達美航空 (DAL) 2009 Q3 法說會逐字稿

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

I will be your coordinator.

Today's call is being recorded.

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

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

Jill Greer, Director of Investor Relations for Delta Air Lines.

Thanks.

Good morning, everyone.

Thanks you for joining us to discuss Delta's September 2009 quarter financial results, Joining us from Atlanta today are Richard Anderson, our Chief Executive Officer; Ed Bastian, Delta's President; and Hank Halter, our Chief Financial Officer.

Also joining us during the Q&A session will be Steve Gorman, Chief Operating Officer; Glen 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, Senior Vice President and Chief Communications Officer.

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

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

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

We've allocated about 25 minutes for executive comments and after their comments, we've allocated 25 minutes for questions from the analysts.

We'll then conclude the call with a 10-minute Q&A for the media.

When we get to the Q&A, I would 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.

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

We'll also discuss certain non-GAAP financial measures.

Operating expense and unit cost results exclude special items unless otherwise noted, and you can find the reconciliation of the non-GAAP financial measures on our Investor Relations website at Delta.com.

With that, I will now turn the call over to Richard.

Thanks, Jill.

Good morning, everybody.

Earlier today we announced a net profit excluding special items of $51 million, or $0.06 per share for the third quarter.

Our results reflect a lot of hard work by the Delta team in a difficult environment.

They have stepped up to run a solid operation and delivered great service to our customers, as we successfully work through our merger integration.

In doing so, they have earned more than $50 million in shared rewards so far this year.

So thanks to Delta people worldwide for their dedication and commitment in these difficult times.

For the second consecutive quarter, our operating revenues were down about 20% year on year, which shows the severity of this economic downturn.

We have seen some improvement in the revenue environment, as our RASM has sequentially improved in the high single digits from its low point in June to this -- to the month of October and that's been on just slightly less capacity.

Nonetheless, we will not stand and wait for revenues to fully recover.

Instead, we continue to aggressively adapt our business to this new environment by taking strategic actions to improve the competitiveness of our network, containing costs, right-sizing capacity, and maintaining a strong cash position.

And most importantly, we are successfully executing on the merger integration, which will ultimately produce $2 billion of synergies.

As a result of these activities, we were able to post a net profit and improve our liquidity, despite this unprecedented revenue environment.

These actions are working.

We are right-sizing our operation with passenger capacity reductions and by discontinuing dedicated freighter service.

We're focused on eliminating all the variable and fixed costs associated with those capacity reductions, including parking aircraft and executing on a $200 million overhead reduction project.

For the September quarter, consolidated nonfuel unit costs, excluding special items, were up only 2% on a 4% capacity decline and our operating margin was 4.4%.

On the network side, we announced a transaction in August that will improve our competitive position in the New York market.

Through our slot and facility transaction with US Airways, which is pending regulatory approval, we will create a new North American hub at LaGuardia.

We will combine our facility there with the existing US Airways facility and consolidate all of our operations, including the shuttle into an expanded main terminal with 27 gates.

We will nearly double our daily departures to more than 270 out of LaGuardia, which is the preferred airport for local metro New York City business customers and, of course, is the largest aviation market in the world.

This transaction continues to build our network, along with the Northwest merger, the Air France KLM joint venture and the Alaska Airlines alliance, as each are important and unique transactions that build our strategic foundation.

Earlier this week, we announced a series of enhancements to our network plan for next summer, including new Seattle flying and partnership with Alaska that allows us to expand global service for 17 cities while keeping our 2010 international capacity flat year on year.

We will continue to take a measured approach to overall capacity.

We're still working on our plans for next year, but right now, we expect total system capacity to be down about 3% in 2010 compared to full year 2009.

On the liquidity side, we strengthened our position this quarter with $2.1 billion in new financing.

That allowed us to refinance the premerger Northwest exit facility and also generate $600 million in incremental liquidity.

There was strong demand for these transactions from the financial community and this shows the market's confidence in Delta's long-term strategy and financial position.

Merger integration continues to progress ahead of schedule, as we have already achieved our 2009 synergy target and expect to deliver $700 million in benefits for the full year.

At this pace, we expect the integration to be substantially completed by the end of the first quarter of 2010.

To sum up, we posted a profit this quarter excluding special items.

We accessed the capital markets for $2.1 billion in total financing and ended the quarter with $5.8 billion in unrestricted liquidity.

We announced another important transaction, this one with US Air, that will allow us to build a hub in LaGuardia.

Our cost management is solid, as we reduced nonfuel unit costs, excluding pensions and special items on a capacity reduction of 4%.

The merger's on track and has been on track for the year and will produce $700 million of tangible benefits in '09.

The economy is gradually recovering and the actions we've taken will position Delta well going forward.

Thank you.

I'll turn the call over to Ed.

Thanks, Richard.

And good morning, everybody.

Thanks for joining us.

Our results clearly reflect the tough revenue environment that we continue to face, as well as fuel prices that remain volatile.

But as Richard said, we're not sitting still.

