達美航空 (DAL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines December 2009 quarter financial results conference call.

My name is Cindy, and I will be your coordinator.

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

(Operator Instructions) I would now like to turn the call over to Jill Greer, Director of Investor Relations for Delta Airlines.

Thanks, Cindy.

Good morning, everyone, and thanks for joining us to discuss Delta's December quarter and full year 2009 financial results.

Joining us from Atlanta today are Richard Anderson, our CEO; our President, Ed Bastian; Hank Halter, our CFO; Steve Gorman, our Chief Operating Officer; Glen Hauenstein, our EVP of Network and Revenue Management; Mike Campbell, EVP of HR and Labor Relations; Paul Jacobson, our Treasurer; and Ned Walker, our Chief Communications Officer.

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

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

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 have allocated 25 minutes for questions from the analysts.

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

When we get to the Q&A I'd like to request that you limit yourself to two questions and a follow-up.

That should allow us to get to as many questions 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 these differences are described in Delta's SEC filings.

Unless otherwise noted as GAAP, all financial results we give today related to comparisons to 2008 will be on a combined basis, including results for Delta and Northwest.

We will also discuss certain non-GAAP financial measures.

Operating expense, operating margin and unit cost results exclude special items unless otherwise noted.

You can find the reconciliation of non-GAAP measures on our Investor Relations Web site at Delta.com.

And with that, I will turn the call over to our Chief Executive Officer, Richard Anderson.

Thank you, Jill, and good morning, everyone.

Thank you for joining us on the call today.

This morning, we announced a net loss for the December quarter of $225 million, excluding special items.

This is a $285 million improvement year-on-year.

While we're disappointed to report a loss, we are encouraged that revenue and demand trends improved steadily throughout the December quarter.

We are seeing positive passenger unit revenue improvement in January, and we expect to have positive year-on-year RASM improvement January through December of 2010.

For the full year, Delta reported a net loss of $1.1 billion excluding special items.

At market prices, though, we would have reported a $291 million net profit excluding special items for 2009, and that's despite a $6 billion decline in revenue year-on-year.

We are pleased to have the negative hedge effects from 2008 behind us as we go into an improved economic environment.

Looking back on 2009, it was one of the most difficult years we faced in the airline industry, and we're really glad it's behind us.

But we want to thank our great employees and commend them for the quick action we together took early on to help Delta weather the storm.

We think we're well positioned to capitalize on the economic recovery.

In 2009, we continued to align capacity with demand and worked hard to right-size our cost structure.

We reduced capacity in 2009 by 6%, with a reduction of 8% in the December quarter, more than double the industry average for the December quarter of 2009.

For the full year, on a 6% capacity reduction, our ex-fuel unit costs were up 4% with most of that driven by higher pension expense.

We executed quite well on merger integration, and delivered more than $700 million in merger synergies.

And despite a very challenging economy, Delta's underlying business has been performing solidly, given the environment, as evidenced by viewing our performance excluding the losses from the 2008 hedging decisions we took.

The Delta team has successfully merged the two airlines, while continuing to run a solid day-to-day operation.

We are in the home stretch of merger integration, and it's on track to be the smoothest airline merger in history.

In 2010, we have commercial initiatives in place to grow our unit revenues while continuing to prudently manage our costs and capacity.

We are investing strategically in the product and at the same time, improving the balance sheet by paying down debt and reducing capital spending on new aircraft.

All the actions we're taking in 2010 should position us for sustained profitability into the future.

As I mentioned at our investor day last month, this business must ultimately evolve to deliver consistent profitability and a return on capital.

Here are the three strategic priorities that were laid out in 2010, or that we are laying out in 2010.

First, we have been and we'll continue to execute well on the merger, and assemble all the assets we need to be successful.

On New Year's Eve, we received a single operating certificate from the FAA and merged Northwest into Delta.

We now have a single inventory scheduling and yield management system.

This is really important to achieving the revenue synergies in 2010 because in 2009 we in essence operated two separate airlines because of separate yield management and reservation systems.

With our technology integration substantially complete, we expect to deliver $600 million in incremental merger synergies for 2010.

2010 must be the year of revenue synergies for our merger.

Our second key objective is to drive a revenue premium by leveraging our network and making investments in our product.

With the diverse fleet we have as a result of the merger, we can fly the right planes in the right markets and strategically align our hubs.

We are playing to win in New York with our proposed LaGuardia transaction and seeking a long-term facilities solution at JFK along with product enhancements we recently announced aimed at high-value customers.

The Pacific is also a significant opportunity for us, as we look to optimize our flying there and develop new alliance relationships.

We are also going to stay the course with respect to ancillary revenues, a $4 billion revenue stream that we're positioned to grow.

The merger, the Air France-KLM joint venture with antitrust immunity, the LaGuardia transaction, where we are building a hub in LaGuardia, the long-term Alaska alliance, the JV with Virgin Australia and our development of SkyTeam around the world, particularly in Asia, give Delta the pieces to succeed long term.

Finally, in 2010, we are focused on improving our financial foundation.

We will remain quite disciplined about capacity and vigilant about maintaining competitive costs by delivering on merger synergies, driving additional productivity and continuing to streamline overhead.

We expect our consolidated unit costs to be flat year-on-year.

