達美航空 (DAL) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines April 2009 quarter financial results conference call.

My name is Cynthia and I will be your coordinator.

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

(Operator Instructions).

I would now like to introduce the call -- 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 to discuss Delta's March quarter 2009 financial results.

Joining us from Atlanta today are Richard Anderson, Chief Executive Officer, Ed Bastian, Delta's President and Hank Halter our Chief Financial Officer.

Also joining us during the Q&A session are Steve Gorman, our Chief Operating Officer, Glenn Hauenstein, EVP of Network and Revenue Management, Mike Campbell, EVP of HR and Labor Relations, Ben Hirst, our General Counsel, Paul Jacobson, Senior Vice President and Treasurer, and Ned Walker, our Senior Vice President and Chief Communications Officer.

Richard will begin the call with a Delta and industry overview.

Ed will then address our March 2009 quarter financial and revenue performance and give an update on merger integration.

Hank will conclude with a review of Delta's cost performance and liquidity.

We've allocated 25 minutes for executive comments.

After their comments, we've allocated 25 minutes for questions from the analysts, and we will then conclude the call with a 10-minute Q&A with the media.

When we get to the Q&A, I'd like to request that you limit yourself to two questions.

That should allow us to get as many questions in as possible during today's call.

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'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.

With that I will turn the call over to Richard Anderson.

Thanks, Jill.

Good morning and thanks for joining us today.

This has been a challenging quarter for the global economy and Delta was certainly not immune.

However, it is clear that Delta's fundamental business strength is solid as we essentially broke even for the quarter excluding fuel hedges and special items.

We achieved in this one of the worst economic recessions in our lifetime.

But before I get into the details I want to first thank the Delta team around the world for their hard work and dedication to running a great airline.

While tough days still lie ahead I have no doubt the people of Delta will get through these challenges with professionalism, and unwavering committment to delivering a first-rate travel experience to our customers.

We have recognized employees for their efforts with more than ten million in shared rewards so far in 2009 for meeting operational performance goals.

And thanks to the team for some really great work.

For the quarter, Delta reported a net loss excluding special items of $693 million.

These results were impacted by hedging decisions we made last year when crude was climbing to nearly $150 a barrel.

What is critical to focus on is excluding special items and fuel hedge losses of $684 million, we had a break even quarter.

We generated positive cash flow from operations of over $600 million during the quarter and our strong $5 billion liquidity balance was unchanged from the end of fourth quarter 2008.

So we're in a sound position to deal with the current economic environment.

We've got a strong financial foundation, a diverse global network, unmatched benefits from the merger, and the best employees in the industry.

In the midst of challenging times, it's even more important that we're running a solid operation.

In February, Delta and Northwest posted top tier results in completion factor and on-time arrivals as reported by the Department of Transportation.

In fact, Delta had its best February completion factor performance on record at 99.1%.

Northwest kept its performance at the top of the industry during the quarter and Delta improved its baggage results more than 20% year on year in the March quarter.

So the investments we've been making in technology and processes are paying off for our customers.

I think the biggest question out there now is the revenue environment.

We've seen some signs of stabilization as the revenue environment appears to have bottomed out.

But it's still a bit early to call and we expect to face significant head winds throughout 2009.

In addition to our announcement last month to reduce international capacity 10%, starting in September we're taking further actions to increase revenue, reduce costs, and preserve liquidity.

We continue to believe that unbundling our pricing is the right thing for our customers and our business.

To that end, Delta announced this morning that we will charge a $50 fee for a second checked bag on international flights.

We're taking 40 to 50 aircraft out of the Delta fleet this year.

This will include grounding all remaining B-747-200 freighter aircraft at the end of this year.

We're also reducing over 30 regional jets this year.

We're also focused on aligning our staffing levels with reduced capacity.

Our staff at the end of the quarter was down 6% compared to last year.

This will be even lower after the end of the summer travel season when most of of the 2,500 employees who participated in the voluntary programs will have left the Company.

So we are staying ahead of the curve on capacity adding new sources of revenue and maintaining our best in class cost structure.

The result is an industry leading liquidity balance that will help us weather this economic storm.

In the midst of challenging times our merger with Northwest is even more important.

It differentiates Delta from the rest of the industry.

We've got an unmatched annual $2 billion synergy opportunity by combining the two companies.

It's been a year since we announced the merger.

The deeper we get into putting the two airlines together the more we see the merger really is a game changer.

We built a tremendous amount of momentum through the integration of the two airlines.

We're on track to receive a single operating certificate from the Federal Aviation Administration by the end of the year and we worked out seniority integration and representation issues for many of our work groups.

More than half the airports have been rebranded and consolidated.

We have employees in new uniforms and our domestic product is aligned.

So really great progress.

So while it is going to be a tough year no airline is better positioned than Delta.

We're focused on the fundamentals, running a great airline, making prudent decisions about capacity, costs and capital, and accelerating our unmatched benefits from the merger so that we'll be ready to take advantage of the up side when the economy turns around.

With that I will turn the call over to Ed Bastian.

Thanks, Richard.

Good morning, everybody.

I will join Richard in thanking my Delta colleagues.

We're in some pretty challenging economic times, and on top of that we're busy merging two companies into the world's largest airline.

The Delta people continue to step up to the challenge day after day.

Thanks to all of you for your hard work and dedication.

Turning to our financial results for the March quarter excluding special items, Delta reported a net loss of $693 million or $0.84 per share on a base of 825 million fully diluted shares.