I want to thank the Delta team for their continued hard work in these difficult times.

Employees are our most important asset and their efforts help position Delta to continue to lead in the airline industry.

For the September quarter, excluding special items, Delta reported a net profit of $51 million, or $0.06 per share, on a base of 828 million shares.

This compares favorably to consensus of a $0.05 loss per share.

On a GAAP basis, we reported a net loss of $161 million in the September quarter, which included special items of $212 million.

These special items consisted of an $83 million write-off of the unamortized debt discount related to our refinancing of the Northwest exit facility, $78 million in merger-related expenses, and $51 million in severance charges related to staff reductions.

Our EBITDAR for the September quarter was $840 million.

We ended the third quarter with approximately $5.8 billion in unrestricted liquidity.

We took significant steps this quarter to bolster our liquidity position, and our recent financing transactions clearly demonstrate the market's confidence in our strategy and solid financial foundation.

Shifting to revenue, as Richard noted, Delta's total operating revenue for the September quarter was down $2 billion, or 21% year-over-year, reflecting the impact of the ongoing recession.

Our consolidated passenger unit revenues dropped 18% year-over-year, with yield down 19 points and load factor up about 1 point.

We have seen sequential improvement in our revenue performance during the September quarter.

And that's despite tougher year-over-year comps from fuel price-driven surcharges and fare increases that peaked in the month of September last year.

Our domestic passenger unit revenue was down 16%, driven entirely by yield pressure, as loads were up 0.5 point on a 3-point capacity reduction.

Our international passenger revenue was down 23% year-over-year, with yields down 25 points and load factor up 2 points on a 7% capacity reduction.

Our cargo revenues were down $187 million, or 51 % year-over-year in September quarter, reflecting our pulldown of the dedicated freighters and overall weakness in the cargo industry.

While cargo volumes have steadily improved over the course of the summer, the pricing environment remains under great pressure.

Our cargo capacity will continue to decline in the fourth quarter, as we ground the remaining six freighters flying by the end of this year.

For the September quarter, other net revenues was $873 million, up 4%, due primarily to baggage fees.

Fees continue to help mitigate weakness in the traditional passenger revenue segment, so while passenger revenue was down 18%, total RASM was down 15%.

In terms of our revenue outlook, while the revenue environment is clearly improving, we are in the early stages of what will likely be a choppy and uncertain recovery.

We're seeing the right trend lines.

Loads are holding and there is traction with yields evidenced by some successful fare increases.

Business traffic is improving, more on the domestic side than international, but off of a lower base earlier in the year.

Total corporate contract volume is down in the 10% range year-over-year, and the associated revenue is down 25%.

While we're certainly not happy with the 25% reduction, this compares favorably to a 40 to 50% reduction that we were experiencing throughout much of the first half of this year.

Our advanced bookings indicate solid load factors continuing through the end of this year.

The holiday periods in particular are showing encouraging trends for both passenger volumes and fares on peak travel days, and while revenue conditions are improving, we expect continued pressure on yields for the balance of the year.

For the fourth quarter, we expect domestic yields to be down in the 10% range and internationally, yields to be down around 12%.

We expect our fourth quarter RASM to be down roughly 8%, about 10 full basis points of improvement versus Q3.

The most effective tool we have to manage in this challenging revenue environment is capacity, and on that front, we will continue to stay very disciplined.

For the December quarter, we expect system capacity to be down 10% year-over-year, with consolidated domestic capacity down 5 to 7%, and consolidated international capacity down 14 to 16%.

And as Richard noted, our current expectation is that total system capacity in 2010 will be down about 3% from full year 2009.

Regarding the merger integration, we continue to gain momentum.

We have hit our original full year 2009 projection of $500 million in net synergy benefits three months ahead of schedule.

We've been able to accelerate our activities and expect to achieve merger synergy benefits of close to $700 million for the full year.

Our accomplishments this quarter are just a few of the building blocks we're putting in place to further ramp up synergy benefits for next year.

We merged the Sky Miles and World Perks programs this quarter.

That was a key technology milestone and the transition could not have gone more smoothly.

We also moved the Northwest operation center team down to Atlanta, so now all of our worldwide aircraft operations are run out of a central facility here in Atlanta, which will make it easier to integrate groups when we receive the single operating certificate.

Our work with the FAA continues and we're still on track to receive a single operating certificate by the end of this year.

We've renegotiated more than 600 corporate contracts, which is driving incremental business volume, as we sell the benefits of our confined global network for the first time.

And on the customer side, we're focused on creating a single consistent Delta brand.

We've made great progress with employee uniforms and harmonizing our onboard products, more than 98% of our airport facilities are already consolidated and over 230 premerger Northwest aircraft have been painted.

Our branding activities, along with our operational and technology integration should be complete by early next year.

I applaud the great work of the Delta employees worldwide in making all of this happen, while also successfully navigating the worst economy of our lifetime and managing to turn a profit this quarter.

With that, I'll turn the call over to Hank.

Thanks, Ed, and good morning, everyone.

