達美航空 (DAL) 2010 Q3 法說會逐字稿

Welcome to the Delta Air Lines September quarter earnings conference call.

My name is Cynthia and I will be your coordinator.

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

If at any time during the call you require assistance, please hit star followed by zero and a coordinator will be happy to assist you.

As a reminder, today's call is being recorded.

I would now like to turn the call over to Jill Sullivan Greer, Director of Investor Relations for Delta.

Thanks Cynthia.

Good morning everyone and thanks for joining us to discuss Delta's September quarter financial results.

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

Also in the room for the Q-and-A are 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 address our September quarter financial and revenue performance and Hank will conclude with our cost performance and liquidity.

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

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

When we get to the Q-and-A, I'd 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 may cause such differences are described in Delta's SEC filings.

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

All results exclude special items unless otherwise noted and you can find the reconciliation of non-GAAP measures on our Investor Relations website at Delta.com.

So with that, I'll turn the call over to our Chief Executive Officer, Richard Anderson.

Thanks, Jill.

Good morning everyone.

Thank you for joining us.

I'll make these remarks very brief so we can get to your questions.

This morning we announced a [$929 million] (corrected by company after the call) profit, operating margin of 13.5%, and earnings of $1.10 per diluted share beating First Call Consensus by $0.16.

The results were driven by revenue performance, cost discipline, and harvesting the synergies from the merger.

Passenger unit revenues were up a little over 16% year-on-year, top line revenue grew 18% and consolidated ex-fuel unit costs remained flat on capacity growth of 2% in the quarter.

These results show the benefits of the merger for our shareholders.

We are guiding to a profitable December quarter.

These results are the culmination of all the work by the Delta team over the past five years and illustrate the benefits of the merger.

We appreciate the hard and professional work of the Delta team.

We want to thank all Delta employees who have worked hard to bring us to where we are today.

It's their commitment to providing a quality product to our customers while maintaining best-in-class cost structure that makes these results possible and we're pleased to be able to reward their efforts with our profit sharing program, which we expect will top $300 million for 2010, and we're looking forward to a payout on Valentine's day of 2011.

So congratulations to all of the Delta team.

We appreciate very much all of your contributions.

Going forward, we have more work to do to get the business to a place where it is consistently profitable and generating 10% to 12% operating margins on an annual basis.

We are focused on building a sustainable industry model for our shareholders, our employees, and our passengers.

To this end, we will continue debt reduction and keep our capital deployment as low as possible, maintain discipline with respect to cost, and keep our capacity in line with demand.

With these operating results, debt reduction is one of our highest financial priorities at Delta.

We are a year into a three year plan to bring our adjusted net debt down to $10 billion by 2012, and we would really like it lower than that, and we've made steady progress so far this year.

We paid down $750 million in debt this quarter and have brought our adjusted net debt down by almost $2 billion this year to $15.2 billion.

This step, and similar steps, are the most accretive things we can do for our shareholders.

When you think about our business model we've traded a discount to the S&P 500 in an order to get to parity, we need to de-risk the business, debt pay-down reduces our non-op expense so it goes straight to EPS, and most importantly builds in flexibility to navigate changes in the external environment so our investors have confidence in our ability to deliver year in and year out.

Delta's December quarter capacity this year will be down 5% versus 2007, down 1% from 2008, and so we will continue that sort of capacity discipline as we go forward.

We will further streamline our fleet in 2011, utilize aircraft more efficiently because capital intensive capacity growth is not in our plans because in order to deliver 8% to 10% return on invested capital, we need to be very judicious about how we use our cash.

Our 2011 capacity guidance remains unchanged at a 1% to 3% increase in 2011 over 2010, and we plan on reducing our fleet in 2011 by 20 to 30 airplanes.

Keep a firm watch on economic conditions around the world and adjust our capacity by region, according to demand.

The airline industry is a service business and we can never lose sight of the fact that our employees make a real difference.

Three years ago, we promised our employees that we would bring them to industry standard pay and each year since then, even in difficult times, we delivered on that promise.

In the toughest times we distinguished our relationships with our employees by avoiding involuntary furloughs in addition to giving regular standard increases each of the last three years.

As of October 1, we have honored our commitment to industry standard by implementing raises for US based non-contract employees.

We also continue to honor the pay benefits and work rules for pre-merger contract employees where union representation has not yet been resolved.

Union elections are currently ongoing for the flight attendants and ramp workers, and the remaining elections are scheduled through the end of the year.

Once we resolve these groups, representation in these groups, we'll begin the process of fully aligning the compensation packages in those groups.

These efforts have already begun for the flight simulator technicians who voted to reject the IAM in September, for a second time, and we rapidly brought these employees to the Delta pay benefits and work rules.

And we've been able to make these investments in our employees while keeping our non-fuel unit costs flat for the past three years despite a 5% overall reduction in our capacity.

On the alliance front, we continue to build leadership in the Asia Pacific region and welcome China Airlines to the SkyTeam Alliance.

This is another outstanding addition to SkyTeam.

They'll be adding their network and hub in Taipei to the Delta network in Asia.

Our Asia alliance position is strong with Korean, China Southern, China Eastern, China Airlines and Vietnam Airlines.