This compares favorably to consensus estimates of a loss of $1.01.

As Richard mentioned, despite one of the worst economic back drops on record we would have reported break-even results for the quarter if we had fuel at market prices.

This point is particularly relevant because we will largely be out of our legacy hedge positions by June.

On a GAAP basis, we reported a net loss of $794 million in the March quarter which includes special items of approximately $100 million.

These special items consisted of a $50 million charge for severance related to the voluntary workforce reduction programs offered in January and $49 million in merger-related expenses.

We generated more than $600 million in operating cash flow and $100 million in positive free cash flow in the March quarter.

Our operating cash flow allowed us to pay down over $500 million of debt in the quarter and make investments in the business while still retaining our unrestricted liquidity balance at a healthy $5 billion.

Unless otherwise noted as GAAP, all financial results and guidance we give today, including any comparisons to the prior year periods, will be on a combined basis which includes the results for Delta and Northwest for all periods.

Turning to revenue, our total operating revenue was down 15% year-over-year in the March quarter, which reflects the weak economic backdrop we're in.

Delta's consolidated passenger RASM decreased by 12% with the yield down 9% and load factor down three points.

This was slightly worse than our guidance of unit revenue down 10% as yields on close-in bookings did not pick up as we were expecting.

Domestic passenger RASM decreased 11%.

Domestic load factor was down less than 1% due to our capacity reductions.

However, yields were under significant pressure due to aggressive sale activity.

Unit revenue on the international side was down 13% year-over-year with the yields down 6%.

Yields in the transatlantic were significantly impacted by foreign exchange and a weaker fare and cabin mix.

Our pacific performance showed relative strength.

Revenue from other sources which includes fees from unbundling our ticket pricing offset some of the weakness on ticket revenue.

As a result, total unit revenue was down 9% as compared to 12% for passenger unit revenue.

Based on the ATA data we recently received for the March quarter, we continue to produce a unit revenue premium to the industry.

Revenues in our cargo business were down $146 million or 44% on a year-over-year basis with about half that decline due to freighter capacity reductions.

The remainder was due to weakness in cargo volumes and yields due to the recession.

We announced this morning that we'll be discontinuing dedicated freighter flying and will ground our fleet of 14 747-200 aircraft by the end of this year.

Last year freighter flying cost us and we lost about $150 million.

So this is a positive decision for the long-term profitability of our cargo operation as we refocus our efforts on our belly business.

For the March quarter other net revenue was up 18% to approximately $900 million driven by ancillary revenues.

Baggage fees implemented in 2008 generated more than $160 million of revenue for the quarter.

As Richard noted, we also announced today a $50 fee for a second checked bag on international flights which we expect to generate over $100 million on a run rate basis starting July 1st.

Our strategy of unbundling product and services from the base ticket price clearly provides a valuable source of revenue and gives customers the opportunity to pay for only those services that are important to them.

In terms of our revenue outlook, while we have seen signs of stabilization in revenue trends, at the same time we haven't seen any indications of improvement.

Right now our May and June is shaping up to be similar to a combination of March and April.

In short, things aren't good but they're also not getting worse.

Domestically our booked load factors are down two to four points year-over-year for May and June but we do expect stronger close-in build.

Advanced yields are lower, due to aggressive pricing and a weaker mix in booking and cabin mix.

Also our year-over-year comps will be more challenged as we head into the summer -- as measured against the summer of 2008 given that was the peak of fuel surcharges and fuel cost driven fare increases.

Corporate travel trends continue to be soft, but the pace of decline in business yields and bookings has definitely slowed.

Our international book load factor is down four to six points for May and June, but we are expecting demand to build closer as we approach the summer travel period.

We've been an industry leader in addressing the deteriorating demand environment.

Last month we announced a 10% international capacity reduction starting in September.

I think it's important to note that we have no limitations or restrictions on our needs should we need to further reduce capacity.

While we haven't seen -- excuse me, while we've seen signs of stabilization I think I would echo the comments of our peers that we're not ready to call bottom yet.

We're more confident in the stabilizing the trends on the domestic side.

International year-over-year comps are tougher and we'll likely have a better indication as we head into the peak of the summer travel season.

So we'll continue to monitor advanced revenue trends and be prepared to make further adjustments to capacity as warranted.

In terms of capacity guidance, we expect our system capacity to be down 5% to 7% year-over-year in the June quarter with consolidated domestic capacity down 6% to 8% and our consolidated international capacity down 5% to 7%.

For the full year we expect system capacity to be down 6% to 8% with our consolidated domestic capacity down eight to ten points and our consolidated international capacity five to seven points down.

In connection with our capacity reductions, we're planning to remove 40 to 50 mainline aircraft from the Delta fleet which includes the 747 freighter I mentioned earlier.

On top of that we're also removing over 30 RJs.

As to the merger, we're pleased to say that the integration is moving faster than we had planned.

During the March quarter we realized about $100 million in synergies and we're on track to generate at least $500 million in merger synergies this year.

As Richard said, we've rebranded a large number of our stations including the top domestic Northwest hubs in Minneapolis, Detroit, and Memphis and we've painted 50 Northwest aircraft in the Delta livery.

We've also launched important initial cross fleeting routes in key market such as Honolulu, London, Paris and Rome inter changing Delta and Northwest metal and those cross fleeting decisions are performing very very well.

In fact the 747 we moved on to the Atlanta-Honolulu run had a 90% plus load factor its very first week.

