達美航空 (DAL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines June 2010 quarter financial results conference call.

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

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

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

Thanks Cindy, and good morning, everyone.

Thanks for joining us to discuss Delta's June quarter financial results.

Joining us from Atlanta today are Richard Anderson, Delta's CEO, Ed Bastian, our President, and Hank Halter, our CFO.

Also in the room for the Q&A session will be Glen Hauenstein, our EVP of Network and Revenue Management, Steve Gorman, our Chief Operating Officer, Mike Campbell, our EVP of HR and Labor Relations, Ben Hirst, our General Counsel and Ned Walker, our Chief Communications Officer.

Richard will begin the call with a Delta and industry overview, Ed will then address our June 2010 quarter financial and revenue performance.

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

We have allocated 20 to 25 minutes for management comments.

After their comments, we have allocated 25 minutes for questions with 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 would like to request that you limit yourself to two questions.

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 could cause such differences are described in Delta's SEC filings.

We will also discuss certain non-GAAP financial measures.

All results exclude special items unless otherwise noted.

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

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

Thanks, Jill.

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

This morning we announced a profit of $549 million for the June quarter.

This is a $748 million improvement year on year.

Our operating margin of 11.4% is the best we have posted in a decade.

I want to thank the Delta team for their hard work and dedication.

Their efforts have gotten the Company to a place where we can post these levels of profits in the early stages of a global economic recovery.

It is Delta's long-standing commitment to share the Company's success with the people who make success that a reality, so I am happy to announce that our results include $90 million in expense for profit sharing that will be paid out to our employees.

The business is performing well, and we still have significant opportunities for improvement ahead.

Ed and Hank will go through the details but simply put, revenues increased 17%, or $1.2 billion and our operating expenses, excluding profit sharing and fuel were flat.

The revenue environment is improving.

I would characterize it as good, but not yet great.

And as we continue to strengthen our business, we will benefit from what we expect will be continued positive momentum.

The benefits of the mergers are clear.

We achieved $200 million in incremental merger synergies during the June quarter, and we anticipate being able to end the year at a run rate of $1.5 billion in synergies, and we will achieve our goal of $2 billion in synergies in 2011.

The merger integration is, for all practical purposes, successfully complete.

We have generated over $1.3 billion in free cash flow in the last two quarters, and we will continue to use our cash to pay down debt as we will have reduced it by about $1.4 billion this year, and we will get it down to around $10 billion in net debt by 2012.

That is the most accretive method of creating value for our equity holders at Delta.

As you know, the union has finally filed for elections, Delta people have been waiting almost two years for this, and we are glad most of our people are able to move on with this process.

Right now Delta people are becoming educated on this decision and the new voting process for what is one of the most important decisions of their careers.

The merger has given us significant opportunity to improve the productivity of our network and fleet.

We are retiring less efficient 50 seat regional jets and turbo props while continuing our strategy of low capital mainline growth as we are focused on obtaining a solid return on capital.

By the end of 2010, our fleet will be 91 aircraft smaller, but we will be able to generate essentially the same revenue for the year.

This equates to 1 point of margin benefit.

We will continue this strategy in 2011 and reduce our total fleet by another 20 aircraft.

While this strategy does pressure unit revenues, it is more than offset by the benefit from lower unit costs.

We are reducing regional lift, which by definition has higher RASM and higher CASM and replacing it with mainline flying, so we are able to grow revenues quite efficiently with fewer airplanes, fewer departures and lower unit costs.

Maintaining capacity restraint in the face of a recovering economy is at the core of improving our financial results.

That leads us to overall capacity.

This quarter, our system capacity was down 0.6%.

For the full year 2010, we anticipate system capacity to be up 1% to 1.5% and for the full year of 2011, we are budgeting capacity to be up about 1% to 3% for the system.

So we will maintain capacity discipline and keep our non-fuel CASM roughly flat.

We remain focused on strengthening our global network through the SkyTeam alliance and our industry-leading joint venture with Air France-KLM and Alitalia.

We celebrated the ten year anniversary of SkyTeam last month.

Today, SkyTeam has 13 members, with flights to 898 destinations in 169 countries.

With the addition of China Eastern, along with our existing partner China Southern, we have the leading position in China.

TAROM and Vietnam Airlines both joined this year.

Our reach continues to grow.

In addition, Alitalia joined Delta Air France and KLM in our joint venture across the transatlantic, which now covers approximately 26% of total industry transatlantic capacity with annual revenues at more than $10 billion.

Delta's partnership with Europe's leading airlines has been very successful and enabled us to add new destinations and convenience to customers on both sides of the ocean.

We have talked about our commitment to winning in New York.

We were disappointed that the FAA did not approve our compromise proposal on the slot swap with US Airways.

The transaction would have benefited the customers and communities we serve through increased competition and expanded service at both La Guardia and Reagan.

We have filed an appeal and in the meantime, we will shift some of our planned capacity at LaGuardia back to JFK and DCA.

In addition, we are working on resolving our facility issues at JFK and hope to have an announcement in that regard shortly.

In conclusion, we are pleased with our results this quarter, but we have significant upside ahead.