Turning to expenses, for the September quarter, total operating expense decreased $2.1 billion year-over-year, reflecting $1.7 billion in lower fuel price, in addition to lower capacity-related costs, synergy benefits, and productivity.

Consolidated nonfuel unit costs were up 2% year-over-year, reflecting increased pension expense compared to last year.

Despite our significant capacity reductions, we've been able to keep costs in line by appropriately aligning our staffing levels and accelerating merger synergies from facilities and technology integration and supply chain savings.

Our solid cost performance is a direct result of the hard work of Delta employees, who continue to increase their productivity and find new opportunities for cost savings.

Thanks to the entire Delta team for ensuring we maintain our cost leadership position in the industry.

We will have additional unit cost pressures in the fourth quarter, as a result of our 10% system capacity reduction, but we expect to offset most, if not all of these pressures by realizing cost savings from our overhead reduction and by further accelerating merger cost synergies.

As a result, we expect consolidated and main line nonfuel unit costs to be up 3 to 4% in the fourth quarter and that includes about 3 points of pension impact as compared to last year.

Turning to fuel, in the September quarter, Delta hedged 53% of our fuel consumption.

Our consolidated all-in fuel price of $2.13 per gallon included $0.11 per gallon of hedging losses.

It's important to note that these losses reflect hedging contracts that we had previously terminated.

Our current hedge positions are in the money.

In the December quarter, we've hedged approximately 39% of our anticipated consumption, primarily with call options.

Based on the current market price for crude and the refining spread, we expect our all-in price per gallon for the December quarter to be $2.14.

In terms of earnings performance, we're expecting a breakeven operating margin in the December quarter.

Despite the worst economic recession in our lifetime and more than $1.3 billion in fuel hedge impact, we expect the business will generate a breakeven operating margin, excluding special items for the full year.

And shifting to liquidity, we grew our unrestricted liquidity balance from $5.4 billion at the end of the June quarter to $5.8 billion on September 30.

That $5.8 billion includes $5.5 billion in cash and $300 million available under our revolving credit facility.

Our operating cash flow was breakeven for the September quarter, reflecting the seasonal declines in the air traffic liability.

In the quarter, Delta raised $2.1 billion through a series of debt transactions that improved our already strong liquidity position, enabled us to address 40% of our debt maturities for 2010.

All of these are secured by our Pacific routes, slots and gates, and the projected annual interest rate on the combined transactions is 9.2%.

While a number of our airline peers also tapped the capital markets this quarter, the transactions we completed show the market's confidence in Delta.

The structure of the transaction, consisting of high yield notes, a term loan, and revolving credit facility demonstrate our ability to tap into these diverse sources of financing.

Demand was higher than we expected and allowed us to secure an additional $600 million of liquidity on the same collateral and combined, these transactions have a competitive single-digit projected annual yield, and with no dilution to our shareholders.

Debt and capital lease payments for the quarter totaled $1.2 billion, which includes $900 million for Northwest exit facility.

We also amended Northwest's existing revolving credit facility to reduce the borrowing available from $500 million to $300 million, with the maturity at the end of 2009.

Capital expenditures in the September quarter were approximately $150 million which included one Boeing 737 aircraft.

Our CapEx for the quarter was about $100 million less than our guidance due the timing of this aircraft delivery as well as integration spending which will shift to the December quarter.

For the December quarter out net CapEx will be approximately $250 million with $150 million in aircraft parts and modifications.

That CapEx includes two 737 aircraft and we have committed financing in place for those deliveries.

We have debt maturities of about $350 million in the fourth quarter.

We're expecting our unrestricted liquidity balance at the end of December quarter to be approximately $5 billion.

So in closing, while the revenue environment is improving, we think it will remain challenging for some time.

Delta has and will continue to take the right actions to strengthen our business.

We've reduced capacity, streamlined our cost structure, strengthened our liquidity position, and used this downturn to accelerate the merger integration.

With the continued dedication of our employees, Delta will emerge even stronger when the economy recovers and will be well positioned to achieve sustainable long-term growth and profitability.

Thank you, Richard, Ed and Hank.

We're now ready for questions from the analysts.

If you could review the process for asking questions and, again, we ask everyone to limit themselves to a question and then follow-up.

Thank you, Ms.

Greer.

(Operator Instructions) And we'll take our first question from Gary Chase at Barclays Capital.

Good morning, everybody.

Hi, Gary.

How did -- I apologize, it's been a little busy this morning.

Richard, in the prepared remarks did you say that international capacity would be flat?

In other words system down 3 but international would be flat, was that the right read?

Yes.

And I guess the question around that possibly for Glen is, it feels as though the, certainly the revenue dynamic has been hit harder internationally and, Ed, you've mentioned that there's a little bit more recovery on the domestic side today.

Sort of feels like that would be the place where you want to be -- that might be reversed, you might be up domestic and down internationally.

Can you just give us a little flavor on how you're thinking about that and whether or not you see things that we don't in terms of how things are recovering?

Well, Gary, this is Richard.