We're on track to achieve a single operating certificate by the end of 2009.

Speed is critical in the receipt of the SOC as it really starts to unlock the full value of the network and operational synergies.

We're also bringing benefits quickly to our customers, while we make this a seamless transition.

All Northwest flights are now available for sale on Delta.com and customers can seamlessly merge points from SkyMiles and WorldPerks accounts.

We're also on schedule to integrate the frequent flyer programs completely by the fourth quarter of this year.

So you can see the integration is progressing very well.

We're focused on accelerating integration activities where we can ramp-up.

As we get our synergies in more quickly.

That will certainly help us to offset some of the revenue weakness we're experiencing from the recession.

With that I will turn the call over to Hank Halter.

Thanks, Ed.

Good morning, everyone.

Reviewing Delta's cost performance for the March quarter total operating expenses excluding special items decreased $1.1 billion year-over-year with $874 million in lower fuel expense.

For the March quarter main line CASM excluding fuel and special items was 7.76 cents an increase of 5% year-over-year.

That 5% is better than our most recent guidance of up 8% due in part to lower revenue related expenses but also resulted from improving productivity across all of our divisions.

Thanks to the entire Delta team for continuing to be vigilant about costs each and every day.

Excluding the impact of pension expenses, main line nonfuel CASM was up only 2% despite a 7% reduction in main line capacity.

Non-operating expenses were $96 million higher in March quarter this year versus last year, largely as a result of noncash purchase accounting related to debt discount amortization.

We'll continue to face some cost pressures in the June quarter from pension expense and from the timing of removing costs related to capacity reductions.

As a result, we're expecting second quarter main line nonfuel unit costs to be up 3% to 5%, and that includes three points of pension impact.

While we have some cost pressures from pensions and capacity reductions, the year-over-year GAAP in our main line nonfuel CASM will narrow throughout the year as we remove more capacity related cost.

We have a solid track record of achieving our CASM targets and will maintain that strong cost discipline.

With regard to fuel and hedging, we hedged 77% of our first quarter fuel consumption, resulting in a consolidated all-in price of $2.26 per gallon.

Included that in fuel price is $684 million or $0.71 per gallon of hedging losses on settled contracts.

During the quarter, we continued to add to our hedge portfolio albeit at a slower pace.

The steepness of the forward curve and the hefty prices on options significantly increased the cost of hedging.

So we need to proceed cautiously in this environment.

In the June quarter we've hedged 75% of our anticipated consumption.

Based on crude of $50, and a $10 refining cost spread, we expect our consolidated fuel cost per gallon to be $2.08 all in, and this includes a $0.45 per gallon impact from fuel hedge losses.

We expect cash collateral requirements on hedges to decline to approximately $100 million beyond the June quarter.

And based on the current forward curve our fuel hedging losses will be $0.18 per gallon in the third quarter and down to $0.03 per gallon in the fourth quarter.

In terms of earnings performance for the upcoming June quarter we're expecting a positive operating margin in the 4% to 6% range as lower fuel prices and one of our seasonally strong quarters offset the impact from the global recession, fuel hedge losses, and higher pension expense.

For the full year we still expect to be profitable as merger synergies along with the benefits of lower fuel prices and capacity reductions offset the deterioration in revenue.

Our liquidity position remains strong during the March quarter.

On March 31st, we had $5.0 billion in unrestricted liquidity which includes $4.5 billion in cash and $500 million undrawn line of credit.

These figures do not include $400 million in net hedge margin posted with counter parties.

The key point on liquidity is that our unrestricted balance was unchanged during a very difficult quarter where we continued to make debt pilots and investments in our business.

We generated positive cash flow from operations of over $600 million in the March quarter.

With that we were able to fund debt maturities, capital lease payments, and cash capex.

In the quarter, we also took delivery of 11 aircraft and issued $500 million in aircraft debt.

We sold 10 Boeing 757 aircraft and one DC-9 aircraft during our March quarter.

For the end of the June quarter we're targeting to grow our unrestricted liquidity balance to $5.6 billion.

We have very manageable debt maturities and capital lease payments of approximately $400 million in the second quarter, and net capex of $650 million with about $550 million of that for aircraft parts and modifications.

By the end of the June quarter we will have covered nearly two-thirds of our expected debt maturities and capex for the full year and grown our liquidity balance.

During the quarter we're taking delivery of three Boeing 777s and two CRJ 900s and have committed financing in place for those deliveries.

And then beyond the June quarter we have only three aircraft deliveries remaining and already have financing commitments in place for those as well.

So for 2009 we're targeting to grow our unrestrict liquidity and end the year with a balance between $6.0 billion and $6.5 billion.

So in closing, while there have been indications that demand trends may be stabilizing, we're still expecting the balance of 2009 to be difficult.

We're in the worst global recession of this generation and the revenue environment remains weak and certain.

Delta's industry leading cost structure, solid cash balance, and benefits from the merger, combined with the best employees in the industry, put us in a unique position to weather these tough economic times.

I want to sincerely thank the Delta team for all they do every day to make Delta the best airline to fly, the best place to work, and the best investment for our shareholders.

Thanks, Richard and Hank.

We're now ready for questions from the analysts.

Cindy, would you please review the process for asking a question.

And again we ask everybody to limit themselves to two questions.

Thank you.

Today's question-and-answer session will be conducted electronically.

We will first take questions from the analysts and then from the media.

