達美航空 (DAL) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Delta Air Lines September 2008 quarter financial results conference call.

My name is Cynthia, and I will 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.

Thanks, Cindy, and good morning, everyone.

Thanks for joining us today to discuss our third quarter financial results.

Speaking on today's call are Richard Anderson, our Chief Executive Officer; and Ed Bastian, our 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 of HR, Labor Relations and Communications; and Steve Gorman, Executive Vice President of Operations; Hank Halter, Senior Vice President and Controller; and Paul Jacobson, Senior Vice President and Treasurer.

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 our SEC filings.

We'll also discuss certain non-GAAP financial measures, and you can find the reconciliation of those non-GAAP measures on our Investor Relations website at delta.com.

I would like to ask when we get to the Q&A portion of the call we limit each participant to one question plus a follow-up, and with that I will turn the call over to our Chief Executive Officer.

Thanks, Jill.

Good morning, everyone, and thanks for joining us for the call today.

It is probably an understatement to say it has been a challenging year with record fuel prices and now we face economic uncertainty in the global markets, and some uncertainty in terms of where the economies around the world will be performing.

Through all of that, our employees have done a really good job, and we thank them for their commitment to building the airline and providing good service to our customers and running a good operation.

We appreciated that.

For the September quarter we reported a net loss of $26 million excluding special items.

While we're never happy to post a loss, it is a modest loss considering costs related to fuel prices were more than $800 million higher than last year.

On a GAAP basis we recorded a $50 million net loss, which included $24 million in special items primarily related to our domestic capacity reductions and merger expenses.

Consistent with what we've talked with you in the past, we posted strong top line growth of 9% and maintained good cost discipline.

Through our solid revenue performance, cost initiatives and fuel hedge strategy, we were able to cover more than 60% of the impact of costs from higher fuel prices.

On the operational side, we're running a good airline.

While we definitely faced some challenges this quarter with severe weather and congestion in the Northeast, and an air traffic control computer outage, we had a 5 point improvement in on time arrivals this quarter, and Delta ranked in the top tier for on-time performance during the past twelve months.

We also improved the customer experience with more than a 50% decline in involuntary denied boardings in the third quarter and our baggage performance continues to improve.

We had a 40% decline in the number of mishandled bags year-over-year in the September quarter, and with more than 30 million bags traveling through the Atlanta hub each year, the investments we're making to overhaul the bag system in Atlanta are critical, and we expect to see our baggage numbers continue to improve.

We're making sure to recognize the role our people play in these improvements.

Delta employees received $10 million in shared reward payments during this quarter.

I note that our good on time performance is coming with the most efficient scheduling in the industry.

When you look at the spread between our block time reliability and our arrival performance we're running the most efficient operation in the industry.

We're not getting it by adding spare airplanes and padding our schedules.

I want to focus on a topic that has dominated the headlines in recent weeks -- the credit crisis and how it is impacting Delta.

The turbulence in the markets coupled with a soft economy and high fuel prices have created a pretty significant financial storm, the effects of which have rippled through the economy in every market around the world and touched almost every consumer and business.

I just want you to know that we're well-positioned to weather the turmoil in the market.

Last winter and last February, March, we led the industry by announcing significant domestic capacity reductions in response to high fuel prices and signs of economic softening.

When fuel prices continued to climb we responded quickly and decisively with additional capacity cuts.

Those reductions are all in place now.

Our domestic capacity was down 10% this quarter and will be down 12% to 14% in the fourth quarter.

We're continuing to trim capacity market by market as we watch demand.

We were first out of the box with capacity cuts.

You will recall we had a staff reduction of almost 4,400 people this past year.

We'll be down -- we'll continue to manage that closely because we have a flexible cost efficient fleet.

We have a lot of airplanes that are paid for, and the ability to change capacity in response to demand is a cashless effectively a cashless exercise for us.

We're going to be doing that both domestically and internationally, and I think Glen and Ed will talk a little bit about a bit more international trimming that we're doing in the fourth quarter.

We're not just removing capacity.

We've been really committed to taking all the fixed costs associated with the business out when we do remove capacity.

It has put us in a better position than our competitors to deal with the current market challenges.

Our liquidity balance remains strong at the end of the third quarter.

We have $3.1 billion in unrestricted liquidity, which included about $800 million in the Reserve Primary fund money market.

We've taken a small charge on our investment.

We expect to recover nearly all of the investment as the Primary fund works through its liquidation process.

We're taking steps to preserve our liquidity with the amendment to our credit card processing agreement to extend it through 2011.

We continue to have no holdback and do not foresee any holdback over the term of the agreement.

We also have financing commitments for all firm aircraft orders scheduled for delivery through 2010.

The fact that we don't expect to tap tight credit markets to finance those deliveries is really significant.

In addition, we have ahead of us a fairly significant opportunity with our affinity card relationships.

As the industry deals with the turbulent times in the credit and equity markets and the potential for a global recession, there is a key difference that sets us apart in our ability to manage through challenging times, and that's our merger with Northwest.

It can't be overstated that the acquisition of Northwest clearly differentiates Delta from the pack by creating a global carrier with a very durable financial foundation.

We're combining two carriers that delivered the best pre-tax profit of the network carriers in the first half of the year, and last year.

And Delta and Northwest have strong top line growth, best in class cost structures, solid balance sheets, strong cash positions, and the most capable employees in the industry.