Cost discipline, along with a significantly reduced capital expenditure budget will allow us to use a projected $1.2 billion in free cash flow to pay down debt and strengthen our balance sheet.

So we believe we're taking the right actions into 2010 to enhance the long-term financial position of the airline.

I appreciate the opportunity to speak with you today, and I will turn it over to my friend, Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us this morning.

2009 was, indeed, a challenging year for Delta, the airline industry and the global economy.

But the team here continued to deliver on the merger integration and run a solid operation.

Special thanks go out to the Delta employees worldwide for working very hard to ensure that Delta maintains its leadership position in the face of very challenging conditions.

As Richard mentioned, on a GAAP basis, we reported a net loss of $25 million for the December quarter.

Excluding special items, Delta reported a net loss of $225 million, or $0.27 per share on a base of 830 million shares.

This compares to First Call consensus of a loss of $0.24.

Special items for the quarter totaled a net credit of $200 million which included $121 million in merger-related expenses primarily reflecting a vendor contract termination, severance, and training expenses.

We expect the remaining merger-related one-time cost of $150 million to $175 million to be recorded over the balance of 2010.

We also recorded in the quarter a $321 million non-cash income tax benefit.

For the full year, excluding, special items, Delta reported a net loss of $1.1 billion.

EBITDAR was $576 million for the December quarter and $2.1 billion for the full year.

Our liquidity continues to be strong despite a $6 billion decline in revenue this year.

We ended 2009 with $5.4 billion in unrestricted liquidity, $400 million higher than at the beginning of the year.

Shifting to revenue, Delta's operating revenue for the December quarter was down $1 billion, or 12% year-over-year.

Our consolidated passenger unit revenues decreased 5% year-over-year, with the yield down 7 points and load factor up one point.

Monthly passenger RASM improved sequentially throughout the quarter with October down 11% year-over-year, November down 4%, and December down 1%.

Our domestic passenger unit revenue was down 7% on a 4% capacity reduction, driven by yield pressures.

Our international passenger revenue for the quarter was down 5% year-over-year, with the yields down 10 points and load factors up 4 points on a 14% capacity reduction.

As we laid out in last month's investor conference, we have seen significant improvement in our unit revenue performance since the June month when we experienced a 23% year-over-year decline in our consolidated passenger RASM.

While the comps have certainly become easier as we closed out the year, we have seen tangible evidence of sequential demand improvement which indicates the recovery has begun.

Cargo revenue was down $32 million in the quarter, or 11% year-over-year, which reflects the pull down of our dedicated freighters which we completed at the end of December.

Yields are still under pressure, but they are improving.

For the December quarter, our other net revenue was $773 million, down 6%.

Baggage fees were up $75 million, but were more than offset by economy-driven softness in our MRO business and other non-passenger revenue components.

In 2010, we will continue to have a strong focus on growing our ancillary revenues in our business to temper the volatility in our core.

We are targeting growth of over $500 million in other net revenue this year, primarily from bag fees, SkyMiles, and our MRO business.

Now, turning to our outlook for revenues into the first quarter.

As mentioned, we've seen clear evidence that the revenue environment is improving and those trends are continuing into the first quarter.

In January, our corporate contract bookings are up roughly 10% as compared to the same period last year.

While this partly reflects easier comparisons, business travelers are returning.

And as we have seen volumes starting to improve, fares are also improving, albeit at a more graduated pace.

Our consolidated passenger RASM has turned positive in January and will be up 2% over last January.

We expect first quarter unit revenue performance to continue with the acceleration trend we have experienced over the last six months and to be in solid positive territory year-over-year.

Domestic and transatlantic are showing the greatest improvements with yields expected to be in the high single digits for domestic and double digits for transatlantic during first quarter.

Our domestic close-in bookings have sustained their trend from the fourth quarter and on the leader front, peak spring break periods also look improved versus 2009.

Our transatlantic business bookings continue to run above last year's levels, coupled with recent industry fare increases and Delta's capacity restraint, we expect yield to improve throughout the quarter.

We expect Latin and Pacific yields to be down in the mid-single-digits year-over-year in the first quarter.

We are seeing strength in South America, but downward pressure driven by Caribbean and Central American capacity growth.

Transpacific is showing relative strength while the Japanese resort markets and intra-Asia markets are relatively weaker.

For capacity in the March quarter, we expect system capacity to be down 3% to 5% year-over-year with our consolidated domestic capacity down 1% to 3% and our consolidated international capacity to be down 5% to 7%.

For 2010, we expect system, domestic and international capacity to be roughly flat from full year 2009.

As Richard noted, the merger integration is progressing very well.

We received the FAA single operating certificate, and our technology integration will be substantially complete this quarter, enabling us to unlock the benefits of the single code and reservation system.

All airport facilities have been rebranded and consolidated.

Nearly all of the Northwest mainline aircraft now have Delta interiors and we will finish painting about 95% of the fleet in the first quarter.

For the full year 2009, we achieved more than $700 million in merger synergy benefits, and we're now targeting $600 million in new 2010 synergies, with about $350 million of that on the revenue side, and the remainder in cost synergies.

We have spoken in the past of the importance of the SOC and IT cutover.

Those are the fundamental drivers of a significant portion of the revenue synergies we expect to start to realize in 2010.

We can align our fleet of 1,400 aircraft to get the right plane in the right market.

We will see network benefits from a single code, increased presence and improved revenue management technology using a single system.