We ask that anyone from the media please hold your questions until that time.

(Operator Instructions) We will pause for a moment to give everyone an opportunity to signal.

And we'll take our first question today from Mike Linenberg at Banc of America.

Hi, good morning, everyone.

Two questions here.

The $150 million that was -- well, the loss from the freighter operation last year is in the synergies for this year, the $500 million, or maybe it's the synergies for 2010, since's year end 2009 does, that include the benefits from shutting down the freighter operation or is that in addition to it?

Mike, in the $2 billion total synergy bucket, we do have benefits from shutting the freighters down.

I'm not sure the number is $150 million.

That's a little high.

We do have some benefits in the current year as well.

But the large synergy benefits will kick in next year.

Okay.

And then just the freighter operation, if you can just remind me, the freighter operation today, it is using combination -- the frequencies that they use in and out of Japan and I think in some of the other markets where there are restrictions in place, those can be used by your passenger airplanes, right?

Correct.

Okay.

Then my second question just has to do with RASM.

Ed, as you indicated, for the March quarter, I believe you were originally forecasting 10%, and RASM came in, I think down 12.

And it had to do with the lack of close-in bookings really materializing later in the quarter.

I know you indicated when we look in the June quarter, that at this point you are anticipating, I think both domestic and international, you indicated that you thought that you would see a better performance in close-in bookings.

What's behind that view?

Is that more of a hunch, or are you actually starting to see maybe things firm up to give you some confidence to make that statement?

No, we're -- the close-in bookings came in, Mike, in March it was the yields on the close-in bookings that didn't strengthen as we thought they might.

The guidance we're projecting for May and June really is very comparable to the performance we've -- we saw in March and we're seeing in April.

So, no, I'm not certain that we're saying it's going to improve as we look forward.

Okay, very good then.

Thank you.

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

Good morning, everybody.

Just a quick question on the -- just a quick cleanup question on that freighter issue.

The $150 million was a loss generated.

Can you just give a sense of what the revenue base from the dedicated as opposed to belly cargo business was?

This is very general, but it's about $400 million to $500 million as I recall.

Yes, I mean we obviously, we've been winding them down over the course of the last six to nine months, so Richard is right it is in that $400 million to $500 million annual range.

Okay.

And then the change in cost guidance, how much of that is your forecast for revenue related costs coming down and how much of that should we think is more sustainable as we move into what hopefully will be a better revenue environment?

Yes, no that cost improvement that we had in the quarter relative to our guidance was -- say about a third of it was due to the revenue related expenses.

A third was productivity across the divisions.

And I think another third is just acceleration of synergy opportunities.

We're taking this opportunity in the Company as the recession is here to look at every opportunity to accelerate, and that's one thing we were able to do during the quarter.

And we'll continue to do going forward.

Okay, and Hank is that a reasonable way to think about the forward looking change in guidance too for the full year?

Yes, as you look forward, as we've talked about, we still have that pension pressure and that is about three points each quarter.

But you will see the CASM performance improve each quarter, so quarter-over-quarter.

And the acceleration will certainly benefit that.

You will see our full year CASM guidance as improved slightly from the prior guidance we gave.

And that synergy acceleration and productivity across the Company is certainly helping us achieve that goal.

Okay and just one last quick one, could you parse out how within the transatlantic business, how the revenue performance was in what I would call "core Europe" versus some of the other flying that you are doing, say Johannesburg and things like that?

Hi, Gary, it's Glen.

We have kind of a -- I'm going to spin it a little bit differently.

We have the coastal hubs which are Atlanta and JFK which seem to be outperforming the interior hubs into Europe.

So really it's a point of sale US issue coming out of the mid states that's really impacting us.

That's the more discernible of the two.

So it's not really within the Atlantic business on the other side, it's just on the US side is where it is differentiated?

The differentiators are more based on the interior US points underperforming the coastal gate ways.

Okay, thanks, guys.

And we'll take our next question from Helane Becker at Jesup & Lamont.

Thank you very much operator.

Hi, guys.

I wanted to talk to you about some of the routes that are unique to Delta and their performance.

For example, your Africa operations.

Can you just sort of address how they're shaping up relative to your expectations?

And relative to what you are doing in terms of when you are talking about capacity that's coming out can you be a little more specific about where those routes are?

Certainly I can tell that you Africa has been an impressive result so far year to date.

We have a lot of new cities coming in Africa.

We're optimistic about the bookings.

They look relatively solid.

And then -- what was your other question?

I'm sorry.

You had talked about international capacity coming down in the second half of the year, more than you were already talking about, when you spoke to us the last time.

So can you just say where the differences are coming from?

We will make an announcement here in the next month or so, a public announcement about where those capacity reductions will be hitting.

We have publicly said by the fourth quarter we will be down 10% internationally versus previous guidance.

So the details of that will be forth coming over the next six to eight weeks here.

Okay.

Well, that's it then thank you for your help.

You are welcome.

And we'll take our next question from Jamie Baker at JPMorgan.

Hi, good morning everybody.

Good morning, Jamie.

I don't want to beat the dead horse on the revenue language, but Ed when you talk about stabilization, it isn't clear if you are talking about year on year revenue declines or year on year RASM declines.

And obviously the reason it makes a difference is that if it's only revenue that's stabilizing, then RASM probably gets a little worse from here.

I'm just not sure if this is what you are necessarily hoping to convey.

We're largely talking about RASM, Jamie.

Okay.