We anticipate continuing revenue improvement as the economies stabilize, and we expect to be solidly profitable for the full year.

We are making the right changes across our business to build a sustainable cost structure, and we are generating a lot of cash that we are using to pay down debt and improve our balance sheet.

So as we look to the future, we are optimistic that we are building a strong company that will provide long-term sustainable benefits for our shareholders, employees and customers.

Thanks, and I will turn it over to Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us on the call this morning.

I would like to join Richard in thanking the Delta team for the remarkable job that they are doing.

We appreciate their focus in providing service to our customers, especially during this very busy summer season.

Turning to our financial results, we reported a net profit of $467 million for the June quarter on a GAAP basis.

Excluding special items, Delta reported a net profit of $549 million, or $0.65 per diluted share on a base of 842 million shares.

This compares to first call consensus of $0.64 per share.

Our operating margin of 11.4% includes $90 million of profit sharing expense.

Excluding profit sharing, our operating margin was 12.5%.

Special items for the quarter totaled $82 million and included $36 million in asset impairment charges and $46 million in merger-related expenses.

EBITDAR was $1.4 billion for the quarter, and we have now generated over $2 billion in EBITDAR through the first half though year.

We expect to generate over $4 billion of EBITDAR for the full year of 2010.

Our liquidity balance continues to be strong with $6 billion in unrestricted liquidity at the end of June.

We generated over $1 billion in operating cash flow and nearly $800 million in free cash flow during the June quarter.

Free cash flow for the first six months of this year was $1.4 billion, allowing us to continue delevering the balance sheet and reducing our adjusted net debt to $15.6 billion, down from $17 billion at the start of this year.

Our plan, as Richard said, is to take the net debt down to $10 billion by the end of 2012, and we are right on track with the current year results.

Turning to revenue, our revenue for the June quarter was up $1.2 billion, or 17% year-over-year on a 1 point decrease in capacity.

Consolidated passenger unit revenues increased 19.4% year-over-year, driven by a 17% improvement in yield and a 2 point load factor increase.

Domestic passenger unit revenue was up 15% on flat capacity.

International passenger RASM was up 29% with the yields up 22% and load factor up 4 points.

Atlantic and Pacific operations led the way for international improvement with Atlantic passenger RASM up 30% and the Pacific passenger RASM up 36% for the quarter versus last year.

Corporate revenues have continued to improve with both yield and volume gaining in strength.

Overall, corporate revenue for the quarter was up 60%.

We see strong trends across all entities which is a significant contributor to our unit revenue gains year-over-year.

Cargo revenue was up $38 million on a quarter-over-quarter basis, or 22%, with volume and yield both showing strong improvement.

Other revenue for the quarter increased $24 million over the prior year, with the primary driver being an increase in baggage fees and SkyMiles revenue, also by some softness in our MRO insourcing business.

In terms of our revenue outlook, we continue to see more normal levels of demand and yield after a particularly difficult 2009, although unit revenues are still below 2008 levels.

The overall revenue environment is good, but there's definitely room for improvement as the economy strengthens.

We expect consolidated passenger unit revenue improvement of 17% to 19% for July, and we anticipate that we will continue to see double digit year-over-year unit revenue improvements in the September quarter.

While we continue to see strength relative to last year's performance, we remain cautious in our outlook as we pay close attention to the economy and restrained in our capacity plans.

As we all know, the 2009 baseline was quite volatile and difficult to draw meaningful comparisons from.

Our prior year comparisons start to become more difficult this month as we begin to lap the recovery which started for us in July of last year.

We estimate that July of 2009 was 5 revenue points stronger than June was of 2009, which means our July 2010 unit revenue momentum of 17% to 19% is consistent with what we saw last month.

Advanced bookings remain strong across the system, which is a reflection of both the improving economy, as well as our efforts to balance the network to match capacity with demand.

On the domestic system, we are seeing yield improvements in July in the 15% range.

The transatlantic is healthy despite fluctuations in the exchange rate.

Solid leisure demand and improving corporate trends are boosting yields.

We credit our joint venture with Air France, KLM and now Alitalia with helping to diversify our customer base and balance out changes in regional demand.

The Pacific continues to show strong signs of recovery from last year's recession as well as the H1N1 impact.

Advanced bookings are well ahead of last year, and ticketed yields are up significantly.

We have been very pleased with the performance of our new routes from Detroit and Seattle which continue to show a positive outlook.

In Latin America, we are expecting a solid performance in routes to South America, driven by an increase in business demand.

We are strengthening our schedule to Mexico after last year's H1N1-driven capacity reductions, with both demand and yield responding positively.

On capacity for the September-quarter, we with expect system capacity to be flat to up 2% year-over-year, but still down approximately 2% from the third quarter of 2008.

Consolidated domestic capacity will be flat to up 2% from prior year, and international capacity will be up 2% to 4%.

For the December quarter, we are targeting system capacity to be up 5% to 7% year-over-year.

The growth rate in the fourth quarter is a bit of an anomaly given the sizeable short term pull downs we took in the back half of last year in the face of a very difficult revenue environment, coupled with the concerns regarding H1N1.