Our joint venture with AF and KLM, as well as our other alliances will bring incremental value as well.

Cost synergies will come from operational efficiencies, including the discontinuation of our dedicated freighter business, as well as scale efficiencies and vendor and regional carrier contracts and the continued streamlining of overhead functions and technology.

So while we have a lot of work ahead of us this year, we are well on our way to completing a successful integration and delivering $2 billion in annual run rate synergy benefits that are unique to Delta.

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

Hey, thanks, Ed.

Good morning, everyone.

For the December quarter, operating expenses decreased $1.2 billion year-over-year, reflecting $900 million in lower fuel price, in addition to reduced capacity-related costs, higher synergy benefits and productivity.

These cost reductions were partially offset by higher pension expense, investments in our product, and increased wages.

Consolidated non-fuel unit costs were up 7% year-over-year in the fourth quarter.

This was higher than the guidance we provided in mid-December of up 5% to 6%, due to higher Shared Rewards expense for exceeding operational performance goals, asset write-downs as a result of impairment testing and higher revenue-related expenses.

It's important to focus on our full year unit cost performance.

Our 2009 consolidated non-fuel CASM was roughly flat to last year, excluding three points of market driven pension expense.

More importantly, we are very comfortable with the guidance we gave at last December's investor conference to maintain flat consolidated unit costs in 2010.

I want to thank all Delta employees for their tireless efforts to increase productivity and to accelerate merger synergy benefits to offset cost pressures.

In the March quarter, we will have some cost pressure from customer and product investments, as well as for maintenance volumes, but we expect to largely offset those with incremental cost synergies and productivity.

As a result, we are targeting consolidated non-fuel unit costs to be flat to up 2% on a base of 8.63 cents in last year's March quarter.

Turning to fuel, in the December quarter we hedged 40% of our fuel consumption.

Our consolidated all-in fuel price was $2.17 per gallon.

In the March quarter, we've hedged 47% of our anticipated consumption with about half of that in call options.

Our current hedge portfolio is in the money.

Based on the forward curve at Friday's close, we expect our consolidated fuel price for the March quarter to be $2.22 per gallon.

In terms of earnings performance, we are expecting a breakeven operating margin for the March quarter.

Shifting the discussion to liquidity, we ended 2009 with $5.4 billion in unrestricted liquidity, which included $4.7 billion in cash and short-term investments, and $685 million available in undrawn revolving credit facilities.

Our year end liquidity balance was down from $5.8 billion at the end of the September quarter.

Operating cash flow was negative $75 million in the December quarter, reflecting our pre-tax loss and seasonal declines in the air traffic liability.

In the December quarter, we completed a $689 million EETC financing with about half of that used to refinance five aircraft delivered under seller financing in 2009.

The rest of the proceeds are currently in escrow and not reflected in our liquidity balance.

Those proceeds will be used to refinance 22 aircraft serving as collateral in our 2000-1 EETC, which matures in the fourth quarter later this year.

Also during the December quarter, we obtained additional liquidity through the sale of $150 million in unsecured municipal bonds and $250 million from new revolving credit facilities.

In terms of debt maturities and payments, Northwest's $300 million undrawn revolving credit facility matured in the fourth quarter.

We also had debt and capital lease payments of $628 million, which included the repayment of the seller financing for the five aircraft we refinanced under the new EETC that I mentioned earlier.

And while it did not impact the change in our total liquidity balance during the December quarter, our $500 million revolving credit facility that was fully drawn at September 30 was repaid in October and remained undrawn and available at year-end.

Capital expenditures for the December quarter were approximately $175 million, which included two Boeing 737-700 aircraft.

Looking forward at 2010, we have very few aircraft deliveries.

We are taking delivery of four new aircraft this year, two 777-200LRs and two 737-800s, all of which have financing in place.

We also recently signed an agreement to purchase nine MD-90s which will bring our total MD-90 fleet up to 28 aircraft.

As we've said before, it's a very cost effective aircraft for fleet replacement.

For the March quarter, our net CapEx will be approximately $400 million, with $330 million in aircraft parts and modifications.

That CapEx includes the two 777-200LR aircraft and four MD-90 aircraft.

We have net debt maturities of $115 million in the first quarter and we are targeting an unrestricted liquidity balance of $5.6 billion at the end of March quarter.

So in closing, 2009 was a difficult year for the industry.

With economic recovery underway and the major milestones of our merger integration almost complete, 2010 brings enormous opportunity for Delta.

We are well positioned to lead the airline industry towards sustained profitability for the benefit of our employees, customers and shareholders.

Thanks, Richard, Ed and Hank.

Cindy, we're now ready for questions from the analysts, so could you review the process for asking a question?

And, again, we ask everyone to limit themselves to two questions and a brief follow-up.

Thank you, Ms.

Greer.

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'll pause for just a moment to give every analyst an opportunity to signal.

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

Yes, good morning.

Ed, I just want to ask for some clarification on your revenue comments.

The comments on the call were -- sounded a bit more upbeat than what I took from the implied guidance.

So maybe the way to come at this is from the perspective of on the -- at the investor day, you talked about a 7% run rate on RASM which is I think where you were at that time.

Has that really changed based on what you have seen in January?

I think it's improved a little bit, Bill, as we have seen sequential improvement.

That was about six weeks ago and we have continued to see the trend lines point upwards.