We're making progress in Latin America.

Aerolineas Argentinas will officially begin the process of joining SkyTeam this month.

They'll be our second Latin carrier with our good partners Aeromexico.

Aerolineas will be a full member in 2012.

SkyTeam partnerships and particularly the joint venture with Air France, KLM and Alitalia are performing well and ensure that our passengers are able to conduct business around the globe.

Finally, I'd like to say just a bit about industry consolidation.

It's good for the industry.

As an industry, we must evolve to a business model that benefits our shareholders, our employees, the customers, and the communities we serve.

Consolidation is a key tool in that process.

Delta has been a clear beneficiary of consolidation.

We believe it is good for the industry.

We still have work to do at Delta.

We owe it to our shareholders to get to that return on capital goal and while we believe these results show that our strategy is working and the benefits from our merger are being realized.

But we can't slow down.

We're building a solid financial foundation by focusing on debt reduction, shrewd deployment of capital, and pretty strict cost discipline.

The global network and alliance strategy is generating solid revenue performance.

We'll continue prudent investments in the product, provide quality service to our customers, and continue to work on delivering consistent profitability for our capital investors.

So, thanks for calling in today and with that, I'll turn it over to Ed.

Thanks, Richard.

Good morning everyone.

Thanks for joining us here today.

Excluding special items, Delta reported a net profit of $929 million, or $1.10 per diluted share, on a base of 842 million shares.

This compares favorably to First Call consensus of $0.94 a share.

On a GAAP basis, we reported a net profit of $363 million for the September quarter.

Special items for the quarter totaled $566 million, in largely non-cash expenses, including $360 million for debt extinguishment, $153 million in costs related to the Comair restructuring and $53 million for merger-related expenses.

Our unrestricted liquidity at the end of September is $5.5 billion, down $500 million from June 30 due to the investment of roughly $750 million in debt reduction and delevering initiatives that we executed during the quarter.

These debt reduction and delevering initiatives are part of our plan, as Richard said, to take our adjusted net debt down to $10 billion by the end of 2012.

As of September 30, our adjusted net debt is at $15.2 billion, down from $17 billion at the start of the year.

EBITDAR for the quarter was $1.7 billion and we've now generated $3.7 billion in EBITDAR for the first nine month of the years.

We expect our full year EBITDAR to approximate $4.7 billion.

We are free cash flow positive for the quarter and free cash flow for the first nine months of the year is cumulatively $1.5 billion.

Through September, we've achieved almost $1.4 billion in cumulative synergies from the merger, expect to close out the year just north of the $1.5 billion in merger benefits.

These benefits contributed to Delta's strong revenue and cost performance for the quarter.

We also want to join Richard in thanking the Delta people.

We've been through a lot of change over the last few years and we've emerged stronger, and much more resilient, as well as much more profitable.

I feel fortunate to be part of such a great organization.

Turning to revenue, our revenue for the quarter was $9 billion, up $1.4 billion, or 18%, on a year-over-year basis against a 2% increase in capacity.

Our consolidated passenger unit revenues increased over 16% year-over-year, driven by a higher corporate revenue and international mix.

Corporate revenue was up 35% year-over-year, driven largely by a 27% increase in corporate volumes.

Our domestic unit revenues increased 10% over the prior year on a two point increase in capacity.

Our domestic yields were up 12%.

We are particularly pleased with the improvements we've seen on the transcons, as well as coming from the northeast business markets.

Turning to international markets, we are seeing continuing strength with unit revenues up 29% year-over-year, with both yields and load factors showing significant improvement.

The Transatlantic business is above its 2007 run rates, with unit revenues up 25% year-over-year on a one point increase in capacity.

Our Pacific routes have performed very well and we're seeing especially strong results in the beach markets, particularly between Japan and Hawaii.

Our overall Pacific unit revenues have increased 45% year-over-year on a six point growth in capacity.

Our Latin unit revenue increased 16% on an 8% increase in capacity.

South America's performing well driven by the recovery of business traffic.

We'll see revenues strengthening as we move into that region's seasonally stronger period as we approach the end of the year.

We believe that our unit revenue production is noteworthy, particularly in light of our strategy of retiring the smallest, least fuel-efficient and least profitable airplanes in our fleet.

While these changes produce downward pressure on unit revenues, we are achieving large reductions in cost and significant margin improvements.

We believe this strategy will allow us to be an even stronger competitor, particularly in key high demand markets.

Despite the fleet mix pressure on unit revenue, our third quarter RASM improved by approximately 200 basis points relative to the industry in the latest ATA data released as of last night.

And we outperformed the overall industry index for the month of August and September, a sign of the revenue benefits we're seeing from our merger.

Cargo revenue was up $50 million versus the prior year as higher yields and volume more than offset the impact of grounding our 14 dedicated freighters.

This is an impressive 28% increase in revenue and I would like to give congratulations to our Cargo Team for their great performance this quarter.

Other revenue improved 9%, or $75 million, due primarily to an increase in bag fees.

Turning to our revenue outlook, we're continuing to see demand stay strong as we approach the end of the year.

Our October unit revenues for the month are coming in 11% to 12% higher than the prior year.