That's helpful.

And as a follow-up, the liquidity guidance was diminished a bit.

I realize it's not an enormous amount.

Anything behind the math there other than what's being captured by the diminished margin guidance?

You're talking about the end of the year liquidity?

Yes, the $6 billion plus which I believe was revised down from kind of $7 billion roundish number.

We're estimating somewhere between $0.5 billion to $1 billion to be the revenue hit from where we thought it would be start of the year.

So that's accounting for the net liquidity reduction.

Okay, perfect, thank you very much.

You are welcome.

And we'll take our next question from Hunter Keay at Stifel Nicolaus.

Thanks, guys.

Good morning.

Good morning.

Quickly on the capacity, to follow up on the previous question, I know more details are forthcoming but the incremental capacity that you are taking out internationally, I mean it's also noted that your full-year mainline capacity is within still in the same range.

So we should assume this is going to be aircraft that might be deployed to domestic routes or is this kind of a utilization thing?

I mean, what are some of the moving parts behind that number?

I will start, Glen can had a color.

Hunter, we're not providing a lot of detail because we're not announcing where the capacity is coming out.

You should not assume you are going to be seeing aircraft come back into the domestic system, though.

Okay, fair enough.

And quickly, would you care to maybe -- I think we can probably imply, based on some of the other numbers you've already discussed, but maybe update the PRASM guidance that you guys provided in January of down 4%?

No, I'm not sure we're in a position to update that now.

Okay, that's it, thank you.

And we'll take our next question from Michael Derchin at FTN Equity Capital.

Good afternoon.

Your pacific RASM was very impressive, down only 2.8%.

I wonder if you could elaborate on that very good performance, and whether you think that's sustainable for the balance of the year?

Well, I think that we're favorably impacted by foreign exchange to the tune of about four to six points.

In addition to that we had very strong performance on the Japanese beach marks.

And we had taken a lot of capacity actions in the off season in the transpacific as well as the inter ports.

So I think a combination of all those actions resulted in some fairly good relative pacific performance.

I would add one other point, which is one of the first things we did after the merger was really spend a lot of time on the strategy for the pacific.

And taking the Delta strength, the strength of the Delta network and hooking to the that pacific network.

And so you are beginning to see a lot of that sort of pay off of hooking that Delta network into the Northwest network, number one.

Number two, the hub in Narita becomes very valuable, because overflies, particularly from Asian carriers, have significantly diminished.

And so when you look at the utility that our network provides and the strength of combining the Delta network with the Northwest network, you see a dramatic improvement.

And it's some of the improvement that you will see over time that will continue as a result of the integration of the two airlines.

And I couldn't agree more.

I just -- to adjust expectations moving forward we do have a lot of incremental capacity in the transatlantic hooking up those networks this summer.

So that would probably in the short run, have a little more downward pressure than we have had in the first quarter.

Thanks, guys.

Thank you.

And we'll take our next question from William Greene at Morgan Stanley.

Hi, Glen, just one quick follow-up there.

You mentioned FX effects of four to six points.

You meant negative on the currency on the international side?

This is for yen-based.

Okay, what was the total international impact from currency changes?

In the transatlantic, it was minus six to eight year-over-year.

And in the pacific it was plus four because most of our transpacific is yen based.

Okay.

And then Glen do you have a sense for how much the revenue is affected by the loss of fuel surcharges on the international side?

To date, actually surprisingly the impact has not yet been realized in the transatlantic because the tickets for the first quarter, which were probably mostly ticketed before the rundown in fuel, and certainly before the rundown in the surcharges, hadn't impacted it yet.

So when we look to the second quarter we have a couple of real hurdles to pass because certainly in the transatlantic we will start to see the reduction in the fuel surcharges on a year-over-year basis as we get into the second and third quarters.

And that to me is going to be the big negative we have to overcome for comps.

Is it just a transatlantic impact or is it all international has the fuel surcharge?

It is all international but primarily Japan and the transatlantic are the two big drivers there.

Okay.

One quick question on liquidity.

Do you guys have any you know unencumbered assets left and how much cash are you to receive from Am Ex this year?

Bill, we don't have any material unencumbered assets at this point.

We received the full $1 billion from Amex in December And the run rate benefits of the new contract are $500 million a year.

We received that as spending occurs over the course of the year.

Okay.

That's great, thanks.

And we'll move to our next question which comes from Kevin Crissey at UBS.

Good morning.

Wanted to ask about any potential changes you might make in your distribution strategy, whether it be on-line or off-line, maybe some opportunities to save some commissions and foreign points of sale?

If could you talk about your distribution strategy.

This is Richard.

We have moved domestically share to Delta.com, and we're probably will get up to 37 to 38% of tickets issued on Delta.com.

So we continue to push our direct to consumer channels.

And, in fact, it actually made sense for us to reduce our reservation fee given the yields that we have from telephone sales.

So that's the first piece of the equation.

The second piece of the equation, across the transatlantic, is the joint venture with Air France and KLM.

And moving more away from general sales agents to the joint venture relationship with our partners in the transpacific.

Third, I just think over time the industry has to evolve more to the mold of other industries where people pay us for our content rather than us paying them to take our content.

Because our content is very rich.

And I think it's going to continue to evolve as distribution costs decline.

And when you look at the value that we provide when we service a reservation versus on-line travel agencies and others, it's really significant.

So continued focus we have a number of synergies that will also come from combining the GDS and OTA agreements between Northwest and Delta.