Just one point before I turn it over to Glen.

Remember, we took a significant reduction in international capacity commencing in September of this year, so when you annualize those, our capacity pulldown I think was the biggest in the industry, commencing right after Labor Day.

Gary, hey, it's Glen.

I think a lot of this has to do with fleet mix.

And if you look, what we're shedding is a lot of 50-seat regional equipment.

That naturally would have a downward pressure on domestic unit revenues but an upward pressure on margin because those are the least efficient airplanes.

And if you look even more specifically as to what we're doing, we're taking out long haul 50-seat flying.

So if you look at the percentage of long-haul flying done on 50 seats 750 miles or more, we are essentially out of that business.

And so that's where a lot of the decline in the, in the domestic arena will occur next year.

And that was intentional on our part going back a couple of years and deciding that this combined carrier had way too many 50-seat regional airplanes.

Gary, just one--.

Go ahead, Ed.

One other thing, Gary, don't forget, next year is really the first year we'll be able to operate as an integrated airline and be able to cross fleet.

So you see us and we announced our summer schedule earlier this week.

A lot of the new routes that we're going to be operating next year are a direct result of the merger being able to connect the Delta and the Northwest traditional networks together and be able to mix and match the fleet.

So there's going to be some incremental opportunities that we haven't had this year that we'll be able to avail ourselves of next year, regardless of the economy, candidly.

Gary, just one fact.

Our international capacity in the fourth quarter of 2009 versus the fourth quarter of 2008 will be down 13%.

So we're really sort of taking all those actions in the fourth quarter of this year and then annualizing them into next year.

Okay.

Well, a personal thanks for getting rid of the long haul 50-seat.

And on the -- just integration-wise, are there any milestones that introduce operational risk, or there are, but where are they along the way?

What should we be watching for on that front?

Well, I think the most significant milestone we're moving towards is the inventory cutover, which will occur during the first quarter of next year.

But I've got to say that the teams, both the operations teams, the technology teams, the business teams, have been doing an outstanding job.

We've got a year and a half of preparation already under our belt at this point in time and while we are continuing to watch it very, very closely, we have confidence we're going to be able to be successful with that migration.

And Gary, there have been a number of very large IT cutovers that have just been completed at various stages.

So we cut over all the crew bidding on the 747-400 and on the Airbus fleet.

We cut over all pass travel.

We cut over all HR systems, and the team has done a good job.

I think what we've been able to do is we've, we use full scale testing.

So in other words, when we get into an IT project, we finished all the coding and programming to do the inventory cutover about a week ago.

And we're going to test for two months.

And then we're not doing flash cutovers.

We're doing phased cutovers.

And so a combination of those strategies and a lot of good work by the, by a lot of folks at Delta, we're pretty confident of our ability to continue to smoothly complete the transition.

And we'll essentially be done by the 1st of February on all the big IT issues and by the 1st of April on a single dispatch system.

Okay, guys.

Thanks very much.

Thank you.

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

Thanks, guys, good morning.

Good morning.

Probably a question for Glen.

Glen, what is the strategy to offset some of, maybe some of the lost revenue from Cal's SkyTeam departure?

Are you guys going to plan on flying some of your own metal Transcon destinations and how much of this maybe relies on cross fleeting with the Northwest fleet?

Hunter, we are very sorry to see Continental leave the alliance.

They are a great carrier and they will be missed.

But from our perspective, we think they were a net beneficiary of the relationship with Delta because of the power of Delta as number one or number two in 80% of the cities that it serves.

And so essentially they were facilitated by our Frequent Flyer program and our point of sales strength in the Southeast and upper Midwest.

And so what we're seeing as we disconnect these two carriers is actually an improvement in the flying to their hubs.

And there really is no lack in our network because of Newark and their Newark versus our JFK or our Atlanta versus their Houston these carriers have a significant amount of overlap.

So I don't -- we don't see any real issues with the disconnect itself, although we are sorry to see them go.

Okay.

That's interesting, thanks.

And I would love to get maybe Richard or Ed, your opinion on some of labor initiatives that change, the RLA.

Is it -- I would also be curious about some of the mechanics behind this.

Is this going to have to be -- assuming we get a decision here at some point, is this a decision made by NMB?

Is congress going to have to intervene at some point, maybe a sense of timing would be helpful, too.

It's a really an NMB, a National Mediation Board decision.

And it's really unfortunate because it's interjecting politics into a process that's worked for about 75 years fairly effectively.

But you have two former heads of AFL CIO Unions at the NMB and they really are politicizing the process.

We are disappointed about that.

We think our elections should proceed.

In fact, they have been conducting elections on cases that have been filed after ours under the old rules.

So we are disappointed with the performance of the National Mediation Board.

I doubt congress will get involved, and we're pressing ahead on the merger regardless, because given the fact that we have integration with our pilots and we've resolved all of the seniority integration issues with our mechanics, we're able to press ahead with single operating certificate and just get it done.

So it's not going to be an impediment to us.