In light of the strength of demand, we're managing our advanced bookings with a keen focus on yield, moving additional inventory available for late high yielding traffic.

Domestic revenue outlook remains solid with both New York and the Northeast business markets leading the way in year-over-year improvements.

Transatlantic, as I mentioned earlier, is continuing to post improving trends.

Heathrow is doing very well with revenues aided by additional frequencies, as well as our improved flat-bed product.

Our Transatlantic joint venture with Air France, KLM and Alitalia has also posted significant improvement over the prior year.

Pacific demand remains strong and we're seeing positive growth to China.

Our new Seattle to Beijing and Detroit to Hong Kong routes are ramping up very well, and we're seeing significant improvement as well in our LA to Sydney route.

In total we are pleased with the revenue trends that we closed out the third quarter with and we expect that momentum will continue into the December quarter.

Turning to capacity, for the December quarter we expect our system capacity to be up 5% to 7% as we have previously guided.

Domestic capacity will be up 3% to 5%, while our international capacity will be up 10% to 12%, as we reinstate a portion of the large 2009 capacity reductions that were driven primarily by H1N1 and international business weakness, conditions that no longer warrant such a large pulldown.

I know our December quarter capacity plans drove some questions on last quarter's call and we wanted to provide some additional perspective.

While our December quarter schedule is up 5 to 7% from 2009, we remain firmly committed to capacity discipline, and as evidence, the current December quarter will still be down 5% from 2007 levels and in line with overall industry trends over that period.

For the domestic business, certainly the part of the business with the greatest sensitivity to capacity levels, our December quarter capacity will be down 10% from December quarter of 2007, which in fact is greater than the overall industry's domestic reduction of 6.7%.

Our international capacity in the fourth quarter will be up a modest 4%, as measured against the December quarter of 2007, consistent with the areas of strong demand that we are seeing particularly in Asia and South America.

In total, our 2010 capacity will be up only one point from 2009 levels.

For 2011, we are still forecasting full year capacity to be up 1% to 3% from 2010, which will be 3% to 4% below 2008 full year capacity, on a 10% reduction in fleet over that time period.

As you can see, we remain committed to keeping our capacity discipline in check and our capacity growth within GDP rates.

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

Thanks, Ed and good morning everyone.

Turning to expense performance for the September quarter, excluding profit sharing, operating expense increased $315 million, or 4% year-over-year, on a 2% increase in capacity.

This increase was driven by higher fuel price, volume related increases and maintenance expense which are partially offset by incremental merger cost savings.

Excluding fuel and profit sharing, consolidated unit costs were flat year-over-year for the quarter.

Non-operating expense was down $23 million from prior year, coming in at $277 million for the September quarter.

Looking to December cost performance, excluding fuel and profit sharing, we expect December quarter unit costs to be down 3% to 5% with main line unit costs down 1% to 3%.

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

Our consolidated all-in fuel price was $2.29 per gallon, up $0.16 from prior year.

And for the December quarter, we've hedged 64% of our consumption.

Assuming an all-in market price of $95 per barrel for crude and refining costs, we anticipate December quarter fuel to be $2.45 per gallon, net of hedges.

In terms of earnings performance for the December quarter, we expect another solidly profitable quarter with operating margins in the 6% to 8% range.

This will represent our third profitable quarter in a row and the first profitable December quarter since 2000.

I'd like to echo Richard and Ed in giving thanks to the entire Delta Team for their hard work and dedication.

It's their efforts day in and day out that make these financial results possible.

Shifting to liquidity, we closed the September quarter with $5.5 billion in unrestricted liquidity, which included $3.9 billion in cash, and $1.6 billion available in undrawn revolving credit facilities.

For September quarter operating cash flow was $515 million.

Capital expenditures for the quarter were $360 million, which included delivery payments for two 737-800s and two MD90s, as well as, the purchase of 14 aircraft off lease.

As Ed mentioned earlier, we successfully completed $750 million in delevering initiatives during the September quarter.

These initiatives included tendering $300 million of the Company's debt, calling $75 million of secured notes, repurchasing $153 million in debt through open market transactions and private purchases, and obtaining $160 million of debt relief through vendor negotiations, among other items.

Looking ahead to December quarter liquidity guidance, we expect capital spending to be in the $300 million range due to investments in our product.

We have scheduled debt maturities of $1.1 billion in December quarter, which include $860 million from the 2000-1 EETC bullet maturity.

You'll recall, that we issued our 2009-1 and 2010-1 EETCs to refinance about two-thirds of this upcoming maturity.

Including the proceeds from these two EETCs, which will be released from escrow this quarter, our remaining debt maturities for the December quarter will be $450 million, and we're targeting an unrestricted liquidity balance of $5.2 billion at the end of 2010.

So in conclusion, we're quite pleased with our September quarter results.

December unit revenues came in strong, while non-fuel unit costs remain flat.

We're forecasting a profitable December quarter, the first since 2000 and we made considerable progress towards delevering our balance sheet already, with more progress to come.

These results are proof that our plan is working and that we are making progress in building a strong financial foundation to secure our long term future.

Thanks, Richard and Hank.

Before we move to the Q-&-A session, I did want to remind everybody about Delta's Investor Day which is scheduled for December 15 in New York.