Now that we are in a more stable economy, we have set the winter schedule to be more normal seasonal alignment with our summer peak schedule.

For example, typically, we and the industry reduce our winter schedule by 10% from summer levels.

Last year, we were down 20%.

This year, we will be down 13% to 15%.

As Richard said, we recognize the importance of capacity restraint in improving the financial performance of the business.

To put our fourth quarter of 2010 capacity in context, it will be lower than 2008 capacity by 2 points and lower than the fourth quarter of 2007 by 6 points with domestic down 12%.

Looking to 2011, we expect full-year capacity to be up modestly the 1% to 3% range, reflecting improved utilization on our existing base of assets.

That said, our plans for 2011 are flexible and as we get closer to next year, we will finalize those plans, ensuring our capacity supply is fully consistent with what we are seeing on the demand front.

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

Thanks Ed, and good morning, everyone.

Moving to operating expenses for the June quarter, they increased $293 million year-over-year on a 1% decline in capacity, driven primarily by $218 million in higher fuel expense and $90 million of profit sharing expense.

If we exclude fuel and profit sharing, consolidated unit costs remain flat as merger synergies and productivity offset higher revenue-related costs, maintenance cost pressures and wage increases.

We anticipate that Delta's cost performance will be the best among major US airlines for the quarter.

Non-operating expenses were $130 million higher than prior year driven by FAS 133 mark-to-market differences and $37 million of foreign exchange impact.

I join Richard and Ed in thanking all of the Delta employees for their dedication to making sure Delta maintains its competitive cost structure.

Their day-to-day efforts to improve productivity and realize merger synergies have contributed to our strong financial performance this quarter.

For the September quarter, we anticipate some cost pressures from higher revenue-related costs and operational requirements.

However, we expect to largely offset those with productivity and incremental cost synergies.

As a result, we are targeting consolidated non-fuel unit costs for September quarter to be flat as compared to last year's September quarter.

With regard to fuel and hedging, in the June quarter we hedged 51% of our fuel consumption.

Our consolidated all-in fuel price was $2.32 per gallon, up from $2.06 per gallon last year.

For the September quarter, we have hedged 50% of our consumption with over half of that in call options.

Based upon the forward curve at Friday's close, we expect our consolidated fuel prices for the September quarter to be $2.33 per gallon and for the December quarter, we have hedged 50% of our fuel consumption, which would imply an all-in fuel price of $2.38 per gallon.

In term of earning performance for the September quarter, we expect another solidly profitable quarter with an operating margin of 10% to 12% net of profit sharing expense, and we expect to be solidly profitable for the full year.

Shifting to liquidity.

We ended the June quarter with $6 billion in unrestricted liquidly which included $4.4 billion in cash and $1.6 billion available in undrawn revolving credit facilities.

Operating cash flow was just over $1 billion which is net of nearly $500 million in pension plan funding.

As of April, we completed our required 2010 pension plan funding.

Capital expenditures for the June quarter were $283 million, with $154 million in aircraft parts and modifications.

These capital expenditures were $67 million lower than our mid June guidance due to timing of projects and the shift in delivery of one 737-800 one MD 90.

Those expenditures will now occur in the September quarter.

Putting this together, we generated $778 million in free cash flow, which we utilized to delever the balance sheet.

During the June-quarter, we paid down $345 million in debt, including $70 million paid before scheduled maturity.

Looking forward, we will continue to keep capital spending in check, and are anticipating September quarter net CapEx to be approximately $250 million.

We have only four aircraft deliveries scheduled for the September quarter, two 737-800s and two previously owned MD 90 aircraft.

Scheduled net debt maturities will total roughly $150 million in the September quarter, and we are targeting an unrestricted liquidity balance of $6.3 billion at the end of September.

In conclusion, with we are pleased with the progress we have made this quarter.

Unit revenues increased 19% while unit costs, excluding fuel and profit sharing, held steady, resulting in an 11.4% operating margin and $778 million in free cash flow.

For the remainder of this year, we will continue to make investments in our product to improve our revenue advantage while maintaining our best in class cost structure.

We will continue our prudent use of capital and make significant progress in improving our balance sheet.

That combination lays a strong foundation for Delta for 2010 and beyond.

Thanks, Richard, Ed and Hank.

Cindy, we're now ready for questions from the analysts.

Could you please review the process for asking a question?

And again, we ask everyone to limit themselves to two questions.

Thank you, Ms.

Greer.

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

We will take our first question from Jamie Baker at JPMorgan.

Hey, good morning.

Can you hear me?

We can.

Barely.

Great.

Good morning, everybody.

Question, if you exclude the domestic portion of international journey, I am curious if you made money in the second quarter on your domestic operations.

I'm sorry.

We missed the first part of question, Jamie.

Can you say that again?

If you exclude the domestic portion of international journey, did you make money flying domestically in the second quarter?

Yes.

Okay.

I will bite, would you care to be a little bit more specific?

What I am trying to get at is whatever the margin differential is.

I think that most of your owners believe that you make all of your money internationally and then very infrequently make your money domestically.

And I am just wondering if that margin differential is any different today that what it has been in the past.