So I think our outlook on 2010 is slightly improved.

Okay.

And then I have a couple of questions just on liquidity.

First, can you remind us your 2010 guidance and, secondly, can you talk to us about how you would fund any deal that you might do with JAL?

Well, with respect to JAL, as you may have seen from the reports, the latest insight we're receiving from JAL, as well as the government, is that there is not an interest in any up front capital investment or infusion.

So while we are prepared and would be prepared to make an up front investment in JAL, that's not in the plans at the present time.

So beyond, that I really can't comment on JAL.

With respect to liquidity guidance, our first quarter, quarter-end guidance is $5.6 billion, so it is a $200 million net liquidity build in the first quarter.

We have not provided year-end 2010 liquidity guidance at this point.

Oh, sorry, I was actually asking for full CapEx, but even within that -- even the pension funding number was $700 million, I think.

Has that changed?

No, it has not.

Okay.

Hank, you may want to comment more on the CapEx?

Yes.

Bill, our CapEx plan for 2010 is not different than what we talked about at the investor day.

I believe it was roughly $1.1 billion, and that included the four new aircraft deliveries, which will complete in the first half of the year and then we've got the 11MD-90s that will trickle in during the year, I mentioned just a few moments ago.

We have four MD-90s coming in in the March quarter.

Okay, great.

So no change.

Thanks.

That's right.

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

Good morning, everybody.

Hi, Gary.

I wonder if you could maybe add -- you talked about that $500 million revenue growth goal you've got on the other revenue line.

And just wondered if you could flush that out a little bit?

I mean, that would look like a pretty good number on top of what was already a good year in 2009, particularly with the Amex deal.

Could you maybe just give us a little bit more color on how you expect to get there and then maybe help us think about the timing, when you think you can realize those sorts of gains?

Sure, Gary.

You know, there's a number of components in the fee-based revenues.

Obviously, the baggage increases, as we start to lap, increases that we posted in 2009 over 2010 will be a component of that.

We're expecting our MRO business, after a tough 2009 to post some growth, and I think the broad impact is, of the economy, in terms of spending, is probably the single greatest effect, as, you know, the corporate volumes, credit card volumes across the board, whether it be Amex or any of the other providers have had a very challenging 2009 in terms of consumer spend patterns.

We expect the growth rate to be able to -- the growth in terms of the new fees and the new rates that we have with the Amex contract to really start to show some improvements in 2010.

Gary, it's Richard.

We expect about $100 million a year -- next year in revenue growth from Delta Global Services, our MRO business, the mainline travel business.

So the ancillary businesses that are related to air travel, but we will do better in an improving economy.

Okay.

So -- so the bag fees are going to be a significant portion of that 500?

I mean, is that the --

They are a portion.

I wouldn't say they are the lion's share.

Okay.

I would say the bigger impact is the improved economic outlook for 2010 versus 2009.

Okay.

And then secondarily, I mean, I know you want to -- you want to utilize the benefits of the combined operating certificate to get at some of those revenue synergies.

I was curious, now that you've got it, how long do you think it will take to get that to a place where it's full up and we're seeing the real benefits?

Is it there today?

End of first quarter?

How should we think about how that should spool up through the year?

I will provide my view and then I will turn it over to Glen and he can provide more color.

It's going to take probably two years, Gary, I would say, to fully spool up.

We haven't yet turned on the integrated code yet with the technology integration.

We are expecting to complete that this quarter and once you have the code, and once you have the technology complete, together with the SOC, we'll be able to start to free flow the fleet.

Remember, there's fairly significant personnel implications as we need to get staffing complete, and the crews in the right spot.

We need to get people trained.

It will take a while, and there will be some trial and experience factors that we'll learn as we move the fleet across the Delta and the Northwest traditional systems.

But I would say two years to get to the full level of that revenue synergy.

Gary, it's Glen.

I would just like to add, we did the cross fleeting -- what we call cross fleeting last year, which was where we took some of the Northwest airplanes and the Delta airplanes and put them on different missions than they have historically gone.

We got about a 5% bump in margin versus the baseline, those planes that were not swapped.

And as we get into late spring, early summer, we are going to take many of the constraints that we've had during the first year of the merger off and begin that integration amongst the fleet.

But I think Ed is really right, that that will involve a bit of trial and error, and so as we work through the first couple of schedules, I think by the end of the year and into next year we should be fully up on that.

Okay, guys.

Appreciate it.

Thanks, Gary.

We'll take our next question from Dan McKenzie at Next Generation Equity Research.

Yes, thanks.

You know, Richard, I believe you mentioned you were expecting flat consolidated unit costs.

I just wanted to verify whether that was total consolidated unit costs or consolidated costs excluding fuel?

Yes, Dan, it's the flat year-over-year on a non-fuel basis, excluding profit sharing.

Oh, great.

Thanks.

And then I guess my second question pertains to Tokyo and we have all heard some pretty heated views about JAL and I'm sure you folks have strong views as well.

I would like to come at it slightly differently.

If I'm not mistaken, Delta serves 21 destinations from the hub, so obviously gets some attractive connecting fees.

So my question is how important is it to have that connecting traffic to make the routes from Japan work and, I guess what I'm getting at is whether the local traffic is rich enough to support the routes on their own?

Yes, Dan, this is Richard.