We're disappointed that the two administration appointees to the National Mediation Board have politicized the process.

So it would be a majority decision of say, two or three NMB panel members would have to make the decision and it would just be made then essentially?

I mean there would be no other sort of--?

Well, this is Mike Campbell.

I mean there's a threshold question of whether the NMB has the authority to make that determination.

There is a, an opinion by a former National Mediation Board where they said they didn't have the authority to change the rules, so the threshold question is whether it's a matter for congress or for the National Mediation Board.

And there's obviously a litigation strategy that could become involved there.

Great.

Appreciate that color, guys.

Thank you very much.

You're welcome.

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

Hi there, good morning.

I just want to follow up a little bit on Gary's question.

As it relates to some of the capacity, simplistically for 2010 you're just ramping up what the changes you've made this year into the 2010 comments that you made about capacity or is there a GDP and fuel price assumption that underlines what you're outlining for 2010?

Well, Bill, we are still building our 2010 plans, so I don't want anyone to read too much into the specific comments, so we're giving a directional view that international will be flat and overall system capacity will be down 3 points.

We certainly are expecting to see some GDP improvements next year.

We're certainly expecting to see the benefits of the merger and the ability to hook the Delta and Northwest systems together.

We do expect as a result of the large capacity pulldowns, particularly in the Trans-Atlantic that we've seen over the balance of this year, that will give us some opportunities to seasonally adjust and be a little more flexible in adding supply back next year.

But our view going forward is essentially where we are now.

Very, very cautiously managing any capacity, capacity additions.

And how much of the view on capacity would change based on what the industry does?

Because some of your competitors have kind of been inching up some of their capacity outlook.

Are you guys now big enough where you can operate sort of independently, or do you still need to pay attention a lot to what the rest of the industry does?

I mean again, we operate in a -- we're a large carrier, but we're still part of the overall revenue story for the industry.

We're going to certainly watch the competitive positioning.

We will not allow our market share to come under too much pressure, but, one of the real benefits of the merger is that we've got a lot of capacity to flex up.

As we pull capacity down, we've retained the aircraft and just reduced the utilization level.

So if we needed to bulk up any specific geography, we could do that pretty quickly.

Okay.

Just one quick question on the synergies.

Have you essentially pulled forward your synergies from 2010?

Is that what this $200 million represents?

Well, what it represents is largely on the cost, we're moving at a quicker speed and getting the cost synergies than we were originally anticipating.

And certainly the economy has had a fair bit to do with that.

We were not anticipating, certainly on the passenger side, any of the real revenue synergies from passengers starting next year until we were able to operate off the single technology platform.

Okay, but your run rate, when it's fully ramped up, is still the same?

The $2 billion.

I mean the full size of the $2 billion, we're not prepared to increase the size of the overall synergies yet, but certainly the pace of integration has gone quicker than we were anticipating.

All right.

Thank you for the time.

Thank you.

And we'll take our next question from Dan Mckenzie at Next Generation Equity Research.

Good morning, guys.

Thanks.

Hi, Dan, how are you?

Great.

Thank you.

It looks like Delta continues to upgrade service to London Heathrow.

Of course that's a major business airport.

Can you remind me how you're getting additional lift into that airport?

And I guess in particular, is Delta getting additional slots from partners?

And I just wonder if you can comment also on the flexibility to, for JV partners to show some additional slots there?

This is Glen.

How are you?

Really we work with our partner Air France KLM in our new joint venture in the Trans-Atlantic which we are so excited about and are just starting to tap the resources available and the upside potential of that agreement.

And so those have been directly supplied by Air France KLM and we will be announcing yet additional services from New York to London here in the next few weeks, based on our agreements with them and the ability of them and now our new partner Alitalia to -- the new Alitalia to also be a part of that.

Okay, very good.

Then I guess just a repeat question here from a prior conference call, but given Delta's disproportionate size at JFK, I'm wondering how you're managing a potential operational hiccup from a three-month shut down of a runway at JFK starting next March?

Well, the FAA, we've been working very closely with them, and Steve could talk as well, but we are pulling down our operations.

The slot rules, they have a use it or lose it, has been waived for the summer of next year.

And they have asked each carrier to participate in a reduction of flights.

And we think we have a mitigation plan that will work and are hopeful that we'll adjust as necessary.

Okay, great.

I appreciate the perspective.

You're welcome.

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

Hey, good morning, everybody.

Hi, Jamie.

Gentlemen, you talk about the pace of reaching synergies going a little bit more quickly than planned, but you still underperformed the industry measured by year on year RASM.

So I guess I'm just curious how to, how to reconcile this fact.

It also looks like, if you look at your margin performance from Q3 to Q4, so let's roundish numbers going from 4% to flat, that's a little bit greater deterioration than what some of your competitors have modeled for us.

I'm just -- it's difficult from where we sit to actually measure the sort of synergistic upside.

I'm just curious if you can walk us through how to best perhaps measure that along the lines of how you're clearly doing it?

Sure, Jamie.

Just a few things.