You'll see more information coming from the IR Team next month.

So with that Cindy if we could go through the directions for the Q-and-A process.

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 everyone from the media to please hold their questions until that time.

(Operator Instructions) And we'll take our first question today from Jamie Baker at JPMorgan.

Hi.

Good morning everyone.

Hi, Jamie.

Richard, the term discipline is increasingly used when discussing the industry.

You used it in some of your opening remarks, as did Ed.

It's a term that I'll admit to using myself.

But it's also a term that I think gets thrown around pretty easily and probably means different things to different airlines.

As concisely as possible, can you provide your definition of discipline?

That's a good question, Jamie.

I was going to ask you what you thought the definition was, because it is pretty much an over used term.

I think it means that your growth, whatever growth you have in the business has got to be below GDP and can't be at the expense of yield and RASM improvement.

So basically, you keep up with demand, don't worry about chasing share, but instead focus on operating, what is going to increase the operating margin of the Company.

I'd ask Ed's view.

I'd say that's right.

Obviously, discipline is not just a short-term phenomenon, you've also got to take a long-term view, and one of the other reasons you hear us use the term discipline as much as we do, Jamie, is that we are focused on derisking the business and delevering the business and it's very difficult to do that if you're out there growing capacity.

I think the other piece you have to look at, Jamie, and then I'd like to ask you what your definition is, because I think that would be instructive for all of us.

The other piece you've got to look at is fleet.

The way for us to delever the business is to avoid big capital outlays, if at all possible, for modifications to equipment or buying new equipment.

So you've got to also take into account how your capital deployment is working and what the fleet plan looks like.

So my question to you is what's your definition?

Happy to be put on the spot and certainly I would agree with what you already pointed out.

I think flexibility also has a lot to do with it.

If you look at what's happening to consensus GDP forecast, if you look at what's happened to fuel prices as of late, it's not clear to me that your competitors have necessarily made any changes to their business plans.

And for me, that would be one of the definitions of discipline, how quickly you can adapt and the levers that you have to pull at your disposal.

Go ahead.

I agree with the flexibility point and we've had a number of our large buy side investors emphasize that flexibility point.

So not having a big stream of airplanes that require a lot of pre-delivery deposits in cash out the door where you've got to take airplanes and then have large fixed obligations is important for us.

So we like having a big chunk of our fleet paid for and depreciated and so then it's pretty easy to park the capacity because you can park the capacity and you don't have to continue to make the monthly payment on the airplane.

Yes.

Completely agree.

Second question, if Glen is there.

If you look at the new cities that Southwest is going to be bringing to the existing AirTran footprint in Atlanta, can you quantify what percentage of your total system revenue is being generated in those 37 or so cities, on a local basis, of course?

I don't really care about Amarillo to Amman.

Jamie, Glen is out this week so, unfortunately, he's not with us on the call.

I don't have the specific numbers that you're referring to.

We can follow up and get back to you with that.

If you look at our total system relative to Atlanta, local domestic flows, local Atlanta is less than 10% of our total system revenue pool.

If you start to carve it down into the more discreet markets you're talking about it, obviously, it's a much smaller number than that.

That's the range that we're talking about.

Okay.

Thanks for the engagement this morning, gentlemen.

I appreciate it.

Take care, Jamie.

We'll take our next question from Dan McKenzie at Hudson Securities.

Hi.

Good morning, everybody.

Nice job on the quarter.

Thank you.

Delta's been pretty vocal about targeting the 10% to 12% operating margin.

In light of the Southwest, AirTran merger and using the past as a guide, Southwest will likely want to introduce itself to folks in Atlanta, which suggests significant fare sales are around the corner.

Consequently it would suggest that to hit your 10% margin in 2011 Delta may need to shore up other domestic flying to offset revenue degradation at Atlanta.

So, I guess my first question is, first of all, is my view a fair characterization?

Or asked differently, will Delta need to optimize, to borrow a word from Southwest, more domestic flying outside of Atlanta and then, should we expect that it would do so if a 10% margin goal appears at risk?

Let me try to sort of address that in a broader context.

As a general rule, when you replace a low cost provider with a high cost provider, which is what we're doing in this instance, it improves the economic environment, number one.

Number two, if you look at our performance in Salt Lake City over the last 12 months, I think Southwest has shrunk about 10% or 11% and we've stayed flat to growing slightly.

And finally, if you look at the AirTran system and you think about the dis-synergies that are in the merger.

If you just do the math on revenue and costs and look at the load factor that's operated on the AirTran system today, the only way to make that merger have the synergies that it's broadcast to have is by increasing fares and revenue.

So when we kind of look at our competitive position around the United States, we probably have more competitive exposure than any other carrier and I think our performance over the course of this year has shown our ability to compete pretty effectively.

I think the other thing, Dan, that you need to take into account is that Southwest has announced that they will be discontinuing AirTran's business product, which obviously is a significant competitive factor for Atlanta local business markets, so that's going to also feed into the equation in terms of how we're going to compete with Southwest's entry.

Understood.

I appreciate the response.

But my second question is pretty much a house cleaning question.

What aircraft are you taking out next year?

Which aircraft are we taking out?

Yes.

Is that your question?

Yes.