Together we'll be able to improve our economics faster than either airline on a standalone basis by creating $2 billion in estimated synergies by 2012.

That's very powerful considering the economic environment we're facing.

We put a lot of work into validating our synergy assumption from the bottoms up, and we're very comfortable with our estimates that we provided in the July 2008 investor update in terms of the timing of those synergies.

When we first announced the merger, it was more of a top down analysis and now we've actually done significant amount of work in every piece of the organization, and we know how we're going to get at it both on the cost and the revenue side.

The merger is a game changer, and we're excited about hitting a number of milestones this quarter.

And both Delta and Northwest pilot groups ratified an unprecedented four-year agreement which will enable us to accelerate network synergies.

The pilot groups committed to a binding arbitration process to determine an integrated seniority list which we'll have in the fourth quarter.

The important piece about this is day one, because of our existing relationship with Northwest in the domestic and international alliance relationship, we'll be able to have full up code-share day one to be able to immediately begin capturing the revenue synergies.

The stockholders of both airlines overwhelmingly approved the merger in September, so the owners of both companies clearly see the benefits of the merger.

The EU, the European Commission gave their approval, and we continue to work closely with the DOJ on their analysis.

We still expect to close in the fourth quarter.

The FAA accepted our plan for transition to a single operating certificate.

We expect to take roughly eighteen months to fully integrate the two airlines and begin operating under one certificate, although we will operate effectively as a single carrier right after closing.

Northwest credit facility was amended allowing us to close the merger with both companies' credit facilities in place.

You can see we're moving forward on integration planning and we're doing it with speed to ensure we start to deliver synergies to shareholders immediately.

We're still targeting to close the merger during the fourth quarter, as I said earlier.

To sum up, it is a tough environment.

In a tough environment, you have to be able to react quickly and be prepared to do the things that are necessary to manage the airline through pretty -- these tough times and in a tough credit market.

We've shown a real ability to rationalize domestic capacity, grow the top line, stay very focused on cost discipline, and that's important because you can't just take the airplanes out.

You've got to take the fixed costs out that go along with the airplane, and we have to maximize and continue to preserve our liquidity.

We've been a leader in the industry for the last several years with international expansion and domestic capacity discipline, and we expect to continue to be a leader making quick decisive action if demand conditions deteriorate.

We'll continue to watch all of our markets closely and be prepared to pull back not just in domestic markets but also internationally.

With that, I will turn it over to Ed.

He can get down to the details of the quarter, and then of course we'll be here for your questions.

Thank you for your attention.

Ed.

Thanks, Richard.

Good morning, everyone.

Appreciate you joining us, taking your time with us this morning.

As Richard said, excluding special items, we recorded a net loss for the period of $26 million or $0.07 per share on a base of 396 million shares.

On a GAAP basis we reported a net loss of $50 million, which includes special items totaling $24 million.

The special items included a $14 million charge for early termination fees under some of our contract carrier agreements, a $7 million charge for merger related expenses, and a $3 million net charge primarily related to facilities restructuring, and some severance costs.

For the quarter, our $26 million pre-tax loss compares to a $363 million in pre-tax income in the prior September quarter.

Fuel prices drove over $1 billion in incremental expense to us this quarter, and we're able to mitigate more than 60% of that additional cost through increased revenues of almost $500 million, productivity initiatives, and fuel hedging gains approximating $200 million.

On the revenue front, our operating revenue improved 9% or almost $500 million year-over-year despite a decrease in capacity.

International revenue grew 32% year-over-year which reflects the benefits of our multi-year international expansion that we began in 2005.

During the third quarter, 41% of Delta's capacity was in international markets, which compares to 35% a year ago.

Delta's consolidated passenger unit revenue increased this quarter by 9%, which factors in a 6% increase in length of haul, making total length of haul adjusted RASM up 12%.

Yield was up 7% while traffic was flat on 1% lower capacity.

Domestic passenger RASM increased 8%, driven by our capacity reductions and pricing actions.

Unit revenue growth has been accelerating through the quarter and into the fourth quarter.

International passenger RASM was up 14% on a double-digit capacity increase in the third quarter which reflects both strong yields and demand.

We are at a revenue premium to the industry.

Our consolidated length of haul adjusted RASM as reported through the ATA was 102% of industry average year-to-date through August.

On the non-passenger side, our total non-passenger revenue was up 26% in the quarter to over $740 million, which gives us a run rate on an annualized basis of roughly $3 billion of non-passenger revenues.

Cargo revenue grew $42 million in the quarter or a 35% increase, which reflects higher yields and volume, particularly in the international markets.

Our other net revenue increased $110 million or 23%, which is driven by passenger fees, growth in our third party MRO and Sky Miles revenue.

There has been a lot of attention around fee-based revenue in the industry.

For Delta, our total fee-based revenue contributes about $1 billion to Delta on an annualized basis.

Moving to costs, in the September quarter our main line CASM ex special items increased 21% year-over-year due to the higher price of fuel.

If you were to exclude fuel, special items, and the 2007 profit sharing, our mainline CASM increased 3% year-over-year to $0.0672.

Controlling for foreign exchange pressures and a couple of favorable items we had last year, our mainline nonfuel unit costs were essentially flat on a year-over-year basis.