How far away might we be from that world where you get paid for content, and when you speak of that are you referring to GDSs and OTAs as well?

American, Gerard mentioned that as well.

I think OTAs for sure.

The travel management firms, the large management firms provide a pretty valuable service to our corporate customers.

And while I think over time the GDS model will also change and the cost per booking will continue to decline, because all the contracts that carriers are under right now were negotiated a few years back, and we won't be up for renewal for a few years.

But I think the travel management firms have an important long-term role to play for large corporations in terms of managing their total travel and keeping up with the -- with their employees around the world.

But the GDS costs will continue to decline, and ultimately the on-line travel agencies should pay for the content the way they do for hotels.

Terrific.

Last follow-up.

If you did 38 to 37% of your tickets on Delta.com how much would have gone through an OTA?

I didn't understand the question.

I think you mentioned 37 to 38% of your ticket are purchased through Delta.com.

How many would have come from Expedia, Priceline, or other OTAs?

Comparable to less than that.

Probably in about the 30% range, I think.

Yes, it is a little bit less than that.

We can have Jill get back to you on the exact number.

Okay.

Thank you very much.

Yes.

And we'll take our next question from Bob McAdoo with Avondale Partners.

Could you just kind of educate us on the difference in the structure of your pacific network versus United's?

Because you obviously have had some pretty good results where United is saying today that they cut 16% of their capacity out of the pacific and still had PRASM down 16%..

What structurally is different between your kind of a network versus theirs?

What works versus -- for you versus not for them?

Bob, it's Glen.

How are you doing today?.

Fine.

Good.

There are a couple of main issues.

One is that United has done a lot of overfly, so they're flying from the US, beyond their historical presence in Narita.

They have really decrease their reliance on Narita over the years, where the historical Northwest operator has continued to rely heavily on Japan point of sale and the Narita hub.

That includes the beach markets, so the resort destinations in Micronesia, where Northwest is a very very large player and Hawaii.

Those sectors had performed relatively well.

United is not a big player, if they play at all, in many of those markets.

So I think they didn't have anything offsetting.

And I don't know what their -- I wouldn't want to comment on their currency is because I am not that familiar with it.

But we are heavily yen based and the first quarter was a good exchange for yen as well.

Bob this is Richard.

We operate a classic hub in Tokyo.

And all points in the US connect to all of the major cities in Asia with the minimum connect time of probably an hour and a half.

And so when you look at the options in an environment where a lot of people have pulled out point to point capacity over the transpac.

And remember point to point capacity over the transpac is very expensive.

Because unlike Europe it takes two airplanes.

You can't do over and back in a 24-hour period.

So when you fly San Francisco to Singapore nonstop, or San Francisco Hong Kong nonstop, it takes two 777s.

Where as we operate a classic hub, so we get the indivisibilities of operating of hub and the ability to very efficiently take traffic and passengers from all over the US, bring them to Tokyo and then redistribute them on the network south and west of Tokyo.

Do you still have narrow bodies operating on the other side of Tokyo?

Yes.

Okay.

Got it.

One last thing relative to the pacific.

Do you serve Australia now?

Did you not announce that you are going to go nonstop US Australia soon and what does that look like in terms of this economic environment as a thing to start?

Because I mean when you hear what Qantas and people are stumbling around with in terms of their kind of numbers, is that still something that sounds attractive in today's environment?

Well, Bob, I think if we were sitting back hear and knew what the global environment was going to be last October or what it is going to be next October, we would have a crystal ball.

I think strategically, we are the only alliance partner, so Star has access to Australia, One World has access to Australia, and SkyTeam was the only one without access to Australia.

And we historically had backed over 200 passengers a day on Delta and Northwest interlining to Qantas.

So the demand is there, and I think it's the same as Heathrow.

If you are the incumbent carrier this is a disaster.

If you are the nonincumbent this is an opportunity.

The question is long run as being the world's largest carrier and having the extensive rout network that we have do we want to have outlet to Australia?

The answer is clearly yes.

Did we pick the best global economic time to start?

The answer is clearly no.

So there's good news/bad in there, and I think we're comfortable with the decision, but we'll be looking at the demand.

The demand for July, which is the first month we operate is relatively strong.

We're booked already well over 30% of capacity, so I think we'll run relatively full.

And the question is the offering in the off-season before we get back into the winter peak, which is the US point of sale origin peak.

And what kind of an airplane is this?

777.

Okay.

All right, thanks.

Thanks, Bob.

Cindy, that's going to wrap up the analyst portion of our call and I would like to now turn the call over Ned Walker.

Thanks very much, Jill.

Good morning, everyone.

Cindy, we are ready to begin the Q-and-A session with the media at this point.

Once again, if you could please review the process for queuing in to ask a question.

And what I'd like to ask with the media, is if you could ask one question with a quick follow-up we should be able to address everybody's question during this process.

With that, I'll turn it back to you, Cindy.

Thank you.

We will now be taking questions from the media.

(Operator Instructions) We will pause for a moment to give everyone an opportunity to signal.

And we'll take our first question from Harry Weber at Associated Press.

Hello, how are you?

Hi, Harry.

Two very quick questions.

One on staffing.

Do you anticipate any more job cuts in light of the international capacity cuts?

And fees for travelers.

You are imposing a new fee for second checked bag on international flights.

Are there any other types of fees that you all are considering?

Harry this is Richard.