We've got some additional 50C regional jets.

We've got some Saab's, some DC 9s.

I think it's about 25 in total.

In 2011.

It's a combination of DC9s, regional jets and Saab's.

Okay.

Great, thanks a lot.

Appreciate it.

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

Good morning, everybody.

Hi, Gary.

Wanted to see if I could get Hank to quickly address the cost guide for 4Q.

You know, I know you're obviously guiding to a number that's down pretty significantly year-on-year, but when you consider the capacity reductions you implemented last year, and likelihood you didn't really have much chance to get the costs out associated with that, it feels like that might be a little conservative.

I'm wondering if there's anything that we should be expecting in the fourth quarter?

Some of the prepared remarks reference the advertising campaign here in New York.

Is there anything special about what's happening in the fourth quarter we ought to be aware of on the cost side?

No, Gary.

One of the things is just continued revenue improvement is driving the various selling related costs.

The benefits from the merger will continue.

We do have some maintenance pressures and we saw that also in the third quarter with volumes on non-engine overhauls, for example, that we've selectively pushed to later in the year.

Some of that is putting pressure there.

But we are still staying very vigilant on cost and we will do our best to exceed that guidance, if possible.

But the guidance as we sit here today, that's our best look at performance for fourth quarter.

The other thing, Gary, is that we've announced that October 1, we do have a pay raise for the employees.

That will be the final installment and bring our employees up to industry standard wages, since I think that's an incremental $25 millionish of run rate for the quarter versus the quarter, the fourth quarter of '09.

Okay.

And then it would appear that you beat your revenue guide from sort of early to mid-September by about 100 basis points.

Just wondering if we're getting caught in rounding or if the outlook in September really did improve toward the back half and if you could give a little bit of color on that and how you think that's going to play into the fourth quarter?

That would be helpful.

It's a little bit of both, Gary.

It was some rounding in the 15% guidance we put out.

Actually, it was 15.4% or so.

It rounded internally.

The actual numbers here are a little over 16%.

A part of it was rounding, part of it was that the month closed fairly strong.

And was there, was that predominantly on the international side, Ed?

I'd say more international than domestic, but I'd say all sectors of the business we were pretty pleased with.

Okay.

Thanks very much.

You're welcome.

We'll take our next question from Michael Linenberg at Deutsche Bank.

Hi.

Good morning, everyone.

Two questions here.

One, I guess we've had some more recently I guess some strikes at Air France although that probably didn't hit you in the September quarter, but with Mexico going to cat two, and then not being able to codeshare on their metal, what I'm trying to get here is just with the alliances, are you seeing, when you run into some of these other regular operations or you run into the situation with Aeromexico, how big of an impact is that on your revenue?

The networks there, people can still interline.

How should we think about the potential impact from some of these hiccups?

Michael, the alliances actually de-risk those hiccups.

So when you go to the different situations that we've had across Europe, because we have a metal neutral alliance and we're both agnostic as to who's metal flies the trip, we're able to work together.

We have daily conference calls to figure out who can fly what, under what circumstances, we will upgauge and put bigger equipment on routes.

So, it actually acts as an insurance policy against that.

With Aeromexico, we worked with Aeromexico very closely to increase our capacity and worked with them to make sure that we picked up the traffic growth from the, even though they got downgraded, that's going to be pretty temporary and at the same time you had Mexicano liquidate and we wanted to be able to capture that.

So, we worked very closely with Aeromexico.

You're much better off with those alliances in those circumstances than without those alliances.

I agree.

Thanks.

And then just -- my second question is, with the recent merger of LAN/TAM down in South America, and I know you've been recently you've been active there with the recent signing of Airlineas coming into SkyTeam I think 2012, but you have a merger down there and you have two carriers that collectively will control something close to two thirds of the local carrier capacity in South America.

Is there an opportunity for Delta, because at this point, they have a relationship with One World and with Star, but at the end of the day, they'll probably have an agreement maybe with one or maybe with no one?

So, I'm just curious about your thoughts and kind of what you see going on down in that part of the world?

Well, Michael, we can't comment on other carrier's business.

Obviously we are committed to the region.

We've been very public.

We think that's one of the growth sectors across the global landscape and we're working hard to increase our flow down there.

Okay.

Very good.

Nice quarter.

Thank you.

Thank you.

Our next question comes from Bob McAdoo at Avondale Partners.

Just a quick one.

Could you go back and give us a little more color on the 180 airplanes that you pulled?

I know you pulled out a bunch of 50 seaters, but you pulled out 25 mainline airplanes too.

In terms of -- you've got 180 airplanes less but still have more capacity.

It kind of causes you to wonder whether the 25 you're pulling out next year are really anything meaningful other than just reducing ownership cost on the airplanes.

Bob, good morning.

Of that 180 aircraft, 128 of it is related to the Compass Mesaba sale, which we completed at the beginning of the quarter.

So those aircraft shifted out of our number of aircraft of owned carrier aircraft and they're still flying in service.

There's really no change.

It's just that it's now those aircraft are flown by a contract carrier.

We did reduce the fleet by 27 regional aircraft during the quarter, absent those 128 for Compass Mesaba and we also reduced about 25 DC9s during the quarter.