Yes, in fact, when you think about a number of those markets, the markets south and west of Tokyo, they are actually best served through a hub.

And with the right alliance relationships, they are, in fact, a valuable part of the network.

Got it.

Okay.

And then just the final follow-up here, how should investors think about the materiality of JAL revenues to Delta if it does move to SkyTeam?

Ask that again.

How should investors, I guess, think about the materiality of a JAL contribution to SkyTeam if it were to switch?

Dan, this is Ed.

We have not -- we've not publicly disclosed our views in terms of what the benefits to Delta, per se, would be.

We have had -- as you mentioned, a fairly visible discussion of what the benefits to JAL would be of Delta versus the current alliance to which they belong, and we believe the benefit to JAL is in the hundreds of millions of dollars per year, about $400 million full up of moving to SkyTeam.

But we obviously expect significant benefits back to Delta and the other SkyTeam members as well.

Great.

Thanks a lot.

That will do it for me.

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

Hey, good morning, everybody.

A follow-up on the JAL situation.

If they do join SkyTeam, and you do not receive ATI, and, therefore, as I understand Open Skies would be sent back to the drawing board, isn't that still an incrementally positive development to Delta, just versus the status quo?

Yes, Jamie.

A significantly positive development.

Okay.

So there doesn't seem to be any scenario under which Delta loses as part of this courtship?

You may gain less, but it seems like the worst case outcome is simply status quo?

And that's true, both for Japan Airlines and Delta.

Yes.

Got it.

Okay.

That was my only question.

Thank you.

We'll take our next question from Mike Linenberg at Bank of America-Merrill Lynch.

Yes, hi.

Two questions here.

You know when we go back to the forecast that you provided in December with CapEx over the next three years in the $3 billion to $4 billion range, with the announcement yesterday about the $1 billion of investment, I think it's $300 million per year over the next few years, is that incremental to the $3 billion to $4 billion or is maybe the $4 billion, leaning towards that, is that the better number?

How should we think about your CapEx?

No, that's not incremental.

That's in that run rate number.

So if you looked at pre-merger Northwest and pre-merger Delta, on a combined basis, if you look back over the last eight or 10 years, on a combined basis, the CapEx was about $2.8 billion to $3 billion a year.

Mm-hmm.

Both airplanes and non-aircraft CapEx, and our goal is to get substantially below that number over the next few years.

And so the guidance -- the number that we put out yesterday was in the numbers we gave you at investor day.

Perfect.

That answers that.

And then just my second question, and this is probably to you, Richard.

With the recent Chapter 11 bankruptcy of Mesa, is that technically a breach of contract and then where do we go from here?

You know, I probably ought to ask Ben Hirst, who is our general counsel, to comment on where we go from here with Mesa or if you want to comment at all.

At this stage, probably not because we are still in litigation with Mesa and a variety of forum.

Okay.

I guess we should -- We can't say anything.

Understand completely.

I thought I would try to get it in.

All right.

Thank you, gentlemen.

Nice try.

Thanks, Mike.

Take care.

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

Thanks, guys.

I would like to go back to the synergy discussion a little bit more, if you don't mind.

I think we are all conceptually familiar with sort of how the refleeting or the cross fleeting can benefit from the load factor side, but do you still expect to drive a RASM premium to the industry in 2010 and maybe give us a little more color, if you don't mind, sort of parse out the contributors to that premium between loads and yields?

Hey, Hunter, it's Glen.

A couple things.

One is, I think you have to put in the context of what happened last year.

We are, by definition, heavily an international carrier and international business travel combined with the H1N1 had probably a disproportionate impact on our revenues versus the industry.

As we move forward, I think one of the things we are encouraged by is the fact that transatlantic, which we are heavily weighted in, seems to be having a very nice rebound, both in -- in both cabins of the airplane, both in front and in the coach section.

And so as we move through the winter and into the spring, I think we'll see our mix actually working to our benefit on a year-over-year basis, given where we are weighted in the industry.

And then on top of that, I think you will start to see the synergies that we knew we could get to, but we had to get through the integration process in order to start delivering those for our shareholders.

So I think really it's a combination two of issues.

One is the mix of where we fly and how those entities seem to be responding to the rebound and, second, is our ability to out perform based on fleeting.

So it's kind of a mix of loads and yields?

I mean, there's not necessarily one that's going to drive -- I guess they kind of both benefit each other to a certain extent, right?

It's kind of a mix of the two?

Well, and Hunter, there's actually a pretty -- there's a third factor that I alluded to in my prepared remarks.

In 2009, we really didn't operate one single airline.

We operated two airlines, because we had two operating certificates with the FAA.

And number two, we had two inventory systems and two yield management systems.

And the way we work to get some revenue synergy benefits was by code sharing.

So in essence, we had code sharing between Northwest and Delta on many routes, and then there were some locations, because of regulation, where we couldn't code share.

So the really big opportunity going forward is we now have the -- we will shortly here in the first quarter have just Delta and we'll have a single code and all of the distribution systems will have a single code and a combined schedule.

And then from a -- on a single revenue management system, with the airplanes free flowing, instead of having to operate them separately on their separate certificates.

Right.

Okay.

And my second question -- thanks for that color, by the way, Richard.

Richard, I'd also love your opinion on what's the pitch here back to the ATI situation in Asia.

What's the pitch to the DOT?