That's why we are making and continue to make investment in products like Business Elite that are driving significant improvements in customer satisfaction, so good performance on the cost line.

By year end we're expecting our mainline nonfuel costs to be flat, meaning we are getting all the costs out of our system from our capacity pulldown.

We hedged 51% of our third quarter fuel consumption at an average all-in fuel price of $3.45 per gallon.

Our hedges reduced fuel expense by $179 million during the period.

Lehman Brothers was a counterparty on some of our fuel hedging contracts.

We terminated all of those contracts with Lehman and replaced them through other counterparties.

In the quarter we incurred $25 million in mark-to-market losses on our hedges, which are included in the nonoperating expenses.

Nonoperating expenses increased roughly $90 million in the quarter.

About two-thirds of that increase were quarter specific and should not be factored into going forward run rates.

Those are the $25 million mark-to-market on fuel hedges, $26 million of foreign exchange losses in the quarter, due to the fairly significant change in the currency rates, and a $13 million reserve on the Reserve Primary fund impairment.

The remaining difference in non-op relates to higher interest costs due to lower cash flow this year and the pulldown of our revolver.

Turning to liquidity, we continue to focus on maintaining a strong cash position.

We ended the quarter with unrestricted liquidity of $3.1 billion.

Our CapEx for the September quarter was $288 million, which includes $246 million in net expenditures for aircraft, parts, and mods.

During the quarter, we borrowed $166 million to finance aircraft predelivery payments, and the acquisition of four 737 new aircraft which were delivered this quarter, and in addition we paid out $148 million in debt maturities and capital lease obligations.

As Richard mentioned, our liquidity balance at the end of the third quarter includes an investment in the Reserve Primary money market fund.

We've reclassified that investment from cash to short-term investments and recorded a $13 million impairment on the original $831 million investment.

We expect to receive approximately $300 million from the primary fund in their initial distribution over the coming week, and we expect to receive the remaining investment as those assets are liquidated.

At the end of the September quarter, we were in full compliance with all financial covenants and with Northwest's amendment earlier this year, we expect the combined carrier to be in full compliance with all financial covenants in both agreements and do not foresee any issues to remain in compliance.

The dropping oil prices in recent weeks clearly provides upside to our liquidity position, but we may also have to post some additional cash collateral with our fuel hedge counterparties.

Anticipating this, at year end if crude were to be at the $80 price point, we would expect to post cash collateral in the $200 million to $300 million range, most of which will burn off by the end of the first quarter of 2009 as contracts settle.

While lower crude prices have impacted the value of our hedge portfolio on a short-term basis, our strategy has delivered more than $500 million in gains this year alone.

We expect to end the year with approximately $3 billion in cash on a standalone Delta basis, and when combined with Northwest at roughly $6 billion.

As noted above, those amounts may be impacted somewhat by short-term collateral in these on fuel contracts.

Turning to our expectations for the December 2008 quarter and the fourth quarter, we expect our consolidated passenger unit revenue to be up 8% to 10% with domestic growth in the low teens.

Non-passenger revenue which includes cargo, SkyMiles, and our MRO operations to be roughly $700 million or up about 15%.

Our operating margin to be in the range of a positive 1% to 3% with our main line CASM to be flat to up 2% year-over-year.

We expect our fuel costs per gallon in the fourth quarter all in to be approximately $3.21, which includes the impact of fuel hedging.

We have calculated the fourth quarter jet fuel price using a market price of $2.58, which includes both taxes and transportation.

We have roughly 30% of our fourth quarter consumption needs unhedged that will participate at that level.

The average costs of our hedge position across our entire portfolio adds another $0.60 per gallon to the calculation.

We expect to post a modest loss in the fourth quarter along the lines of what we saw in the current quarter and from a cash perspective we expect free cash flow to be break even for the fourth quarter.

One other nit I want to put out there -- if you were to show the significance of how much leverage our earnings have to fuel, if you were to compare our fourth quarter earnings projection that we're giving you to today's jet fuel market prices, we would be expecting a pre-tax profit in the fourth quarter of roughly $200 million.

Looking at capacity going forward, in the fourth quarter we expect system capacity to be down 4% to 6% year-over-year, with consolidated domestic capacity down 12% to 14%, and consolidated international capacity to be up 13% to 15%.

We're looking hard at all of our capacity, but particularly our international capacity, and this guidance is a reduction of about 2 points of international capacity from our latest guidance.

With respect to CapEx, we expect our fourth quarter net CapEx to be $70 million, which makes our full year CapEx to be roughly $1.1 billion for 2008.

We're anticipating a delay in the scheduled deliveries of at least two 737-700s and one 777-200LR due to the labor strike at Boeing, and that's factored into those estimates.

For 2009 we expect CapEx to be approximately $1.3 billion for Delta standalone with about $1 billion of that in aircraft.

We have finance commitments for all of our firm aircraft deliveries next year.

Fourth quarter debt maturities are expected to be $134 million and total 2009 debt maturities for Delta are expected to be roughly $800 million.

Looking at advance revenue trends, while near term demand remains solid, we're keeping a very close eye on booking trends.

Internationally, we're starting to see a little bit of demand softening.

Book load factors are down 2 to 4 points for the November and December months, but advance yields are maintained at a very strong level, and all in support a fourth quarter RASM growth target for international of roughly 10%.