So that's what makes up the 180.

Very good.

Thank you.

Bob, to that point, that's how we develop operating margin in the business.

When you think about how we stack up against discount carriers, one of the benefits of the merger is you have the opportunity, in a tightly scheduled network, to have enough schedule permutations to get as good a utilization out of the asset as any carrier does, and we think it's created several hundred million dollars worth of synergy, by being able to more tightly schedule the airline in ways that improve the operating margin of the Company.

So, you basically fly the airline with a smaller fleet and that creates operating margin and so we're going to do it again next year.

And the ones, again, that are coming out in 2011 are primarily?

DC9s, RJ50s and Saabs.

And by the end of next year, how small is Comair going to be?

In terms of total -- the total--?

We said it's going to be, I believe, 43 airplanes.

44 airplanes.

Over the next several years.

Maybe 10% of the total RJ fleet in terms of your total stuff that's going on, something like that?

No more than that?

That's right.

That's right.

Yes, you got it.

Okay.

All right.

Thanks a lot.

Yes.

Our next question comes from Bill Greene at Morgan Stanley.

Hi.

Good morning.

Richard, I want to touch upon some of the comments that you made in your opening remarks which relate sort of the competitive landscape.

So we've got a lot more concentration among the big carriers post the mergers, if we assume for a moment Southwest AirTran goes through, and I'm wondering if you think that that's enough?

In the past the small carriers have had an outsized impact on sort of pricing and sort of created some big reactions in some of the bigger carriers.

Do we have enough concentration that the competitive landscape could have more permanently changed and if not, what's the industry need to look like to kind of get to that point?

Well, first, I think we've made excellent progress, both outside the US and inside the US.

I don't think it's over, but I think we're probably three quarters of the way there around the world and in the US.

I can't really predict, because it's really up to the market in the end, because the industry is really -- with the tighter credit conditions and a lot less sort of speculative capital in the marketplace, the industry really is required by its capital holders to return on capital.

Ultimately, that force is more powerful than anything else in the marketplace.

And so I think it's going to continue.

I think we're probably three quarters of the way there.

You just saw it around the world now with the LAN/TAM merger.

You saw that British Airways closed on Iberia and I think we'll continue to see that in other places around the world.

In terms of trying to give you a prediction, Bill, I don't know.

But I think we've made very substantial progress and what we've got to do is build the confidence in our investor base that our forward earnings are really there and are not going to be taken away by either exogenous events we can't handle or a business model that isn't predicated at Delta on returning on capital.

Okay.

Thank you.

That's how we ultimately get the multiple up.

Because when you look at the cash flow, look at our -- Ed said we'll have over $4 billion of EBITDAR this year and you look at what that multiple is versus what normal multiples are in industries that have a sort of higher level of trust from capital holders, we have a ways to go and the way to get there is to derisk our balance sheet, build that flexibility.

I forget who used the word flexibility on this call.

I think it was Jamie.

That's a really important word.

And making sure that we get back to an investment grade, so that our investor base has confidence that in more leaner cycles, we're going to still be profitable and the model won't have a lot of risk in it.

Okay.

Just a couple of detail follow-up questions.

In 2010, do you estimate you had revenue dissynergy that doesn't repeat in 2011?

So is there sort of a process of sort of integrating here for this year?

Secondly, just for Hank, do you have any guesstimates at this point on the pension impact cost and cash for 2011?

Thanks.

Let me try the first one.

What you have to remember about 2010 is we did not free flow airplanes until May.

So in essence, even though we got to a single operating certificate on December 31, 2009, we didn't run all the airplanes in a single network configuration.

What we called internally free flow, and just moving the airplanes where they naturally wanted to go, we didn't start that until really the beginning of the summer.

But is that a $10 million impact or is that in hundreds of millions in terms of what it means for your revenue?

It's a big -- it's a good sized number.

I don't know what the number is.

We're in the process now of building the business plan for 2011.

We've got our top down plan ready and now we're doing the bottoms up to put it in place and so, as we get to Investor Day in December, we'll have a little bit more visibility into what 2011 looks like.

If I could just add a little more color to Richard's comments, it is a big deal.

When you think about moving 1,400 aircraft around the globe, fitting the right supply to the right demand profile, it's a very significant opportunity, and Richard's right, we didn't have until the June schedule the opportunity to do that in a unconstrained manner.

So we look at that as a key component of not just our revenue synergies but also our cost synergies.

It's also allowing us to continue to squeeze out unproductive shells of flying, i.e.

the 90 aircraft that we've eliminated from the fleet this year and the further reductions that we're going to be taking next year.

I'd say the number is, it's certainly in the hundreds of millions as compared to $10 million.

I'd also say it was certainly a contributing factor to the -- when we look at our revenue performance in the quarter, vis-a-vis the ATA data we outperformed our industry peers by 200 full basis points, relative to the prior year, and there's no question the free flow of the schedule certainly had something to do with that.

Okay.

And Bill, related to the pension, we're still working on the numbers for 2011.

But I expect 2011 will be similar to 2010.

Our defined benefit expense in 2010 is in the $400 million range and our funding is about $650 million.

But we'll finalize that as we get through the fourth quarter and, as Richard mentioned, give more guidance at the Investor Day in mid December.