On the first point, with respect to staffing, we have worked really hard to avoid any involuntary furloughs of any of our frontline employees.

And that's our goal.

And as we said in the script, we have 2,500 people who are taking voluntary reductions.

And we have a whole host of other programs, Company convenience leaves, special slip leaves, and insourcing of work.

So our goal is to -- because we think the way for us to contribute to the economy and getting Americans back flying again is to preserve as many jobs as we can.

That's the first point.

On the second point, I think Ben Hirst, our General Counsel, would prefer that I not talk about any future ideas about where fees would go in the industry.

We're very careful about being certain we comply with Department of Justice and Department of Transportation rules on those sorts of matters.

Thank you.

You are welcome.

And we'll take our next question from [James Pilcher], Cincinnati Inquirer.

Good morning, gentleman.

Can you give me any specifics on how the new fare system is operating here?

And as a follow-up, can you also talk about how the process is going with the new regional handling subsidiary between -- I know it's Comair and Mesaba, and how that whole transition is going with the announcement today that you are going to cut 30 RJs, how does that impact the local CVG hub?

I can address the issue on the ground handling subsidiary.

The purpose behind pulling our ground handling subsidiary was to continue to maintain separate operations at each carrier, but to have consistency in our customer experience across all of the Delta connection carriers.

And that work is well underway and is going well.

As we look out at the regional carrier reductions, those reductions given the size of the fleet, will probably have minimal impact on staffing across the airports in the regional carrier network, because we operate a fairly large fleet.

It will have a minimal impact in terms of staffing.

And the extent to which it does have any impact we will once again work to mitigate that, as best we can with our regional carrier partners.

And Glen can address the Cincinnati --

Yes.

We have been very pleased with the response from the people in Cincinnati and northern Kentucky to the lower fare structures that we put in place there a little over a month ago now.

And so we are continuing to hope that people continue to use that service, and we're able to keep those similar structures in place, of course.

Fares change, so they will migrate up and down, depending on the demand in the market.

But in general we're very, very happy with the response that we've gotten to the lower fare structures in Cincinnati.

Do you have any specificity around that in terms of traffic increased percentages or anything like that?

As a follow-up on the RHS situation, any light into the Mesa lawsuit and where that might stand at this point?

Because that has implications here in Cincinnati.

Well I can't talk to the second point, but I will say that we've seen that the local Cincinnati enplanement base subpoena double digits now versus where we were pre restructuring.

And that's a percentage, double digits?

Yes.

So we appreciate the support of our good customer base in Cincinnati.

And we will not be commenting on pending litigation with Mesa.

Thank you.

We'll take our next question from Kelly Yamanouchi at Atlanta Journal Constitution.

Hi there.

I was just wondering, first question, what other aircraft will you be removing from the fleet to get to that total here?

Well, we've got a combination of aircraft that we are looking at.

There's some 757s, MD-88s that we're look at, obviously the regional jets we've already talked about and the dedicated freighters.

On the 757's and the MD-88's is that a part of those fleets or are there any aircraft type as a whole that you are looking to pull out?

No, we are not exiting any whole categories of aircraft types.

Okay, great.

And then my other question is, with pull-out of the freighter operations from the available slots in Asia, will you be adding passenger flights to Asia or shifting things?

And will you be shifting any international routes to Atlanta or JFK because of the underperformance of the interior cities or will you just be discontinuing or pulling down capacity from some of those interior cities?

No, we're going to continue to retain the slots that we have in Narita.

They're valuable slots in valuable positions.

And we will be reallocating that capacity.

Okay, into Europe, any shift from the interior cities?

No significant shift, no.

We announced we're going to be reducing some international capacity in the fourth quarter.

Okay.

Great.

Thanks.

We'll take our next question from [Ted Reid] at TheStreet.com.

Thank you.

Kelly basically asked my question, but when you take the freighters out at Narita, do you have to operate to preserve the route authority?

Yes, this is Richard.

You do have, I believe it's an 80% requirement.

But given the opportunities that we have in the combination passenger/cargo business, we'll have a good ability to utilize those slots.

Already we've added Salt Lake City to Tokyo, we've added four additional flights from Atlanta to Tokyo and we've added JFK to Tokyo.

And we've added an additional spoke from Tokyo to Ho Chi Minh City.

So there are plenty of opportunities.

The freighters have been gradually pulled down and we've been reallocating those slots to much better opportunities in terms of revenues and profits.

These are just slots at Narita then, you can use them either for US routes or to routes elsewhere in Asia?

Right, the slots are -- don't have any particular destination tied to them.

You can use the slots for passenger or freighter or for operations within Asia or outside of Asia.

Last thing are there any specific questions regarding the route authorities?

Do you have -- do you have route authorities that you have to use for any specific destination?

I don't understand.

You mean in the pacific?

Yes, in some of these markets you have to have authorities to fly into these countries.

So it's not just the slots it's also the --

Right, but we have the authorities.

We by and large have the authority.

Okay, thank you.

And we'll take our next question from John Crawley and Reuters.

Hi, guys.

Back to the 757's and 88's does, that bring up to that 50 count, or would those bring you above 50?

They're part of the 50, John.

Okay.

And when you talk about a year-end profit, are we talking about a profit in the fourth quarter, or are you talking about a profit for the full year?

Full year.

Okay, thank you.

And we'll take our next question from Mike Esterl with Wall Street Journal.

Yes, good morning.

I wanted to ask about the European Commission coming out a few days ago, looking into SkyTeam cooperation.