If there was anything related to either bankruptcy or the merger that has caused that margin differential to narrow.

Jamie, I would not say we made all of our money internationally, either in the past or certainly not this year, either.

Domestic operations are quite strong.

They were quite strong in the quarter.

Our hub here in Atlanta was quite powerful.

As you can imagine, we made some very significant margins and returns up in the Midwest, certainly Minneapolis performed well.

So I would say our domestic business performed in accordance with our expectations for the quarter, and we look at the third quarter as being equally, if not even more -- stronger.

Okay, excellent.

I appreciate the color.

That will do it for me.

We'll take our next question from Richa Talwar, Deutsche Bank.

Yes, hi.

It is actually -- it's Mike Linenberg here with Deutsche Bank and good morning, everyone.

Welcome back, Mike.

Oh, hey, thanks, Ed.

Two quick questions here.

Richard, when you were providing the capacity guidance for 2010 and 2011, you indicated that that would be on, I think you said flat CASM.

Now I know that that's your forecast for 2010.

At this point, are you also out there providing an early read on what you think CASM trends will be in 2011?

Or did I misinterpret?

No.

What I was trying to do was give capacity guidance first and foremost for 2011, and our goal is to continue to maintain basically flat CASM.

We have commenced the bottoms up budgeting process, and we will have more specific guidance later on in the year.

Okay, perfect.

And then, just my second question, with the recent announcement to divest of two of your regional carriers, from our perspective, can you give us maybe some color on whether or not there's meaningful deleveraging here, or do you control the assets?

I know in the case of --with Pinnacle, I guess there's a debt receivable.

When sort of the dust settles here, what sort of motivated you to do this, and could we see some potential upside as it relates to the balance sheet?

Mike, we have been pretty consistent over the long haul that we don't feel like we need to own these assets in terms of being able to control them and manage the product and manage the network.

We retained ownership of the product and the revenue management and the network.

We retained actual -- the physical assets themselves.

So no, this doesn't signal any kind of change.

Our thinking, it is not part of a deleveraging strategy, didn't contribute to any level of debt reductions in the quarter.

Okay, okay.

Very good then.

Thank you.

We will take our next question from Jim Higgins at Soleil Securities.

Yes, good morning, everyone.

A couple of -- one, sort of a nit question.

There was a big negative non-operating swing.

I assume that was partly currency translation charges, but is there anything going on there we should note?

Yes, during the quarter, June quarter 2010 versus June quarter 2009, there is about $130 million swing there, and that's driven primarily by two items.

One is FAS 133 mark-to-market related to the ineffectiveness of our fuel hedges.

That's about $90 million, and then the remainder is foreign exchange differences.

That's about $35 million to $37 million, so that makes up the bulk of that $130 million.

Thank you.

Also, can you comment on trends in your European point of sale bookings, revenues, et cetera?

Obviously a lot of dislocations over there, it would be helpful to see how things are looking over there.

Hey Jim, it is Glen.

How are you doing?

Hi Glen, how are you?

Good, thank you.

Quite surprisingly, European point of sale has remained strong despite the currency devaluation.

And of course in the revenue management systems, we update them weekly for current exchange rates, but it has been quite resilient in both cabins to date and the forward bookings through the end of the summer continue to look quite resilient.

So I think we are relatively optimistic about European point of sale throughout the rest of the year.

Great.

Thank you very much.

Very helpful.

We will take our next question from Gary Chase with Barclays Capital.

Good morning, everybody.

Hank, I wondered, could you tell us what the specific FX impact was in the actual quarter?

I know you noted the year on year variance, but what was the charge actually taken in the period?

Gary, that charge was $25 million.

So quite a bit of hedge ineffectiveness in there, right?

That's right.

The hedge ineffectiveness, the FAS 133 was about $46 million, and then $25 million or so for the FX which gives that $72 million total charge in the June quarter.

On the FX, there's not really any hedge effect at all.

That's just FAS 133.

Related to the fuel hedge ineffectiveness.

-- related to the fuel.

The foreign exchange is just the strength of the dollar.

The movement of the currency, that's right.

Movement of the currencies.

Okay.

And guys, if I could just ask you to elaborate a little bit on the capacity outlook.

If I am not mistaken, you have tweaked upwards the objective for the year, and it does sound like the fourth quarter is going to be a little bit of an acceleration from at least where we were thinking you would be.

Is there something that's driving that?

Do you think the environment warrants it?

Is it run rate or new service?

Can you give us a little bit more flavor for what's driving that plus 5% to 7% in 4Q?

Gary, we really haven't tweaked it.

The numbers are consistent with the direction we have been providing all along.

The 5% to 7% really is just the annualizations of some very significant sharp pull downs for the fourth quarter of last year.

If you recall, last fall we pulled down, particularly our international flying in the face of, particularly the H1N1 concerns by over 20%.

And we believe we pulled it down a little bit too hard, and we are just now going forth looking at our seasonal schedule for the fourth quarter relative to what we are seeing in the current demand as well as what the summer peak is, and we are somewhere, as I say, somewhere between 13% to 15% lower than we were for the summer, which will be consistent with past practices.