Thank you.

Thank you, Bill.

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

Good morning, everybody.

Hi.

When I've thought about your guidance in the past, we thought that it was generally conservative and during, based on the revenue data that we have, and looking at what other carriers are suggesting and that's turned out to be the case.

When I think about your guidance this quarter, though, hopefully it has that same level of conservatism, but it doesn't feel that way naturally and certainly your stock price is reacting as if it's a surprise to the upside.

Can you talk about that in terms of -- because it doesn't seem like revenue, at least for other carriers, improved that dramatically from kind of the start of September, start of the quarter, through the end of the quarter.

So can we -- how can we think about your guidance going forward in terms of conservatism on the revenue front?

Kevin, this is Ed.

I don't know how the other carriers are going to report since they haven't yet.

I don't know how they forecast.

I can tell you, we use the same forecasting approach, using the same tools.

We try to give you our best middle of the road view.

Obviously, there's range in the guidance and we certainly are not trying to be unduly conservative.

We're trying to give you our best view and that's what we're seeing in the business.

We're seeing certainly our international markets continuing to have great strength.

The Pacific mix of our business is one of the contributing factors that's enabling I think some of the growth you're seeing.

I think you're continuing to see a lot of strength on the corporate side coming out from the synergies of the merger, being able to put the two networks together and have the new corporate deals start to show up, and realize significant benefits.

I think you're also seeing us, through the joint venture with Air France, KLM, also contribute significantly to the progress.

So can't speak to other's momentum.

I can tell you that our view, we said for the month of October we're looking at plus 11 to 12, and obviously the comps get more difficult as you move towards the end of the year because the recovery this time a year ago was in full steam.

But, we'll have a solid fourth quarter.

If we plug in all those numbers, and I just want to make sure I've done the math right, if we plug in the numbers that you've guided to, the implied RASM for the quarter somewhere in the 10% vicinity if we go to mid-point of your guidance range?

That sounds a little high for the math, Kevin.

Okay.

You can try your numbers against Jill after the call.

Sure.

I'd say that's a tad high.

I did think the comps were tough with 11 to 12 as your starting point.

Okay, terrific.

When we think about -- you talked about the free cash flow and the debt paydown and I think that's a key for investors in the sector in general but certainly in your stock there's got to be some sort of forward projection on how things look and while we're of the belief that we're kind of in the start of a recovery still and we're not past mid-cycle, the concern I guess would be, is that you look back and you go okay as much as you say it's a good thing that you're back to two years ago levels, that also makes you wonder how much higher things can go from here.

The comps get tough.

You're looking at now 50% year-over-year type revenue range for the Pacific, so next year's comps are going to be tougher.

When we look forward with kind of where GDP forecasts are today, how should we think?

Should we think of 6% or we don't have to define it as a specific number, but normal revenue growth for the industry is appropriate on what is a tougher comparison but hopefully is a recovery or where does that sit?

Let me give you just a couple data points.

Forecasting the future, who knows.

We certainly are living evidence of that here in this industry.

But if you look at our 2010 sequential build as we've worked through the year, we like to compare ourselves to 2007 because that's probably the last normalized baseline.

2008 was a very difficult year between fuel spikes and then the recession causing major month-to-month changes.

But if you look at our first quarter performance, first quarter of 2010 versus the first quarter of 2007, our RASMs were about flat.

Our first quarter '10 RASM was at the first quarter of '07 levels.

Despite the fact that we had 9% less capacity in the first quarter of '10 as compared to the first quarter of '07.

If you then project that over the course of the year, and we look at it month-to-month, our forecast for the fourth quarter of this year we're looking at our fourth quarter RASM in 2010 being up roughly 5 points higher than the fourth quarter of 2007.

So a 500 basis point build sequentially over the course of the year on modest capacity growth as compared to '07, so 5% less capacity in the fourth quarter of '10 versus the fourth quarter of '07.

That 500 basis point build is probably what I'd give you as an indicator of the build in the momentum we've created over the course of the year as we're going into 2011.

Obviously, we'll see where that takes us.

We've got, we're assuming GDP growth in the 2% range for next year and that's why we're keeping our capacity within those levels.

We still have room to go, as Richard said, we're still not at that sustainable 10% to 12% operating margin level that we need to be as a business.

Thank you very much.

Good quarter.

Cindy, we're going to have time for one more question.

Our last analyst question will come from Glenn Engel at Bank of America-Merrill Lynch.

Good morning and congratulations.

Thank you, Glenn.

Two questions.

One on just miscellaneous net income.

It was $25 million gain.

Can you talk about that and tied to that for the fourth quarter, could you give us a rough guidance on what non-op is going to look like?

Glenn, hi.

The miscellaneous non-op is largely FAS 133 ineffectiveness related to fuel hedges.

We also had a little bit of a foreign exchange gain.

We don't forecast that in a quarter so I wouldn't say that you should plan on it for fourth quarter.

As the market moves, that will obviously dictate whether we have an impact or not.

Because of the delevering initiatives, our interest expense will be down a bit in the fourth quarter, particularly because we completed those initiatives toward the end of the third quarter.

So there will be an interest expense benefit in 4Q related to the delevering.