As I previously said, we are not expecting any considerable passenger revenue synergies this year.

We're not going to be able to get there until we're able to cross fleet, untill we're able to move off of a single -- on a single technology platform with a single code.

So most of our synergy benefits are yet to come.

The corporate deals we're negotiating are all forward-looking.

Just a couple comments on our revenue performance.

And I don't disagree that there were some real challenges that we faced this summer.

Certainly the Pacific was one of those, with the impact of H1N1 and our largest degree of Japanese point of sale presence in the industry certainly impacted some of our performance trends.

Trans-Atlantic, we had some excess capacity, which we've moved aggressively and addressed.

We have almost 20% of our Trans-Atlantic capacity out as of October.

And I would say the other part of the business that was under challenge was the domestic heartland, which has a higher concentration of business traffic than some of our other geographies.

So just a few, a few comments of color in terms of how the third quarter performed.

But going forward, we've seen a considerable, some considerable improvement.

As Richard mentioned, if you look at our October month, our October month RASM is down 12% versus a year ago.

Our low point for us, at least in this year to date, and we hope going forward as well, was the June month.

The June month was down 23% on a year-over-year basis for RASM.

So a little bit of that can be explained by capacity, but the bulk of that can be explained by sequential improvement trends that we're starting to see in the business.

So we see the business continuing to pick up and garner momentum.

I think when you measure us against the competitors, if you look forward to next year, you're going to start to see the synergy benefits kick in.

And we have, we have confidence we're going to deliver that full value of synergy to the shareholders.

So you're comfortable then that whatever an individual analyst, margin change estimate for the industry is next year, that Delta would be on top of that RASM as well?

I mean those are the two metrics where we should be able to see the tangible benefits?

That's our expectation, Jamie.

Okay, excellent.

Thanks for the clarity.

I appreciate it.

Sure.

And we'll take our next question from Mike Linenberg at Banc of America/Merrill Lynch.

Hey, good morning, everyone.

Two questions.

Ed, just back to on the corporate contracts, I know you talked about them being forward-looking and I think you mentioned that you had renegotiated 600 contracts.

Can you give us a sense of where the terms are heading on these contracts?

I mean are they, are they better given the size of the network and of course, now it's, Delta, Northwest plus Air France KLM.

And then can you give us any sort of update on new -- on wins, getting corporate contracts, maybe from other carriers, anything that you've picked up, where you're really selling the network.

Any quick wins would be great.

We can't disclose publicly the contents of any of our contracts or any of our quote, unquote, new wins.

But I can assure you, Mike, that we've picked up considerable share in the bulk of those 600 negotiations as we've been able to hook the two networks together.

If you look at Delta or Northwest stand today's alone versus what we're able to sell today we're also selling, particularly the Trans-Atlantic with Air France KL.

We have a much more robust network with much greater schedule frequency and option than ever before.

So I would say in the vast majority of the contracts, I won't comment on pricing, but I can tell you that we've picked up incremental share.

Okay.

That's good enough for me.

Then just my second question to Glen, the industry has done a pretty good job on ramping up the ancillary fees.

When you think about, and again, you've now had maybe a full year to observe this, when you sort of look at the elasticity of demand, both from the passenger in response to fares moving up versus these ancillary fees moving up, are you seeing that the response is much more inelastic say for an increase in bag fees?

What, with the year behind you, can you kind of give us your latest thoughts?

Well, clearly there are a lot of customers who shop on price only and I think that we have been with the industry in assessing that those customers would prefer to buy a la carte, and the -- when they are making their purchase decision, if price is a single driver on it, we want to be able to give them the lowest price for a seat and then we want to charge them for the options that they want to upgrade to.

And so that seems to be the way we're seeing the consumer choice working.

We think the industry is wise in going that way and we'll continue to press in that direction.

Okay.

Thanks, Glen.

Very good.

And we'll take our next question from Duane Pfennigwerth and Raymond James.

Hi, thanks, good morning.

Wondering if you could quantify the currency impact on your revenue or your RASM in the third quarter, and how much of your sequential RASM improvement would be driven by currency?

Currency, Duane, this is Ed.

Currency in the quarter actually was, was kind of negligible in terms of its net impact on revenue.

We had favorability to the Yen, roughly $35 million and it was offset by a $38 million unfavorable euro exchange movement.

So on the quarter, we were -- we did not see any significant net currency benefit to the revenue trends.

And going forward, we're not, we're not anticipating any significant movements either.

Okay, that's helpful.

And then the commentary around 50-seat RJ reduction, are these incremental cuts, or is this consistent with what you've already announced ?

And if they are incremental, how much of it's coming from your own fleet versus the third parties?

Thanks for taking the

These are all consistent with the previously announced numbers, and so there are very few incremental.

We do continue to shed 50-seat regional jet, as well as 37-seat turboprops throughout next year.

And it's a mix between both the fleet we own and the fleet that we contract.

So the ultimate goal is to probably reduce our overall RJ fleet by -- RJ 50 fleet by about 100 and ultimately retire the propeller fleet and that will happen over the course of the next two to three years.