So no, I don't think there's any change in our thinking about capacity in the least.

And it's really the reason we gave the 2011 capacity, to show that we are expecting to maintain significant discipline and restraint in the low single digits, which is what we have indicated in the past.

Yes Gary, I think you've got to go look at it on a full-year basis and I think on a full-year basis for 2010, our system capacity will be up just slightly over 1% for the full year.

Because when you look at the dramatic pull down we had last year, all we are doing is sort of keeping the system sort of relatively constant in terms of the core schedule.

And the most important thing is what we are -- the general guidance we are giving for 2011.

We are not moving outside of what we have historically said, which is 2011 system capacity, we're thinking in the 1% to 3% range at the very most.

So I think the capacity discipline is continuing.

We just have an anomaly of 4Q because last year, you'll recall, we pulled probably twice the capacity that anybody else pulled in the September to December quarter last year.

And we will take our next question from Dan McKenzie at Hudson Securities.

Yes, hey, good morning.

Thanks.

Just following up on 2011 capacity guidance, just a couple of quick questions here.

Given the joint venture agreements, I'm wondering if the capacity outlook was derived in conjunction with the JV partners.

And if so, is Delta is growing overall or does that assume the partner shrinks somewhat?

Or is the growth being driven at this point primarily to entities where the JVs don't exist, perhaps such as Latin America and the Pacific?

This is Glen.

Just clearly, we have an agreement with Air France, KLM and Alitalia to plan capacity together across the joint venture.

And the basis of that is essentially a 50/50 split of the capacity between the European and the United States carriers.

And so yes, we do plan capacity together.

Yes, we are planning for next year.

Does that mean there's no growth in next year?

No, that -- we haven't finalized our plans for next year yet.

We are in discussions with Air France, KLM and Alitalia to set the levels as we go into the planning seasons for next year.

But I don't expect dramatic increases on any part of that transatlantic joint venture.

In fact -- Dan, this is Ed.

In fact, the higher capacity opportunities that we see are more in the Pacific for next year than across the transatlantic.

That was my sense exactly, and I guess just following up on the Pacific opportunities, perhaps even the Latin American opportunities, is your sense that domestic remains flat next year or perhaps even shrinks to help subsidize some of the Pacific and Latin American opportunities?

We are not giving that level of guidance, Dan, for 2011.

We just wanted to set a general framework in people's minds so people understand how we are thinking about capacity for 2011, but we don't want to start drilling into the details.

We'll give you that as we get closer to the end of this year.

Okay, understood.

Thanks very much.

And we will take our next question from Duane Pfennigwerth at Raymond James.

Hi, thanks.

Good morning.

Just on the June -- if we could peel back to June for a second, did that month close the way you expected?

And specifically, did you see any deceleration in close-in revenue?

It just seems like it came in a shade lighter relative to the guidance in mid June.

It came in consistent with the guidance we were giving in June.

We are seeing -- there's constant tradeoffs between the near in levels of bookings and price points and the like that we are continuing to work hard to improve our revenue outlook and revenue performance.

But I would say it generally came in consistent, Duane.

Okay, and then July made sense.

It actually looks like it might imply some improvement on a two year basis.

Do you read it that way as well?

We read July as having the same base level of revenue momentum that we have been seeing -- saw in June.

And then as we look out towards August and September, while the numbers are still a little bit early, the -- that level of momentum, we're again, continuing to anticipate a slight build from historical patterns.

Just to clarify, so we should assume maybe some modest improvement on a two year compounded basis?

Yes.

Thank you.

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

Thanks.

Good morning.

Can you talk about the fourth quarter growth being somewhat of an anomaly, and I understand the moving parts there, but can you give us a breakdown, maybe directionally of how much of this growth is in fact H1N1 related route restoration versus routes that maybe were pulled down from general economic weakness?

I don't have the details.

We can get back to you on the details by entity, Hunter, but I'd say H1N1 was the single biggest driver, particularly in the Pacific.

Okay.

Then I guess, presumably whatever portion was in fact due to the economic weakness, it seems to me like you guys might be taking a little bit on some more incremental, let's say down side yield risk here because presumably, those routes that you pulled out that weren't related to H1N1 were pulled for a reason, because they were underperforming.

So if some of those are going to be added back in this recovery, which who knows how long this is going to last or if we, God forbid, double dip.

Would that -- would you guys be introducing some significant pricing into the system, adding back these routes that were probably underperforming in the first place?

No, we don't look at that at all, Hunter.

We have made some very significant changes to the schedule over the last year, and there's nothing that we are adding back per se, this winter as compared to what we have been doing currently, and I would say that the bulk of the pull downs last year were directly attributable to the H1N1 concerns that we had seen.

Hunter, the only other color I can give you is if you look at total ASM change versus the July published schedules in the industry, as we move out into September, October, November, Delta will be pulling more capacity than the industry in those months when compared to the actual July schedules.

So in terms of where we are in the fall as compared to where we are today in July, the schedules will actually be -- the reductions will actually be greater at Delta than what's published today versus the industry.

Okay, great.

Thanks.

Then just a quick follow up, just a little modeling question.