Domestically, despite the large amount of capacity that has come out and traction that we've seen around price increases, there continues to be significant sale activities, particularly from some low fare carriers.

While we're seeing some pressure in this environment, our year-over-year book load factors for domestic are higher through the remainder of the year.

We remain committed to quickly address any weakness in demand in both international and domestic markets at the first sign.

Looking into 2009 we expect to experience a decline in demand, given the current economic crisis and are developing plans with a number of different scenarios, but a significant decrease in demand is in some ways easier to work with than $150 oil was this past summer.

We now have the tools through our flexible fleet to manage it better than others.

We historically have and will continue to move quickly on capacity because of that flexible cost effective fleet with a number of aircraft within their retirement window.

We've also built a lot of diversity into our network, so we're not overly exposed to any single market segment like Heathrow or Florida.

We're still finalizing our capacity plans for next year, monitoring demand at a market level both domestically and international and will be taking that action as necessary at the first sign of weakness.

So in closing there is no doubt we face challenges with the credit crisis, the volatility we've seen in the global economy, and fuel prices have still remained at historically high levels, but we are prepared to be a leader once again with capacity cuts if demand continues to deteriorate.

We're willing to scale back international growth and pull down additional domestic capacity, and we've got the fleet and the will and the know how to do it quickly in response to the market environment.

We're running a great airline.

We continue to separate ourselves from the pack with solid top line growth, that domestic capacity discipline that I mentioned, and had a best in class cost structure, and a very solid liquidity position.

And when we bring Northwest into the equation, we'll be positioned to be the world's best airline with the best assets, the best employees, and clearly the best opportunities to move forward.

That ends our prepared remarks.

At this time we'll be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) We'll take our first question today from Mike Linenberg with Merrill Lynch.

Good morning, all.

I guess a couple questions.

I think when I look at your other revenue guidance it is $700 million, and I guess -- or the non-passenger, and that's cargo and other.

You were $741 million in this last quarter.

When we think about some of the ancillary revenue fees, are they hitting that line item and is that number actually somewhat of a conservative forecast or are there some one timers in this third quarter that bulk that up?

Mike, there were no one timers in that that bulked that up.

I think a little bit is the fact that you have a little more capacity out there in the third quarter versus the fourth quarter and third quarter is a heavier travel spend period and there is a little seasonality in the run rate.

But all the fees are sticking and they're in the numbers on an ongoing forward basis.

Good.

Second question and I guess this is to you, Ed, as well.

You mentioned that you had your financing commitments in place through 2010 for the aircraft that are being delivered.

Are those -- is that predominantly manufactured support financing or are there other channels or other sources that you have lined up?

We have not disclosed publicly what the commitments are, but we can assure you that all firm aircraft that are on order are fully committed.

Great.

Thanks.

Good quarter.

Thank you.

Thank you, Mike.

We'll take our next question from Gary Chase at Barclay Capital.

Good morning, guys.

Good morning.

Wondered if you could elaborate a little bit, Ed.

You mentioned a little bit of international softness, wondered if you could shed a little bit more light on where you might be seeing that.

And then more importantly, if you could talk a bit about the response to it which you and Richard have touched on both in the prepared remarks responding at the first sign of weakness.

Should we expect that when international capacity comes out, it will just come out?

Or are we talking about a reallocation to domestic or that you're going to pull it out, and how do you get the costs out with it?

I will give a little color, and then I will turn it to Glen, Gary.

As I mentioned, we already are starting to trim a little bit internationally as we are entering into the fourth quarter.

Our expectations -- we've already pulled about 2 points of international growth out as going into the fourth quarter.

I would say that there is no general trend line that we're seeing in terms of any targeted signs of weakness, and I think it is far too early with respect to the size of the economic valley that hit us over the last four to six weeks to see a longer term trend line.

But number one, we're not going to be pulling capacity back domestically, so people need not worry about that.

Secondly, as we look forward to our coming merger with Northwest, it is going to give us a lot of additional options and allocation opportunities to address some of that weakness.

Clearly in the short-term we're going to be addressing it through day of week cancellations and frequencies.

We're looking at a handful of markets, but no large scale pulldowns on international front at this point.

Glen, do you want to add color to that?

Just a couple things, Gary.

I want to point out the diversity of our portfolio relative to some of the other carriers who are heavily entrenched in markets like London to New York, which we believe would probably be disproportionately hit by the turmoil in the financial markets.

Delta has by far the most diverse portfolio in really serving most of the major global marketplaces.

And a lot of the places that our growth is targeted for like Africa despite the financial crisis are still estimated to have some of the highest growth rates in the world over the next year.

So I think we're somewhat insulated in certain areas, and we'll continue to focus on those that are accretive, and at the same time trimming out the capacity at the bottom end when we see that things aren't working.

I'd much rather be sitting with a market basket where we have 41 trans-Atlantic markets than sitting where we're heavily focused in one or two-lane corridors which have been historically highly dependent on the financial sector.

This is Richard.

I will address the cost issue.

In the event we pull wide body capacity or the market signals that we pull wide body capacity, I think I would reiterate what Ed said -- we're still seeing a pretty strong remainder of the year, go back to our earlier comments in the prepared portion of the call.

But we get to that point, remember we have a very flexible fleet, and those airplanes will not flow back to the domestic marketplace.