Are you expecting Delta to to have make any concession to Brussels given those probes that are continuing?

Actually, I think the announcement that came out was pertaining to the other two alliances.

But it is fairly routine for the European Commission to look at these sorts of arrangements that are negotiated under the bilateral agreements among the US and the European Union countries.

And does that mean -- are you expecting any -- I think you're a little further along I guess in the process.

Are you expecting to have to make any concessions?

It seems like Brussels is rather than going away is ratcheting up its scrutiny.

Well I mean I think the best way to answer the question is, we've been through pretty rigorous review in the EU of first getting approval for our transatlantic joint venture last summer.

So it was about a year ago or about ten months ago.

And then second, the Northwest/Delta merger included analysis by the European Union, including our alliance relationships with Air France/KLM.

So we've been through a lot of scrutiny on both sides of the ocean with respect to the competitive aspects of our merger and our joint venture.

Thank you.

And we'll take our next question from John Welbes with St.

Paul Pioneer Press.

Good morning.

With the 747s you are parking on the freighters, does that mean the freighter operations, the hangars at MSP and Anchorage is that shutting down, or --

Well, the hangars in Minneapolis/St.

Paul are used for maintenance of the whole fleet, so there won't be any real material change there.

And the facility in Anchorage we will eliminate.

We no longer will have a need for a hangar in Anchorage.

So we'll be working through as we shut down the facility rationalize -- as we shut down that operation, which lost a lot of money before the merger, we will look at rationalizing those facilities across the network where we have freighter-specific facilities.

Okay.

And at the headquarters in Eagan, Northwest, have all the people been notified what's happening with their jobs?

Whether their positions are being eliminated or they're moving to Atlanta?

Is all that in the works now?

We are largely complete, yes.

Okay.

Thanks.

And we'll take our next question from Mary Jane Credeur at Bloomberg News.

Hi, gentlemen.

It appears that the airlines just completed their first domestic fare increase in what, nine, ten months or, so since summer of last year.

And should we be reading into that, that it's an indication that bookings domestically might be looking a little bit better?

Well, we are moving into peak season here.

And the advanced bookings, we have been running relatively full airplanes even through the shoulder season, so we're hopeful that those trends continue.

And what has been historically missing here have been the business travelers, and we're hoping that they come back soon, and that the economy starts to recover.

And we should be well positioned as that occurs, because the planes are already relatively full.

And speaking of business travel, can you tell us a little bit more about what we should see sequentially on yields going into Q2, especially on the international premium side?

Can you give us any more granularity on that?

No, Mary Jane, we didn't give specific revenue guidance, and I don't think it would be wise to start at this point.

Can you say anything about sequentially though?

Will it be much worse, better, about same?

Well what we said on the call is that the comps are going to be more challenging, particularly on the transatlantic, the international side, than they were on first quarter, because of considerable amount of fuel driven surcharges went into effect in the spring and summer of last year as fuel was reaching record levels.

So the comps will be more difficult to manage.

Obviously as we get into stronger travel periods, we would expect yields to improve accordingly, but with respect to any individual guidance, I would be shying away from saying that.

Okay.

Thank you very much.

And we'll take our next question from [Aaron Carp] with Air Transport World.

Hello.

Do you have any idea what you are going to do with the freighters?

Are you planning to sell them?

And what sort of value do you think they will have?

We will be looking to market them.

I don't know there's a tremendous amount of value in those aircraft.

And how many slots in Narita were you using for the freighter services?

We've been drawing down the freighters over the last 12 months, so while there are 14 dedicated freighters in the fleet, at the present time we're only operating seven of them.

So it's a minimal number.

And is this sort of a conclusion reached that it's just untenable to operate all cargo flights?

It was that conclusion on a small amount of capacity in a difficult economic time, yes.

Thank you.

Cindy, we have time for one more call, or one more question on the call.

Thank you.

Our last question today will come from Andy Compart with Aviation Daily.

Thank you.

Thanks, guys.

Just wanted to clarify something you talked about ultimately you think on-line travel agencies should pay for their content.

Can you give some sort of time line as to how soon you expect or want that to happen, and how would that come about?

No, we don't have any specific time line.

When asking about the earlier question was really about how we would see it structured as we move forward sort of long term, and we don't have any time line or any specific plans.

But ultimately, we would like to see our distribution model be more like a completely unregulated distribution model that's used in other consumer businesses.

And could you also just give some more maybe explanation of your decision making behind the international bag fee?

Because obviously there was a reason airlines decided they didn't want to do that at first as to apply it domestically.

What was your thought process for adding to the international flights?

I think there's a degree of consistency between our domestic product and our international product.

Frankly we have a -- there's obviously a fairly considerable amount of costs we incur as we transit.

But I think the larger opportunity here is the unbundling of the ticket pricing that we have been working as an industry through over the course of the last year and a half.

Do you expect to apply more of those fees to international flights that perhaps have not been applied to them in the past or will more of this unbundling show up?

We can't comment on forward pricing decisions.

Okay.

Andy, thanks very much.

Appreciate your time today as well.

And Richard, Ed, Hank, Glen and Jill, thank you very much, as well as everyone here on the telephone lines.

That will conclude the first quarter earnings call for 2009.

We'll go ahead and see you guys in about three months.

Thanks so much, appreciate it, everyone.

Thank you, that does conclude today's conference.

Again we do want to thank you for your participation today.

And you are free to disconnect at this time.