I think the important point that Glen made is we've really adopted a policy of applying the 50-seaters in stage lengths of 750 miles or less.

Thank you.

And we'll take our next question from Kevin Crissey at UBS.

Good morning, everybody.

Good morning.

Can you talk about JAL and what's going on?

No.

That's what I -- can you talk about structurally then the profitability of your, of your franchise in the Pacific historically versus the, versus the rest of your network?

We, Kevin, we have a strong Asian presence, and we've got the largest market share between the US and Japan and, we certainly are always looking for opportunities to improve that network.

So geographically, we feel, while it certainly was hit pretty hard this year with H1N1, plus the economy, going forward we feel strong about our opportunities to be quite successful, as evidenced by some of our announcements early this week with some growth, direct growth to both Japan and China, from the States.

So it's fair to say that historically that it's been above average in terms of profitability or less of a loss?

Well, historically, it's been in the Northwest system.

Delta has not had a significant Asian presence.

We're just starting to look at and next year we'll begin to realize some of the benefits of the Delta feed into the traditional Northwest Pacific route structure.

And I say going forward, our outlook on the Pacific is positive.

Yes, it is a strong franchise.

It was an important part of the merger and it is a place where we will continue to invest and grow.

Okay.

And then if I could -- question I've asked other carriers as well.

The online travel agencies, they reduced their booking fees a while back now.

Can you talk about what you're seeing in terms of market share losses off of website direct?

Not too high.

I mean the bottom line is Delta.com continues to produce over 30% of our bookings and we have seen really a negligible change in the bookings that come in through Delta.com, a few percentage points.

But at the same time, we've reduced our direct ticketing fee to reservations.

And typically we get higher yielding tickets on Delta.com and through reservations.

So overall, hasn't really had much of an impact on our distribution strategy.

Terrific.

Thank you very much.

You're welcome.

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

Oh, hi, everyone.

Couple of questions.

One, what's the timing on the, on the slot swap decision by the DOJ?

I assume they are the main decision-makers there.

Right, well, there's two decision-makers.

There's the Federal Aviation Administration and the Department of Justice.

And we're going through the Hart-Scott process with the Department of Justice and going through the normal regulatory process with the FAA.

We're hopeful that we'll be able to bring that to conclusion with US Air around the end of the year.

Okay, and also going back to the timing on the decision with the NMB.

When do you think that's going to get resolved?

This is Mike.

Hopefully sooner than later, but unfortunately we don't control their timetable.

Richard's point was well taken.

It's time for them to move.

The important thing, though, from the perspective of realizing synergies, it -- we can continue to aggressively move forward and in fact, once the single operating certificate is obtained, which we expect to have by the end of the year and the Northwest code goes away, we're essentially free to run the business the way we need to run the business from scope, from a scope perspective.

It's for the benefit of the employees that it needs to get resolved to remove the uncertainty and allow them to get the full benefit of being able to have this thing already to bid and move around the system is really the reason it needs to move forward.

It would surprise me that they would very cavalierly change something that's been in place for that many years, that not only affects Delta, but also every company in the airline and railroad industries.

Yes, well what it really does is it politicizes the process that has not been politicized before, which means at some point it's going to be in Republican control again and that will result in mandatory arbitration and baseball arbitration and other changes that are not going to be in the long-term interest of the Unions that are pushing this change.

Right.

It certainly would add to the volatility, which is counter to what the NMB is about.

Correct.

Okay, thanks, guys.

Okay, thanks, Mike.

We have time for one more question from the analysts.

We'll take our last analyst question from Bob McAdoo at Avondale Partners.

Hi, just a quick one.

As we think about the impact of grounding the freighter fleet what -- is there some kind of way to think about how much revenue you are actually going to not be able to accommodate on your other flights or will you be able to kind of keep existing run rate on revenue, but just cut the expenses out?

How should we be thinking about that?

That's the way you should be thinking about that is that when you look at the margin and the cargo business and you look at the losses that that business -- we're focused on margin, right?

Right.

And you look at the losses that that business has sustained, it's been around $150 million to $200 million a year on a fully allocated basis.

So we have a major project under way to pull that much cost out.

And we can recapture and just fill up the bellies of our airplanes and improve the margin on the cargo side of the business significantly.

So can we -- is it as simple as -- I mean you got the $150 million, $200 million number, or is it as simple as just trying to figure out how much -- what are kind of the variable operating costs on that fleet of airplanes?

Well, no, it's more than that.

You have all the ownership of the airplanes, all the variable operating costs, plus the fixed costs, plus the indirect overhead that was carried by those airplanes.

And we're going after all of those costs to take those costs out.

Okay, thanks.

Appreciate it.

Thank you.

That concludes the analyst portion of the question and answer session.

We will now take questions from the media.

(Operator Instructions)

Okay.

This is Ned Walker.

We'll go ahead and begin the media Q&A at this point.

Once again, if we could ask the media to limit themselves to one question with a quick follow-up, we should be able to accommodate most everyone.