When you look at our ownership costs, our CASM ownership costs of our 767 fleet, it is by far probably the most efficient given the reorganization that the company went through in terms of its capital costs, and we can get the costs out quickly.

We demonstrated that earlier in the year when we took about 15 airplanes out.

We go very diligently and really attack all of the fixed costs that go with each one of those airplanes, and I think we've demonstrated that we do that, and we would do it again.

And given that the capital ownership of the 767-300 is as low as it is, we don't have to bring those airplanes back and won't bring those airplanes back to the domestic system and just add capacity for the sake of adding capacity.

And then just quickly how much impact does currency have?

How much did it have in the quarter and then do you have a material amount of your costs in nondollar denominated?

Gary, this is Glen.

On a revenue side, and I will let Ed talk to the cost side.

On the revenue cost side, we probably had 4 to 5 points of trans-Atlantic RASM in the quarter for year-over-year increases, and the euro/dollar exchange rate.

As you know, when we get to the fourth quarter, that becomes flat right now as we're looking at it on a year-over-year basis, but unit revenues are still up double digits.

So that portends very well for the discipline the industry has had on the pricing front as we enter into the shoulder season.

On the cost side that for in terms of cash, Gary, our costs are significantly denominated in dollars, so there is minimal cost implication.

There is some on FX, but minimal given that it is largely dollar denominated costs.

Fuel is all dollars, right?

Fuel is all dollars, most labor, and we don't have a whole lot of employees in foreign location.

Thanks very much.

Thank you, Gary.

We'll take our next question from Jamie Baker with JPMorgan.

Good morning, everybody, and welcome back to Jill.

Ed, Mark and I have asked you in the past about the timing of a potential capital raise, and your preference as I recall has been to wait until after the closure of the deal, and I am just wondering if anything in regards to the Reserve primary fund situation or what's happening in the economy and the market changes your view on this potential timing?

It doesn't, Jamie.

We're expecting to close the year with $6 billion in cash.

We are monitoring the Reserve primary fund as everyone is very carefully on a daily basis, and the SEC's got that under their full jurisdiction, so we have confidence it is going to be handled in an orderly manner and we're going to get our cash out of there.

And we do need to get to the other side of the transaction to look at the question with respect to overall liquidity.

The only point I would add -- while we are going to continue to consider whether a capital raise in the future is necessary, when you look at the seismic shift in reduction and cost of fuel, that certainly has added a considerable amount of additional liquidity to the merger forecast we previously did not anticipate when we last had that conversation.

Okay.

Okay.

I am sorry.

Go ahead.

This is Richard.

The other thing you can't miss is the fact that we have an affinity card opportunity.

That's right.

That's right.

We have noted that in the past.

Actually, Richard, while I have you, you talk about taking steps at the first sign of weakness.

I don't want to get too hung up on this, but by our math and I suspect the math that many others are doing, current fuel and quite frankly pretty bad demand doesn't necessarily require that you do anything, I suppose it is better that you do.

I guess I am just curious what sort of demand hit it might take at $2.40 spot jet kero to potentially drive you into loss production, or if you want to put it differently, are you now optimized to withstand a strong recession or merely a modest downturn?

Well, let me try to answer the question a different way, Jamie, and I guess we haven't particularly quantified it.

We do sensitivity analysis as we're preparing our 2009 plan.

When you think about what you would rather manage at an airline, you would rather deal with demand cessation rather than $150 fuel.

And in some respects with fuel dropping the way it is dropping, we're somewhat hedged against the economic downturn, because the fuel prices have gotten so high.

We were looking at a $4 billion year-over-year increase in fuel, and when fuel goes down to normalized levels, to Ed's point, if you took today's spot in the fourth quarter, and we didn't have any hedge effect, we would have a couple hundred million dollar profit.

So in terms of what you would rather manage to, you would rather manage -- you would rather not have either, right, but if you had to manage to one of them, having very -- dropping fuel, dropping like a rock is a big offset to what happens in the economy.

Thanks for that, Richard.

That's pretty much the point we've been trying to make, but the market doesn't seem to have woken up to this reality just yet.

You actually wrote a good note on this a week ago.

Oh, well, thank you.

I mean it highlighted that, and it is accurate in that regard.

Okay.

I appreciate the feedback, gentlemen.

Jamie, to echo what Richard was saying, we also don't make certain we're not going to be stagnant and take the lower fuel prices and sit back and let that roll to the bottom line while we watch our top line soften.

So we will would be doing both, but it gives you a hell of a lot better cushion in operating flexibility with the lower fuel price environment than $150 oil did to make those decisions on demand.

Excellent.

Thanks, everybody.

We'll take our next question from Ray Neidl from Calyon Securities.

Yes.

To verify your cash position, I just to want verify, did you take down your full $1 billion revolver?

And I haven't seen the cash flow statement.

I know you went through it quickly on the conference call, but taking down that revolver, I would have thought your cash position would have been higher than $3.1 billion at the end of the quarter.

Could you just briefly outline?

Sure, Ray, I'll give you a quick -- if you were to factor in, we've been talking about total liquidity in the past including the revolver, so to do an apples-to-apples, if you were to look at where we ended June including the revolver, we were at $4.3 billion of total liquidity, and we closed September at $3.1 billion, so there is three components to that.

First off is at the end of June we were carrying a significant amount of fuel hedge collateral in our cash, so it is about $675 million that came out.