I noticed that you guys said your main line, I think you said your main line CASM is still tracking at flat this year, which I think is consistent with what you said in the past.

That despite that the fact that we have got about 150, maybe 100, 150, bips higher capacity growth, are there any, maybe revenue associated expenses that are a little bit higher than you saw tracking in the back half of the year, or is it kind of just rounding?

No, Hunter, it is probably more rounding, but we do have higher revenue-related costs.

We also have some maintenance pressure as a result of the investments we're making in our fleet this year, some timing there, but nothing stands out that is anything -- any one or two particular items.

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

Good morning, guys.

Didn't you start 2010 with a capacity guidance of down 3 and then went into flattish, and then it's now 1.5?

Is that fair?

That was last year, Kevin.

Okay, so you started as flat and so flat becomes 1.5.

And so 1 to 3 -- I know, I understand the fourth quarter capacity overall, I just think investors are starting to question whether -- the primary reason to be in the stocks these days is on the idea that things have changed and the capacity discipline reigns now and that there's going be pricing power over multiple quarters.

And you guys being the largest carrier, 7% in the fourth quarter, and you've gone through, quite in detail.

It's just -- I guess what I'm imploring and asking you to do to be towards the lower end of that 1 to 3 and then get too much price next rather than start at the 3 and have to pull back later.

We understand, and we have not yet built our 2011 plan or detailed schedule.

And we just wanted to put a marker out there so people knew what we were thinking about with respect to capacity but as we get towards the tail end of this year we will firm this up and we will get back to you with specific details.

Kevin, look, we understand exactly what you're saying, that's why we gave the guidance on where we're thinking about for 2011 and try to put in context what's going on in the fourth quarter.

Perhaps the best way to answer that is our fleet's down 91 shells this year.

Next year our fleet is going to be down another 20 shells, and we have no orders pending for new airplanes.

So our focus is very much on driving efficiency in the fleet that we have and getting a return on capital and taking our cash and paying down debt.

Terrific, terrific.

That's what we want to hear you continue to do.

Thank you.

We will take our next question from Bill Greene at Morgan Stanley.

Yes, hi there.

I just want to come back to the RASM guidance.

If I understand it correctly, you have got some pretty good trends here in July and August.

But the implied full quarter guidance would suggest a significant slow down in September, and I am not quite sure why that deceleration would occur.

I saw you also put a fare sale out for the fall.

So maybe there's something that you are seeing there, sort of -- do you have any color you could offer in terms of that deceleration toward the end of the quarter that you are assuming?

I wouldn't say we're seeing a deceleration, Bill, for September.

We have gone back -- the 2009 baseline is a very difficult one for all of us to measure against in terms of improvements to 2010.

We have gone back and looked over the last four years, from 2005 through 2008, to get a more normalized set of RASM indices to historical norms.

And what we based it against was what we saw for the June month that we just recently concluded.

And typically if you go back over that period of time, you will find the September RASM as measured against June is down in the 80% to 85% to 87% of nominal June RASMs.

Our outlook implies that is we will do at least that level of revenue activity, if not slightly better.

So no, I think the 2009 baseline certainly adds a higher level of complexity, given that the improvements really started in the first part of July last year.

And was the fare sale any more or less aggressive than prior ones?

We wanted to get ahead of it so we could set the level slightly higher than last year.

So it is actually a little bit less aggressive than it was this time last year.

And that's why we went ahead and did historical time period so we can set levels which we though were a little bit better for the industry.

Okay.

And then just one quick follow up, what are you going to do differently now under the new NNB rules that you go through the selection process?

This is Mike Campbell.

We're going to have to educate the people as the change in the voting rules.

So it is primarily making sure people realize who don't want representation that the rules have changed and that you have to affirmatively vote against the representation if you are against representation rather than simply not vote, which was the rule on the prior procedure.

We will take our next question from Glenn Engel with Bank of America Merrill Lynch.

Good morning.

Two questions, please.

One of them on the fuel ineffectiveness.

Can you give us what a normal fuel ineffectiveness would be?

Is there such a thing?

There isn't.

We don't predict that because it is impossible to predict.

It is just calculated as the movements in the commodity we hedge, which is typically crude, how it moves against the commodity we are seeking to minimize the volatility of, which is jet fuel.

So this quarter it moves to the tune of $45 million, $46 million loss.

There's other times where it can move in the opposite direction resulting in a gain, but it is not something that you can predict.

It is up to the market forces.

So it is not really a cost of hedging each quarter, it is strictly the ineffectiveness.

That's correct.

And that's why it is reported in non-operating.

On the second question, is on the guidance on synergies, you're now looking for $1.5 billion, you are still looking if for the $2 billion you were talking about before.

As of yet, it has been hard to see the revenue synergies in the number.

Have you changed the mix of synergies?

Is it still half and half revenue and expenses, and is there a reason to believe that the revenue synergies will start seeing that in terms of RASM outperformance in the second half?

Glenn, this is Ed.

No, we haven't changed the mix.

We continue to anticipate that the revenue synergies will build as time marches on here.

As you know, we are now just to the point this summer where we are able to free flow the schedule and start to get the fleet benefits out of that.