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

Hi, gentlemen.

Can -- I know Kevin asked about this a little bit earlier, but can you tell us anything about the level of your interest and pursuit in Japan Airlines and whether you think you might find out one way or the other or resolve that one way or the other before year's end?

We're not -- we're not going to comment on the specifics of that.

But I mean, I think, suffice to say that we have the number one position across the Trans-Atlantic, and have a demonstrated ability with our partners at Air France KLM to really develop very successful alliances.

And -- but otherwise, it's not appropriate for us to really comment.

Okay.

Can you tell us how many jobs you've cut so far this year and how many more you need to eliminate?

Our main line head count is down about 3000, and the -- we've done that with no involuntary reductions on the front line side of the business.

We've had some reductions on the administrative side of the business because of the merger and some of the redundancies, but the bulk of those reductions have been through voluntary early-out opportunities.

And how many more do you need to eliminate?

We have some additional reductions as we complete the integration activities over the course of the next year.

We haven't pegged a specific number to it, but we're moving in the right, on the right path.

Can you ballpark?

Are we talking maybe couple hundred, a few dozen?

No, it's -- there's no -- there's nothing new to the guidance we have issued in the past.

Okay, thank you very much.

And we'll take our next question from Harry Weber with the Associated Press.

Actually, Mary Jane took my question, so--.

Well, you can ask your own, Harry.

Well, one thing I am curious about is what you all are hearing from customers.

You talked a lot during the call and the release about some signs of improving economic activity, but what are you really hearing from customers as far as what they are looking for and price with regard to fees and, any changes that you all might make as a result?

Well, we, from a customer standpoint obviously, there continue to be under pressure, budgetary pressure and pressure on the economic front.

Certainly we're seeing the volumes come back, as we mentioned.

Our overall corporate volumes are down about 10% today versus where they were a year ago.

So they, they -- which is a considerable improvement from where it was earlier part of this year.

I think a lot of our corporate accounts are starting to hit the, hit the road again.

They certainly -- and I think a fair number of them have been traveling over the course of this year.

They have been traveling on restricted tickets and lower fare classes that are starting to move up the price point.

We're looking at our current overall corporate revenues are down about 25% on the year-over-year basis, which is significantly better than where it was earlier in the year, which was down about 40 to 50%.

Harry, this is Richard.

Our overall load factor's been very robust.

I mean in the quarter, our load factor was about 86% in the quarter.

So demand has actually been strong across all segments of the business.

It's just the yields have been much lower than a year ago.

But overall, we're seeing good demand in the business.

Right, and to that point about yields, you're talking about more people purchasing tickets at lower prices.

So how do you get them to pay more for their tickets, or if they are not willing to do that, are you talking about more fees?

Well, we wouldn't talk in advance about any fees.

We price our product very competitively and provide a superior service to our customers than in a combination of both price, schedule, convenience, and the strength of our frequent flyer program and alliances are the offering, the most comprehensive offering now in the industry.

Our employees are doing a good job, and if you look at our RASM performance from June to September we've had almost a 10% improvement in RASM on roughly the same capacity.

So I think we're continuing to pick up both volume and improving yields.

Thank you.

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

Hi, there.

I was wondering, in terms of the $51 million severance charge listed, how many people does that represent?

How many involuntary cuts among the salaried employees have you done so far?

Pardon?

I didn't hear your question.

Sorry.

How many involuntary cuts among salaried employees have you done so far?

Kelly, we don't -- we're not giving out the quarter to quarter updates on that, but the bulk of that severance actually related to payments where of that severance actually related to payments where people were voluntary reductions in accord with the early-out programs we announced earlier this year.

Okay.

And in terms of litigation and the NMB, would that be a situation where I guess if they made a unilateral decision, or what if they went through a public process or that type of a process that delayed elections?

I wouldn't speculate on our legal strategies or position with respect to the Board.

Suffice to say that the process that's being used is not fair to the Delta employees, and it's not fair to Delta, and it's really unfortunate that two political appointees would engage in this kind of a process and change 75 years worth of rules that have worked really well.

Okay.

Is there any possibility do you think of resolving labor issues this year, or do you think it will go into next year at this point?

I wouldn't speculate at this point in time on timing.

But I think the key fact to take away is this will not slow down our integration.

We have time for one more media question.

We'll take our last media question from Ted Reed at thestreet.com.

Thank you.

I would like to ask, is it too early to call this the smoothest merger in airline history or in recent history?

What pitfalls were you trying to avoid in this merger?

And did you have any models you were looking at as you sought to avoid them?

That's a tough one.

We're just going to keep our heads down and continue to work hard to do a good job for our employees and our customers.

And then I'll let you decide that.

All right, thank you.

I will.

I figured you would.

Okay.

Thank you very much, Richard, Ed, Hank, Glenn, Mike and Jill.

That will conclude our September quarter 2009 conference call.

We'll go ahead and talk with everybody in January of next year.

Thanks so much.

Again, that does conclude today's conference.

Thank you for your participation today.