Secondly, seasonally our cash flows are weaker in the third quarter.

So reductions in the air traffic liability, receivables and the like contributed to about a $582 million seasonal reduction in working capital.

And the third thing is we spent about $300 million in cash CapEx in the quarter.

So if you were to factor those three negatives, add back about $300 million for depreciation, I think you will get there.

That clarifies that point.

Thank you.

Second thing is you did talk about your credit card holdbacks and reserves.

It might not apply to Delta, but for airlines in general I am hearing from our credit card guy that the credit card companies are telling everybody that they're going to start making troubled industries and troubled companies put reserves aside.

Admittedly right now airlines aren't the worst industry any longer.

I can think of a few others that are in worse shape.

But going down the road, is that a threat to Delta or do you think that's a threat to the industry?

It is not a threat to Delta.

We just signed up a new long-term agreement with our Visa Mastercard provider that takes us through to 2011 with a very, very manageable cash covenant, substantially better than we had previously in place.

And on the American Express side as Richard said, we're talking about a longer term affinity relationship with them, so I don't think holdbacks are going to be a topic of much debate on the AmEx side as well.

So I can tell you Delta is well protected, and I think the other thing you need to know is we have negotiated our credit card processing agreements with the mind of bringing Northwest into the portfolio as well going forward, so the new entity will be fully protected.

That's a good point.

Thank you.

We'll take our next question from Bill Greene with Morgan Stanley.

Hi.

My question is just a point of clarification on the fuel commentary.

Ed, you mentioned I think in your comments $3.21 or gallon or so for fourth quarter all in, but in the press release it says $3.22 cap.

Right.

Is that capped at $3.22 and yet you're going to have $3.21 all in, despite the fact that fuel is lower?

I had the same question.

We both had the same questions.

I think it is in the mechanics with how the hedges work, and as fuel -- we're assuming a $2.58 all in current market including taxes and transportation.

As that rises, it caps out at $3.22.

So it is probably longer than this call can take to explain the ins and outs, so Jill will follow up with you on the details, but we triple checked it, and yes, our $3.21 for the fourth quarter is the proper calculation.

All right.

Maybe you can talk broadly, how are you thinking about hedging going forward?

Are you trying to look it in here at $80 or let more ride?

Or what's your view strategically on how you're going to approach this and are you going to use more call options so you don't end up in the situation if oil ends up at $50 like we would all love, but obviously if you've locked in at $80 that would be a problem again.

We have used call options in the past and we're continuing to use call options, and it is certainly the best protection you have against collateral calls, and as oil drops that you have the opportunity to fully participate in that downside.

Systemically we put a program in a little over a year ago, Bill, since we exited bankruptcy to try to capture somewhere around 50% to 75% of the coming twelve-month supply and locking that in and it meters down over the following year to two years beyond that.

We're continuing to use that same philosophy.

We're not trying to go in there and outguess the market or lock in large quantities at $80 because to your point, if it falls below that, you don't want to be stuck on those hedges.

Look at it to fix our near uncertainty.

We look at our ability to move our fleet around is somewhat limited within a three to six-month window.

Obviously longer term it is more flexible in terms of getting the costs out.

So you want to take some certainty in knowing where your fuel price is going to be as you're setting your near term flight schedule.

But beyond that, we're going to -- beyond six to 12 months, we're not going to go long at this point.

Okay.

And then on the credit card issue, is there a MAC clause in the new agreement or no?

Which credit card issue?

The one you just resolved through 2011.

The Visa/Mastercard?

Yes.

Yes, I think all credit card agreements have a MAC clause, but we factor that in in calculating the covenants as well.

Real quick lastly -- corporate customers, Glen, what are they saying to you for 2009 in terms of demand?

Hey, Bill, how are you?

I think most of the corporate clients right now are seeming very cautious.

We had some clamping down in the fourth quarter, but the capacity reductions we've taken have to date more than offset that, and I think we continue to watch it very carefully and take the actions to mitigate any continued decline in demand.

All right.

Thanks for your help.

We'll take our next question from Hunter Keay with Stifel Nicolaus.

Good morning.

Thanks.

Quick question for you on your consolidated RASM growth estimate fourth quarter.

Looks like you maybe scaled back nominally from comments you made last month.

Is this -- 8% to 10% is still fantastic, but is this a function of maybe slower than expected demand environment or in just overall economy or some pockets of resistance in the price increases you have to pass through?

Any kind of color there would be appreciated.

We didn't give specific fourth quarter guidance last month.

I think we talked about it being in the low double-digits domestically.

I don't know that we gave a consolidated number.

We are seeing it continue in the low double-digits domestically.

Yes, I would say over the last 30 days our expectations for the fourth quarter on our RASM growth probably come down a point or two from expectations.

I will tell you the fuel expectations have come down far greater in terms of the cost savings than the 1 to 2 points on demand.

But we are looking as I mentioned a 10% unit RASM growth rate in the fourth quarter internationally, low double-digits domestically.

The reason it only adds to 8% to 10% is because we're taking a much higher proportion of RJs out of the system that carry a disproportionate higher absolute RASM in the calculations, so when you do the math, you can actually be pulling domestic and international down or improvements at double-digit rates, yet the aggregate comes in slightly under that.

Great.

Thanks.