We talked at your conference last month, actually, about the fact that we are able to drive the schedule now with 90 fewer aircraft, saving $300 million.

And whether you call that a revenue synergy or a cost synergy, it is a network synergy, and I think those synergies continue to stay on track.

Synergies may not necessarily show up in terms of RASM?

I think it's going to be RASM, it's going to be in CASM.

But they were network related, amongst other -- obviously there's a long list of other areas we are looking to improve our revenues.

And we will take your next question from Justine Fisher at Goldman Sachs.

Good morning.

The first question that I have is just a clarification on the deleveraging.

I know that you guys repaid the $914 million of first lien revolver during the quarter, but I guess the appendix to the earnings says that you did issue in some way $1.2 billion of debt, so there was only a net reduction of $300 million.

Am I reading that correctly?

No, I don't think so.

The liquidity balance at the end of last quarter, I believe was $5.6 billion, we finished this quarter at $6 billion, and that includes cash and undrawn revolver.

During the quarter, we paid down approximately $914 million of that revolver, so it remains fully undrawn and it is part of that $1.6 billion.

In addition to that, we made scheduled -- we made payments related to maturities, both scheduled and in advance of scheduled date of about $345 million during the quarter.

So it was $1.2 billion total that you repaid.

That's right, that's right.

And the $914 million still remains available to draw in the future, should we desire to do so.

Okay.

That's where I was heading, because I was wondering how you guys were looking at refinancing versus just repaying debt with cash from the balance sheet.

You guys obviously did a EETC after the end of quarter and even though LTVs are lower for what you can borrow against planes right now, you still do seem to be refinancing debt on planes as opposed to just paying it down.

And so is the goal to get from the $15 billion now to $10 billion at the end of 2012 to stop doing as much refinancing and just use cash to repay as much debt as possible?

Well, if you looked at that EETC and what we refinanced, we basically refinanced half of the face value.

So we paid down half of it, refinanced half of it.

And so yes, going forward, and I think also in the quarter, we had about $180 million of early debt repurchase.

So we are opportunistically going in the marketplace and buying debt in advance of maturities.

So we will continue to use our cash to do that.

It is actually the most accretive thing we can do for the shareholders.

We will take our next question from Helane Becker at Dahlman Rose.

Thank you very much, operator.

Hi everybody.

Most of my questions have been answered.

I just have two left.

One is you said 91 aircraft out this year, 20 aircraft out next year.

How low do you think you can get the fleet to that you would consider it to be ideal for the route structure you're operating?

And then the second question I had was, what did you say the impact of the volcano was in April?

Thank you.

The volcano was roughly $25 million impact that hit us in the quarter.

The question regarding the size of the fleet, we are comfortable with our fleet plans where they are currently, Helane.

The returns that we are seeing -- the reductions we are seeing are largely being driven at this point by small gauged regional jets that are coming off of lease.

Okay.

Thank you.

We will take our next question from Bob McAdoo at Avondale Partners.

My questions have all been answered.

Thank you.

We will --

I think this going to be our last question.

Mike Derchin.

Okay.

Mike Derchin with CRT Capital.

Oh thank you.

Amazingly, I actually have one more question left after all of this.

Can you go back over the union elections and give us some flavor of the timing and when do you expect that process to be over?

Yes, I can to that.

This is Mike Campbell.

There have been three applications filed, one for flight attendants, one for the ramp and cargo employees and the third for the passenger service employees.

We have already started the process with the National Mediation Board on all three elections.

The board has told us that the elections will not occur at the same time, meaning on the same dates, but they will be sequenced.

And we have not been informed as to how they are going to be sequenced, and there will be overlapping of the elections.

All of that said, we would expect those elections will be concluded by the end of the year, and they will start probably some time after Labor Day.

Great.

Thanks very much

That's going to wrap up the analyst portion of the call, and I'm now going to turn the call over to Ned Walker.

If we can review the process for asking questions for the media, once again keep it to a question and a quick follow up we can accommodate most everyone.

Thank you.

Again that did conclude the analyst portion for the question-and-answer session.

We are now moving to the question-and-answer session for the media.

(Operator Instructions).

We will take our first question from Doug Cameron with Dow Jones.

Good morning, everybody.

How much rumor -- how could you characterize how the capacity guidance for next year leaves room for opportunistic aircraft acquisitions?

Are there used stuff on the MD 90 front, or even whatever might happen to those legacy 787 orders you have from Northwest?

We are continuing to purchase used MD 90s in the marketplace, because at today's prices they have a far better return than a 737-800 or an A320.

So we will continue to opportunistically look at the used aircraft market.

Second, we have no further updates on the 787.

Do any of these, the Northwest legacy ones, do any of them have delivery positions for next year or 2012, or has that all been shunted into the dark and distant future?

They were all supposed to have been delivered before now.

Oh yes, but obviously everything slipped with the program.

So I just wonder where they'd slipped to now, in theory, at least.

I don't think we have had any update.

Got you.

Okay, thanks very much.

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

Good morning.

Thanks for taking my question.