I mean, it's pretty clear that there are obvious financial benefits for both you and JAL, should they defect to SkyTeam, but how to you propose this as consumer friendly?

I think the market share statistics are pretty overwhelming and Gerard had some pretty impassioned comments on the AMR call.

How do you pitch this to be friendly to the consumer to get that ATI approval from DOT, if that's your end goal?

Well, first of all, I think it's important to recognize that the Department of Transportation has a very capable group of professionals who have been handling these sorts of ATI applications since we filed the first one in 1993 at Northwest-KLM.

So there is a long body of precedent that governs ATI applications and there is a significant number of decisions, both from Republican and Democratic administrations.

The second point is, you really have to go into the data.

I mean, this is a legal and factual analysis.

And the legal and the factual analysis would show very clearly that the market shares in this instance are substantially below market shares that have been previously approved in ATI applications.

Most notably, Lan Chile, the ATI application that SkyTeam had for the Paris market, the German market.

So it's really more a matter of just sort of coolly and objectively evaluating the law that has been fairly well settled by DOT over the last 20 years and then taking the econometrics that come from the market shares that the carriers have.

And the ones that I cite you to were all situations where there were single carriers in the market and this instance, the Star Alliance is actually the largest alliance between the United States and Asia and will continue to be the largest between the U.S.

and Asia.

From a consumer perspective, the benefits of alliances have been very well established over the past 20 years.

And those benefits come from seamless networks that provide many more travel choices, much more efficient routings, and an increase -- a significant increase in output by the carriers that are in these alliances, all of which drive significant consumer benefits.

So I think it's really a matter of a cool and objective view of both the law and the facts in this case, and I'm certain that the very professional staff at the DOT will do the good job that they've always done in handling these sort of matters.

Okay.

Thanks for the color.

Appreciate it, guys.

And we'll take our next question from Duane Pfenningwerth at Raymond James.

Hi, thanks.

Good morning.

I wonder if you could do some attribution on our sequential unit revenue improvement and specifically, how much of the improvement you are seeing is being driven by suppressed capacity in peak leisure demand periods versus a return of the business traveler?

I know you have shown some charts showing business travel has recovered, but in terms of what's leading the improvement in unit revenue, is it leisure or is it business?

Well, I think it's clearly the capacity discipline that we've maintained and we'll continue to maintain going into 2010 is helping in that respect.

But we have seen a fairly significant uptick in our corporate revenue base.

I mentioned in the month of January, our corporate bookings are up 10% and that's against a lower base of capacity of about 5%.

So when you think about that in terms of unit revenues, obviously the corporates and the business -- the return of business demand is having a fairly significant impact here.

And don't forget, as we go through 2010, the sequential comparatives become substantially easier, as well, as we move month-to-month throughout the year.

Thank you.

And then just a follow-up with regard to your full-year capacity plans.

I think previously you have talked about international up modestly and domestic down, 1Q it looks like you are cutting international more than domestic.

Any change on your thoughts in terms of full year capacity in those two segments?

Thanks.

No.

No.

Duane, it's flat through the year.

You will see us adjust our capacity more in line with seasonal patterns so international, naturally will be a little heavier in the summer and the peak travel periods and a little lighter in the shoulder periods, but on balance, it's flat for the year for both entities.

Thank you.

You're welcome.

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

Oh, good morning.

Just a couple of questions.

One is, can you give us a status on the National Mediation Board voting procedures, where that stands?

And then the second question is also a status on the -- where the DOJ stands on the slot exchange at LaGuardia and Washington National?

This is Mike Campbell.

I will take the first one.

The National Mediation Board had a 60-day comment period which I commented on at the investor conference.

It closed in early January.

So right now it's under consideration by the Board as to whether to revise the rules or to keep the current rules.

There's no time frame for them to come out with a ruling.

So right now, we are just waiting for that ruling.

Okay.

And what is the status of the slot exchange?

The slot exchange is being reviewed by the Department of Justice under Hart-Scott-Rodino process which is coming to a head, we believe by the end of this month.

And by DOT on a similar timeframe and we expect resolution from both agencies in early February.

And just one final follow-up, assuming the resolution is favorable, how quickly can you implement schedules at LaGuardia?

We currently haven't planned -- we have it planned for June and we have not moved off that plan, if the government timeline slips a little bit later, we could delay that plan until later in the summer, but our current plan is to retain a June start date.

Great.

Thanks very much.

We'll take our next question from Justine Fisher at Goldman Sachs.

Good morning.

I think you guys had mentioned that you did take some write-downs on routes for the quarter, but we saw Continental and American write down certain of their routes that were subject to Open Skies agreements.

So did you take guys notable route write-downs related to Asia based on the Open Skies agreement?

No, not at all.

And, I mean, is that after taking into account the new methodology for valuing the routes so you guys don't anticipate taking any going forward?

No.

Okay.

And then the second question is just about the view on transatlantic.

You guys had mentioned that domestic and transatlantic will be the most positive performers in the first quarter, and what is driving transatlantic?

I know at the investor day you had mentioned that it's a lot of synergies and a lot of the cross selling that you can achieve from the Northwest-KLM, Delta-Air France alliance.

So is it that and just additional demand on the transatlantic or do you think you are seeing incremental versus peers because of that alliance?

I think it's both, Justine.

We're also, obviously our capacity is down fairly significantly in the transatlantic.