That's helpful.

Also, on the demand side, as we look at balancing load factors and yields to revenues, how much of a decline in load factor are you guys comfortable with thinking about in the context of increasing RASMs and increasing yields?

How much of a decline in load factor are you comfortable with before you start to think you need to actually start making more cuts to the capacity side?

Is there an inflection point there?

How should we think about that?

At a system level our lows -- at a total system level, our advanced bookings are up consistently throughout the November/December time period.

And when you get to January, you have relatively low percentage booked right now.

But what we see is domestic is up year-over-year, and international is slightly down.

Neither of those at their current rates and given the advanced yields in the marketplace would cause us to change very much our portfolio moving between now and the end of the year.

But as Richard and Ed said we're monitoring this as a daily basis, because I think we're all a little bit uncertain as to where the economy is headed after the turmoil in the financial markets.

And, Bill, it is Richard.

I don't think you can look at just one component of that equation.

You've got to always look at load, yield, and RASM.

I mean, it is all three.

When you look out -- what we look at and we have very good, probably the industry-leading point of sale systems because -- we have an SAP system.

So we get almost up to the minute information.

And what you triangulate with is, okay, what are the advanced yields, what are the -- what's the advanced booking curve, and how do both of those compare year-over-year.

And then that drives into your capacity decisions, and you really -- Glen keeps his hands on those on a daily basis.

And so it is not just a load factor question.

You can't answer that question without seeing yield and what your RASM performance is.

Sure.

Okay.

Thanks.

Appreciate it.

Hope that helps.

We'll take our next question from Daniel McKenzie with Credit Suisse.

Hi.

Good morning.

The trans-Atlantic unit revenue results are a little bit counterintuitive given what's going on in Europe and the UK right now.

I am just wondering if you can help us peel back the onion a little bit and in particular how much of this revenue performance might be due to Eos and MaxJet liquidating?

They didn't matter really.

Daniel, I think again you have to look at what sectors have been disproportionately hit.

We are the largest carrier to the Middle East.

We're the largest carrier to Africa, and those are all included in our trans-Atlantic numbers.

Those economies are still quite robust right now.

Where we're not so big is London Heathrow, where we just entered service last year, and I think what you know is that there are several carriers out there that have made their living off of New York to London, and that's been disproportionately hit as you saw from BA's announcement a couple of weeks ago or last week.

And we're somewhat insulated from that because that's not where we're big, and I think that's been one of the secret sauce in our recipe of success in the trans-Atlantic.

MaxJet and EOS were so small, that it was a rounding error in terms of trans-Atlantic capacity.

Sure.

Okay.

Fair enough.

And just following up with respect to regional jet plans, I know Delta is planning to get rid of the equivalent of 100 RJs, and I think the lawsuit if I am not mistaken with Mesa is still pending here.

How would that or does that impact your ability to execute on your regional jet plans through the end of the year here?

We still have and we'll particularly have a number of levers after the merger closes to continue to vary our capacity.

We have utilization floors in the existing contracts, and then we have an owned carrier, ComAir, and we'll own Masaba and Compass after it closes.

So we'll have three pretty significant owned carriers.

And we have some ability to vary our capacity in our capacity buy agreements, and we're going to continue to vigorously litigate the Mesa lawsuit.

Okay.

One quick final question here.

Looks like Delta is planning to grow 8% in Atlanta in the first quarter of '09, some of which of course is tied to plugging in Northwest hubs, but a lot of it not.

I am wondering if you can talk a little bit about the thought process with respect to adding capacity at Atlanta in a recession here?

I actually read your comments on that last week, and I think what you'll find is we have not loaded our January schedule yet, and it will be significantly below that when it actually gets loaded in the next few weeks here.

Okay.

Good.

Thanks a lot.

Appreciate that.

We'll take our next question from Bob McAdoo with Avondale partners.

Just a quick one back on the fuel hedging, make sure I understand what you've gone through here.

If I look at the release, and you have this heading called jet fuel equivalent cap, that's not really -- is that a cap or is that really what you think it is going to be as opposed to a cap versus a floor?

Are you just saying it will be $3.22 or are you saying that's the most it is going to be?

Bob, this is Ed.

I will ask Paul Jacobson who is with us, our Treasurer, who has the details of that to explain that.

Thanks, Ed.

That is a cap on the hedged portion, so the 69% of projected consumption for fourth quarter -- for 69% of it we wouldn't pay more than $3.22.

But if it goes down below that, do you benefit to the extent it goes below?

We've got -- as Ed mentioned we utilize the call options and collars.

A significant portion of our hedges are out of the money right now, so that we're incurring losses in the fourth quarter, which is what's driving the higher projection for fourth quarter fuel prices.

So as we look out into what you described for the first, second and third quarter, should we make a similar kind of assumption in terms of the amount where in effect there is a floor there, i.e.

if it goes lower you're stuck at this level so that -- however you want to say it, not stuck is maybe not the right word, but where you would pay these kind of numbers even if it was lower?

Yes.

Similar to the fourth quarter?

But it is on a declining percentage of our overall consumption based on our hedge strategy.

Sure.

That's all I had.

It is about for the next this quarter and next quarter, that's right by the time we get into the second quarter we're largely out of our hedge position, so we'll have full participation.