Just wondering how the summer travel season is going, whether you are seeing any signs businesses are reining in travel costs given the economic uncertainty that's still out there.

And do you see room, now that you're solidly profitable again, to increase fares and fees?

Well, on the fares - this is Richard - on the fare and fee question, we wouldn't be commenting on that.

It wouldn't be appropriate to comment on that.

The summer travel season has been strong, and business travel remains quite strong.

And we're pleased with both our loads and the demands that we've seen over the summer and that we continue to see through the remainder of the summer.

Thanks, Harry.

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

Hi, Glen.

I wondered if you could elaborate a little bit more on, I think it was you speaking earlier about the fall fare sale and how much leverage that will give you on the back end.

Well, every year the industry posts a fall fare sale.

The industry levels, of course, are determined by the marketplace.

So, we wanted to try to see if we could initiate it a little bit earlier and see if we had gotten traction on the traffic side.

And, so far we are very pleased with the initial results.

And can you tell us how the bookings and yields are going on the new Chicago shuttle leg?

Is it profitable?

Well, we don't comment on individual route profitability, but I will say we are very, very pleased with the initial customer reaction to our La Guardia shuttle leg.

We hope you've tried it.

Thanks very much.

And we'll take our next question from James Pilcher at the Cincinnati Enquirer.

Good morning, gentlemen.

How are you guys doing today?

Wanted to follow up on the regional sale.

You guys' official stance was that Comair was part of that initial discussion.

Does that mean that Comair -- you're still actively shopping for buyers for Comair?

James, this is Ed.

We do not comment on our plans for the future.

We've talked over time that we don't necessarily think ownership in the regional jet space is necessarily in the best interest of the Delta shareholders.

That said, we take each investment one at a time and evaluate the opportunities as they present themselves.

Can you follow up -- just a quick follow up on that.

Can you talk about why Comair fell out of those initial discussions?

And then one more, maybe for Glen or somebody.

As you are expanding, especially in Asia, is there any chance that Cincinnati could get one of its international routes back or potentially a route to Asia?

Relative to your first question, no, we will not comment on the specific Comair discussions that we've had.

And as far as new markets, we continually evaluate them.

There are not current plans for any new international routes out of Cincinnati.

But they can change over time, so we like to keep our options open with the market place.

Next call from Kelly Yamanouchi at Atlanta Journal Constitution.

Hi there.

I wanted to ask about -- you mentioned that you're pleased with your new routes from Detroit and Seattle.

And I wanted to ask if those routes are performing a lot better than they did or would have from Atlanta and a little bit, I wanted to ask --

Kelly, we can't hear you.

Oh, I'm sorry.

I wanted to ask about your new routes from Detroit and Seattle, and I wanted to ask if they're performing much better than they did or would from Atlanta and why that is?

Well, Seattle, of course, is a natural gateway for Asia because you are able to use airplanes that are not required to go over 12 hours in order to get into eastern Asia.

And so those planes could not fly from Atlanta to Asia, and that's why we looked at a closer jumping off point.

So those are really trans-Atlantic airplanes that we have turned into trans-Pacific airplanes, and the initial results out of Seattle are very, very good because when you fly to Asia, usually you fly right over Seattle, no matter where you are in the country.

So it's right on the way, and it's very, very direct routing from all points in the US.

And along with our partner Alaska Airlines, we're able to provide a great, extensive network of feed throughout the United States to feed those.

So it's got a great local market, great location and a wonderful launch point into Asia and very convenient for customers.

Great, and then I also wanted to ask about your merger related expenses.

I was wondering what the expenses were for in this particular quarter and how much more you expect in the future?

Sure, Kelly.

The nature of those expenses that are merger related deal with facility integration, relocation, training, and information technology work.

And we expect those expenses to wind down as they year progresses.

As Richard mentioned, we're virtually complete with the integration, and we've just got the remaining tasks to complete.

So it will wind down by fourth quarter.

We have time for one more question, Cynthia.

And we'll take our last question from David Shaffer at the Minneapolis Star Tribune.

Good morning and thank you.

Back to the labor question.

If the AFA and the IAM succeed in the unionization effort, how do you see that affecting Delta and especially its labor costs and competitive position over the long term?

As you may know - this is Mike Campbell - we have committed to industry standard pay and have built that into going forward, so it's speculation, I suppose, as to what would happen in negotiations.

On the other hand, I don't think it's going to have a material impact on labor costs going forward given the philosophy we've always had at Delta of being competitive on pay and benefits.

Yes, if you look at historically, Delta as a non-union carrier always had, as a general rule, superior pay, benefits and work rules when compared to unionized Northwest.

As follow up question, given the new voting rules, what are your thoughts on the chances that one or both of these unions will succeed in getting a majority this time?

Ultimately that's up to our people to decide and we're confident that they'll be making a decision based on the fact that Delta's had an 80-year track record of how it has dealt with its employees, and the unions have their own track record, and employees can decide.

Okay.

Thank you all very much.

Richard, Ed, Hank.

With that, we'll conclude the June quarter 2010 results, and we'll see everybody in October.

Thanks so much.

Bye-bye.

Again, that does conclude today's conference.

Thank you for your participation.