We were down almost 20% in the fourth quarter.

And that level of capacity or strain has helped to improve the overall margin performance of our transatlantic route system.

And the second point I would add about, Justine, there is in our Air France-KLM joint venture, we are really the only U.S.

partner.

Our competitor joint venture Star, the traffic has to be divided between four U.S.

partners.

So given the nature of the fact that it's really just bilateral, Air France-KLM on one side of the Atlantic and Delta on the other, we get the benefit of all the flow from Air France-KLM, we don't have to divide it with any partners.

Excellent.

Thanks so much.

We'll take our next question from Helene Becker at Jesup & Lamont.

Thank you very much, operator.

Hi, everybody.

Just on the guidance for, beginning in March and then going out to the second quarter when JFK's main runway will be closed.

Is that part of the international pull down that you have, that you have been talking about for this year?

Actually, in JFK, the international for the peak summer is up.

We have funded the reduction in capacity by a rationalization of the feed markets into Kennedy.

So you will actually see year-over-year increase in international capacity in Kennedy this year, but the number of aircraft movements will be down.

Okay.

And that's just swapping out -- you find it out by swapping out larger planes for some of the smaller planes to keep the number of [inaudible] or how should model that?

That's correct.

Larger international airplanes and some reduction in commuter capacity.

And if you think of the commuter airplanes at 50 to 70 seats, they take up just as much air space as does a wide body.

And so we are able to [rejigger] the schedules around and take the peaks out and still provide the feed and get the international capacity in line.

Great.

Thank you very much.

Cindy, we have time for one more question from the analysts.

Our last analyst question comes from Kevin Crissey at UBS.

Hey, good morning.

Is there anything unique about the year revenue comparisons as you progress through the first quarter versus the industry?

I don't know, Kevin, what the industry is going to do in the first quarter, but I would say --

I mean last year, like the comparisons?

On the year-over-year comparatives?

No, I don't anticipate there's going to be a significant change.

Obviously, with our S-curve benefits and the synergy benefits, we expect the premium that we should be able to generate versus the industry to improve over time, but directionally I don't think you should see a huge point of demarkation from Delta versus the industry.

Yes, and I guess -- if I just type in the numbers that you've provided in guidance with operating margin and the other details, I come to somewhere in the vicinity -- and maybe I'm wrong, you can correct me if I'm wrong, somewhere in the vicinity of 7% RASM in the first quarter, give or take.

With January being 2%, and that would imply that the remaining months kind of spool up maybe 5% better year-over-year in each month thereafter, but that to me doesn't really look like any improvement as the comps get basically that much easier.

I guess what I'm trying to reconcile is the comments that we're hearing from a lot of carriers that things are looking better and business travelers are coming back, but I think what is driving 85% in the improvement now in year-over-year performance is simply easier comparisons.

Maybe you can give some color around all of that long soliloquy?

Well, I think directionally your numbers are not off the mark.

No question, we are seeing a significant easier comparative benchmark versus last year as we move sequentially through 2010.

That said, we have seen a considerable amount of demand improvement.

The demand, the forecast that we are giving you is based only on what we see today and to the extent we see further demand improvement going forward, we're, I would say, as cautious as anyone else in terms of giving guidance in that respect.

Okay.

Thank you.

Sure.

Okay.

Thanks very much, Cindy.

We'll go ahead and begin the media Q&A at this point and once again if you could review the process for asking questions, so we can try to get everybody in.

I would like to ask for one question with a brief follow-up so we can accommodate as many people as possible.

And we'll go with the first question.

Thank you.

We will now take questions from the media.

(Operator Instructions) And we'll pause for just a moment to give everyone an opportunity to signal.

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

Hi, gentlemen.

Hank, I think you said that would you be taking delivery of two 787s this year.

Do you know when that will be and are you guys talking to Boeing about swapping any of those or others out for Dash 9s?

No, actually, I said we will be taking -- in terms of new aircraft deliveries in 2010, we have two new 777-200 Series LR aircraft which we'll take in the first quarter, and we also have two 737-800 aircraft, which we'll take in the second quarter.

And then in addition to that, we've got the nine additional MD-90s that we'll take throughout the year, four of which will come in the first quarter.

We do not have any 777 deliveries in the first quarter, or excuse me, in 2010 at all.

787, excuse me, 787.

Okay, yes, I misheard 78s for 73s.

So are you in talks with Boeing about swapping any of those 78s that you do have on order out for Dash-9s?

We don't comment specifically on our conversations with any of the manufacturers with respect to our relationship with them.

Okay.

And a follow-up question.

How much was capacity down at CVG in Memphis in 2009 and how much will it be down in 2010 at both?

Memphis is roughly flat and Cincinnati is down 29%.

For 2009?

For 2009.

And what are you projecting for 2010?

We are projecting that Memphis will remain essentially flat and that Cincinnati will be plus or minus five.

Okay.

Great thank you.

We'll take our next question from Ann Keeton at Dow Jones.

Hi.

Could you comment a little more on your fuel hedging strategy for the year?

We heard that you are 40% hedged in the first quarter.

I wonder if that's a high level of hedging for you, and just kind of what are you looking for during the year?

Yes, the 40% was related to the December quarter 2009.

We were 40% hedged and as we look into 2010, we are following a systematic fuel hedging program.

