at a free cash flow in the $200 million range.

And just finally on the Atlantic performance, clearly very strong there, I was wondering if you could unpack that a little bit, how much of that was FX, how much of it was attributable to specific markets or better success passing on fuel surcharges, et cetera?

We have estimated that about 6 points of the 14 points of year-over-year RASM improvement or a little under half is for currency exchange variations as well as point of sale variations.

Okay.

Any specific markets doing particularly well, like Africa in particular?

Certainly, there is an incredible strength in the Transatlantic.

The Middle East is very strong.

Africa is very strong.

But Western Europe is very strong as well.

So there is really no weak sister in the Transatlantic marketplace.

The Latin America markets are performing wonderfully through the holiday period and the advanced bookings on them continue to be strong.

And then despite the fact that we essentially doubled our capacity in the Pacific, we are maintaining unit revenues -- which if you think about it, going from one to two, that's a big step, adding Seoul to our portfolio of one Pacific market which was Atlanta/Narita and maintaining flight unit revenues is really an incredible story I think for us.

International is still -- it does seem very, very strong.

Thanks a lot, guys.

Thank you.

And our next question will come from the line of Frank Boroch with Bear Stearns.

Please proceed.

Good morning, everyone.

Ed, I think the last quarter, you talked a little bit about some of the nonmainline business units, and perhaps improved disclosure this time around.

I wonder if you could give us an update on that and the Comair review that you both talked about last quarter.

Sure, Frank.

We committed to the Street that starting in 2008, we will be giving you better transparency on the revenues and then the performance of some of our noncore businesses, or ancillary businesses is probably better stated.

We will be doing that with the first quarter earnings.

The 2008 topline revenue expectations for our MRO business which is a primary feature of our ancillary businesses, is in the order of $400 million to $425 million of third party revenues coming into 2008, with solid double digit operating margins.

So as the year proceeds, we will be providing you more color, but at this point, we are waiting for 2008 to progress.

Turning to Comair, we are still in the strategic review phase of our portfolio.

We have slowed down a little bit of the Comair decision-making process, pending where the ultimate answers come out on the consolidation front, but long-term, we believe Comair will be an important part of the Delta family, however that contract gets structured.

Great.

And Richard, I guess now that you have been in -- over at Delta for a few months, do you feel that you have all of the systems and all of the team in place at Delta to take the carrier to where you think it ultimately needs to go to drive long-term shareholder value?

We will continue to build our team.

We've made a number of very significant moves.

We hired Neel Shah from United Airlines to take over our cargo operations.

We brought in Vinay Dube from Sabre to run our alliances.

Steve Gorman, former colleague of mine, came in as EVP of ops.

We've had a number of important internal promotions and added responsibilities for Hank and Paul Jacobson.

So we're going to continue to build the team and really operate with a meritocracy, but I think by and large our senior team is set.

On the system side, we have in our non aircraft CapEx number about $125 million of system investments in 2008.

That is an important part of -- there is over $300 million of benefits, either on the revenue line, or the cost line that come from that, so we do need to continue to make investments on the system side at Delta.

I would say that overall, we have a lot of opportunity ahead of us.

If you look at a number of our competitors, and you look at sort of where they are on growth, RASM and CASM and think about this, this airline grew 9% top line last year, and will grow 8% top line this year, when you think about a number of our competitors, and you look at our relative position, we have a lot more upside -- both on the revenue side, the international growth side, and closing the RASM gap.

And same thing on the cost side -- we have a lot of opportunities with the good solid growth that we have built in our 2008 plan to continue to optimize across Delta.

And so that is going to be a continual process of making sure we have the best people and the best strategy and a wise investment, CapEx investment strategy, and that we continue to move the airline from a performance standpoint, a financial standpoint, all of the important metrics, that we continue to move the airline.

And we have a lot of room to be able to do that.

Great.

That's helpful.

And lastly, Ed, could you give us a quick update on the claims resolution process and how many shares are out there now and what the next milestones are?

Certainly, Frank.

We have I think it is approximately 291 million shares out in the market at the present time.

We have resolved I think out of an estimated total claim pool of approximately $15 billion, I don't have the numbers in front of me, roughly $12.5 billion, don't hold me to the exact numbers but order of magnitude of claims that have been resolved through share distributions.

We are scheduled for our next round of distributions I believe in April.

But it is quite possible we will make an earlier distribution before that, depending on how the negotiations go with respect to some of the TIA claims in litigation.

Great.

Thanks very much.

You're welcome.

And our last question will come from the line of Daniel McKenzie with Credit Suisse.

Please proceed.

Hi, good morning.

Thanks.

Hey, Dan.

I guess this question is for Glenn or possibly Ed.

I'm wondering if you can provide some color on your gate use obligations at Los Angeles.

As I understand it, Delta has exclusive use of the gates, meaning there is no risk of losing the gates if they sit empty.

So first, I guess I'm wondering if my understanding is correct, and if so, I'm trying to better understand the need for adding domestic capacity there, given the record high fuel prices, and an economic slowdown here.

Well, first of all, this is Richard, we have in essence reached, along with a number of other carriers, a settlement with the Los Angeles Airport Authority.

And so in terms of our gate position there -- our gate position there has really been solidified.

And a lot of the flying that we were doing there regionally was on a straight rate prorate basis with ExpressJet.

If you look at our flight levels at Los Angeles, we pared those down as part of the domestic capacity pull-down in light of the higher fuel prices.

So in summary, in answer to your question, one, our gate position in Los Angeles has been solidified with the city of Los Angeles.

Number two, a lot of the flying that we were doing there to feed our Mexico operations and our transcon was flying that was done on a no-risk basis on a straight rate prorate with ExpressJet.

And number three, if you just look at the sheer number of departures, we're being very judicious about capacity in L.A.

in light of these fuel prices.

Okay.

Thanks.

And I guess as we look ahead, domestic capacity cuts of roughly 4 to 5% ,should we expect those capacity cuts to be primarily Cincinnati and Salt Lake City just based on a read of schedules today, or will those phase in perhaps more evenly throughout the system?

This is Glen.

I think that you hit it right on the head there, that since the international is in JFK, and the international feed, we want to preserve our ability to continue to feed and I think that is one of Delta's really long-term strategic advantages is that we have really the two primary gateways to Europe on the East Coast and Latin America, one being Atlanta, and one being New York.

And so continuing to feed the international operations will be a priority for us.

And with domestic softening particularly with Cincinnati and Salt Lake which are primarily domestic U.S.

hubs, that would be where we would go to trim first.

Okay.

Great.

Thanks a lot.

Appreciate it.

Okay.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.