And even in the -- not to further complicate it, even at these levels, I am not sure stuck is the right word, but for the fourth quarter I think roughly 45% of our aggregate consumption participates down to $80 and 30% of that even below that, so we do have a large amount of participation in a downward trend going forward as well.

Great.

That's what I wanted to be sure.

Thanks a lot.

Sure.

We'll take our next question from Kevin Crissey with UBS.

Good morning.

Most of my questions have been answered, but I do like to ask in terms of providing specific guidance for the combined entity, that will be a post announcement or post approval or when would we see that?

Our expectation, Kevin, is we're going to have an Investor Day probably sometime in December.

I don't know.

We're looking at a couple dates, so at that point we're going to provide full consolidated guidance.

Okay.

Terrific.

Thanks.

And I will just go with everyone else to the extent that you can provide more detail on the hedges -- I know you have a range of different derivatives, but to the extent you can give more detail, it would be great.

Thank you.

We'll do that.

We will do that.

We'll take our next question from Chris Cuomo with Goldman Sachs.

Good morning, everyone.

Just had a quick question for you on the ancillary fees.

Just basically what's your view on the sustainability of the numerous additional fees the industry is charging -- the baggage fees, the change fees?

We have a slowing economy -- we have substantially lower fuel prices.

What's your view on that looking in '09?

Do you think that Q4 '08 run rate is sustainable?

We do think it is sustainable, Chris.

We've probably been a little less aggressive in a couple of areas than some of our competitors, and we're still looking at that as we move forward.

On the fee-based revenues, everyone is in a very different place across the industry, and as we merge with Northwest we'll have another opportunity to look again with respect to where the fee-based revenues align, but strategically going forward, a la carte pricing is where we need to go as an industry, so I think at a macro level it is very sustainable.

That's all I got for you guys.

Thank you.

We'll take our next question from Michael Derchin with FTN Midwest Securities.

Hi, guys and gals.

A couple of questions.

In looking at the RASM by region, the Asia Pacific area is obviously the weakest.

It is certainly very small portion of your operation right now.

However, when you acquire Northwest, it is going to be a substantial portion.

I am wondering if you can give us some view on your outlook for Asia Pacific, particularly in the current global economic climate and with so much capacity added by the foreign flag carriers in that region -- compounding a problem going forward?

This is Glen.

I think we have a couple of issues there.

When you look at the numbers, also look at the percentage increases we put into the trans-Pacific.

I don't have it in front of me, but we almost doubled in our size in the trans-Pacific, and to have unit revenue increases on a doubling in capacity I think is a very impressive number that relates to our core advantage here applying from our major hub complexes into Asia and creating uniqueness that other carriers would only offer as an off line connection.

So I think we've seen a very durable growth in Asia.

Of course we're concerned as we are with all the international markets what the economic turmoil means moving forward, and we'll continue to monitor very carefully, but I am actually very impressed with the Pacific results year-over-year.

Okay.

Could I ask a couple of other questions, one, just relates to your conviction on getting the DOJ signoff by the end of the year and before the administration leaves office?

How confident are you on that?

Extremely confident.

And finally just on the aircraft you have announced that you are removing, I think it is roughly 20 mainline aircraft, the 100 or so equivalent RJs.

How many of those have you actually either sold or returned to lessors or have agreements in the process?

We have either sold or returned on the main line side roughly half.

We've got about half of those parked.

Obviously the market conditions are changing pretty significantly as the credit market has dried up in the last month or two, but we think things will continue to move forward, and I think it is just a temporary pause, but we're continuing down the path to dispose of those aircraft.

Thanks very much.

We'll take our next question from Bill Mastoris with Broadpoint Capital.

Thank you.

Ed, you talked about $1 billion in incremental fees on a run rate basis.

Does that break down to 250 per quarter with the combination of the bag fees, change fees, et cetera?

How should we be thinking about that going forward?

To clarify, Bill, it is not $1 billion of incremental.

Our total fee-based revenues with what we have today is at the $1 billion level all in, so it includes fees we already had, administrative service charges and the like and factors in new fees.

When you look at our other net revenue line which is where the fees come into, that line is growing at about a 25% clip year-over-year in the September quarter.

I expect on a going forward basis those looking into '09 as compared to say the fourth quarter we're going to continue to see those grow at a double-digit clip from where we are in '08, but it is not $1 billion of new revenue.

Would you expect to see it when you say double-digit near the 25% range or slowing down a little bit?

I think it will slow down.

The economy is slowing down.

You have a lot of those fees already in the base and lapping as you go forward, but I would say low double-digits.

Okay.

Next question.

Once you merge with Northwest Airlines and maybe this is getting a little bit ahead of what you might be discussing on the Investor Day, how are you going to think about liquidity just in terms of is it 25% of LTM sales?

At what level, all right, in this new environment are you comfortable?

Is it 20%?

Is it 30%?

Where do you want to be ideally, and I know you talked about some of the mechanisms you could use to actually achieve whatever goal you set forth, but any additional color would be very helpful.

Two things on that.

One, you're right.

We will give much more color at the investor conference that we're going to hold, so I will hold most of my remarks until then.

But I can also tell that you where we sit today, we're very comfortable with $6 billion of cash at the end of this year.

Thank you.

Sure.

At this time we have no further questions.

I want to thank you for your participation on today's Delta Air Lines third quarter earnings call.

You are free to disconnect.