And as such, for the first quarter, we're hedged just shy of 50%.

And as we progress through 2010, you'll see us adding additional hedges towards that 50% mark for each of the quarters.

For where we stand right now, we have in our press release second quarter's hedged north of 30% and then obviously the third and fourth quarters of 2010 the hedges will build as we continue through the year.

And the other important thing I would add on hedges is the instruments that we use typically are options, which give us the ability to participate in the event the price drops significantly.

So it's essentially a system that allows us to cap our exposure to the fuel price and to participate on the downside.

Right.

So is this a different approach from last year?

Yes, last year --

Yes.

It is a different approach from last year.

We really just do it on a systemic basis, and try to in the near-in quarter reach close to somewhere around 40% to 50% of our fuel hedge, principally with options.

Right.

Okay.

Thank you.

We'll take our next question from Mickey Maynard at the New York Times.

Richard, a couple --

Lost her.

Mickey, are you there?

No.

Mickey, please check your mute function.

It looks like we may have lost her.

Why don't we go ahead with the next question and have Mickey call back in.

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

Hi.

I was wondering if there are any potential areas for new fees for ancillary revenues or do you --

I hit one.

-- or do you plan to increase any existing fees?

You know, Kelly, we do not comment on prospective matters pertaining to pricing, scheduling, or fees.

Okay.

And one point for clarification.

I wanted to see if the capacity guidance for the first quarter, is that mainly an extension of the fourth quarter cuts resulting in lower comparisons or is it incremental to the cuts?

It's essentially -- it's a continuation of the fourth quarter operations.

Okay.

Thank you.

I think we have Mickey back on the line, Cindy, if you want to go ahead and put her back on.

Are you okay, Mickey.

I'm here.

Can you hear me?

Okay.

You went off into the abyss.

Sorry about that.

Maybe when you hear my question, you will know why they muted me.

No, I don't know if the TSA is listening.

But, Richard, in your comments at the end of the year to employees, you expressed some disappointment that -- and everything that has been done in security since 2006, that you still had the incident that took place in Detroit.

Since then, we've seen security dialed up and dialed down and become kind of unpredictable.

Do you see that as having any impact on your business, either, sort of in the short term or in the long term?

You know, the most -- the most important thing is the safety of our passengers and our employees.

So we are supportive of the efforts that the Transportation Security Administration has undertaken.

And it has not had any effect on our bookings, but always remember that we don't -- first and foremost is the safety and the security of the operation, and that trumps everything else.

And do you feel that things are calming down a little bit since then?

Maybe Steve Gorman.

From an operating perspective, the operation has been running well, and we continue to work closely with the TSA.

They have actually worked very hard and very diligently in close cooperation with all the airlines.

That's what I was going to mention, Richard.

We are definitely working very, very closely with the other airlines, as well as with the TSA and the Department of Homeland Security, and feel we continue to enhance the security of our airline and the industry.

Thank you.

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

Thank you.

Richard mentioned that Delta will continue to streamline overhead in 2010.

Does that mean that there will be more job cuts and if so, how many are you expecting?

And on Japan Airlines, which way are they leaning and when do you expect to hear?

You know, we don't anticipate any additional reductions in our plan, other than what we've continued from our work on the merger.

So much of the productivity can be gleaned through attrition and non-employee-related expenses and the investments we're making in technology.

We're not commenting on Japan Airlines, Harry.

You don't have a crystal ball?

You're the one with the crystal ball.

That's why I always read your articles to find out what's going on.

Well, thanks.

I appreciate it.

Let us know.

Okay.

We'll take our next question from James Pilcher at Cincinnati Enquirer.

Good morning.

Richard, I know you met with the local officials from both the airport and the business community Friday.

Can you give a little bit more color as to what you said and then maybe could you provide a little bit more color behind the plus or minus 5% for this year?

What would that be contingent on?

We continue the ongoing dialogue with the Cincinnati community, supporting the goal of returning the hub to success.

We'll probably operate 160 to 170 daily departures from the Cincinnati hub this year, with flight levels varying by season and continue to review our schedules each month to ensure they reflect the local demand in the Cincinnati market.

As we look out on our schedule, 48 of the 50 top markets out of Cincinnati will have service.

The two others are seasonal markets to Florida, which we serve in the winter time.

So we still have very strong schedule patterns there, and we're hopeful that with the economy returning, that the businesses in the Cincinnati region will continue to increase the amount of travel they have there out of Cincinnati.

The 160 to 170 is still 10 to 20 flights below where we are now.

Where are those flights going?

Are they shifted to other hubs or are they just being eliminated entirely?

Are they just repetition?

Well, without going into the specifics of the schedule, because I don't have the schedule in front of me, as I said, 48 of the 50 top markets out of Cincinnati will continue to be served.

So it's -- actually, we are adding two new markets to Austin and San Antonio out of Cincinnati.

So in terms of the market coverage, the market coverage hasn't really changed.

So there's still service, nonstop service in all of those markets and the Paris flight continues to perform well.

Okay.

Cindy.

That should wrap up the call.

It's a minute after the hour.

So we'll go ahead and conclude that.

I would like to thank Jill, Richard, Ed, Hank, Glen, Ben, Mike and Steve.

Thank you all for joining us.

We'll talk to you in the next quarter.

Thanks again.

Thanks.

Thank you.

That does conclude today's conference.