And secondly, you've been making a lot of changes to the RJ fleet over the last year and are making more changes next year.

Can you talk about what's changed about the RJs that make them work less and how you manage to get rid of the aircraft and yet keep the revenue?

Glenn, I think you wrote a pretty informative note about this, actually.

Basically, what you do -- typical market, where historically we may have, say, Atlanta, Birmingham, flown that with nine RJ trips a day, you can reduce the number of RJ trips, put them on an MD80, you get higher customer acceptance.

CASM goes down a bit, but total shipped revenues improved, and of course unit costs get a whole lot better.

A lot of our airplanes are coming off lease and so airplanes that are coming off lease are returned to lessors.

We terminated a certain number of agreements that we had with various contract carriers and in a number of instances on owned airplanes they're depreciated, a handful of them are depreciated and we just park the airplanes.

So, what our goal is, is to get to stage length because we think our customers don't want stage lengths over about 750 miles, and so our goal is to actually to continue to bring the stage length down on that airplane and you'll continue to see more reductions in that fleet because it's important that, that fleet get to fully allocated profitability.

And is most of the cuts in the RJs been on hub connecting routes or on point-to-point routes?

I'd say it's a combination of both.

We've closed certain small markets that were not performing over the last couple years and we've changed the flow on the hub markets as we've upgauged a number of markets.

So it's been a combination of both.

Thank you very much.

Thank you.

That is going to wrap up the investor portion of our call.

So, I will hand the call over to Ned.

Thanks, Jill.

Cynthia, if you could go ahead and review the process for asking a question during the Q&A and, once again for the media, if you could limit yourself to one question and a brief follow-up we should be able to accommodate most everyone.

Cynthia?

Thank you.

Again, that does conclude the analyst portion of the question-and-answer session.

We are now taking questions from the media.

(Operator Instructions) And we'll take our first question from Josh Freed at the Associated Press.

Good morning.

Could you say a little more about the idea of holding inventory open for that late high yielding traffic?

Is that something that's kind of focused around a certain seasonal time frame for you or is that something you think you'll be doing a lot more of going forward?

Josh, this is Ed Bastian.

No, this is a -- I think it's just a response to the strong demand we're looking and expecting to see as we approach the holiday season.

So we want to make certain we're leaving seats for our high value customers and not selling out too quickly in the face of the strong demand flow.

Okay.

Are you doing it more this year than you did in previous years?

Well, we're certainly doing a lot more this year than last year when demand was off about 25%.

Sure, sure.

Okay.

Real quick on the fleet, you mentioned the 20 to 30 planes coming out.

Are there any coming in?

We have a very small number of MD90s that we'll be bringing into the fleet.

I think that's largely it.

Okay.

Will the changes next year leave you with any DC9s or will that be the last of them going out?

Yes.

We will still have DC9-50s.

Thanks very much.

We'll take our next question from Mike Esterl at the Wall Street Journal.

Yes, good morning.

I wanted to ask about the Union votes that are under way at Delta and if the Unions are successful in those votes, what sort of an impact do you think that could have on Delta in terms of costs and profitability and success of the business?

Mike, this is Mike Campbell.

We've addressed that before.

The bringing people to industry standard pay, which is what we've done with those that representation has been resolved, has been built into the model as well as harmonizing paid benefits and work pools has been built into the model, whether it's done because representation is dissolved without having it or whether it's resolved with having it.

Next question, Cynthia.

We'll take our next question from Doug Cameron at Dow Jones.

Richard, the airlines and members of the three alliances are very (inaudible) with the antitrust approvals they've had in both Pacific and TransAtlantic routes the last year, I guess.

I wonder if your view on sort of completing the circle and the prospect for the alliances to have some sort of antitrust immunity between Europe and Asia?

What sort of time line you might think for that and how that might improve the economics of an alliance such as SkyTeam, for example?

Are you talking about EU approval?

That's what it would have to be, obviously, to get that end of things going, yes.

But how much of a gap in terms of potential for SkyTeam for an alliance is kind of still to be realized.

You obviously argue that ATI was great for alliances on TransPacific and TransAtlantic.

I assume there's a gap in the potential of an alliance because of this lack of antitrust between Europe and Asia.

I was just wondering--?

I think you make a very good point.

That model has demonstrated real success and it's actually good for the industry to have three competitive models now with Star, One World and SkyTeam.

And the world will continue to evolve to those three alliances and what antitrust immunity allows you to do is combine flows, traffic flows to the benefit of consumers in markets.

It also makes the carriers more viable and healthy and for the European carriers, the EU really needs to support the European carriers in their competition against the Middle Eastern carriers for traffic between Europe and Asia.

So, I would expect that the EU should get on with that and approve those sorts of arrangements between Europe and Asia and it will be important for each of British Airways, Lufthansa, KLM, Air France, Alitalia, as they compete in a much more global marketplace.

I take from that, that the absence of ATI is kind of one of the biggest pieces of the puzzle in terms of fourth quarter what SkyTeam could do?

Yes.

It's a big piece of the puzzle for SkyTeam because without -- what I think has been demonstrated is if you don't have ATI, you can't bring the benefits to consumers.

Great.

Because without ATI, you basically just have a pro rate agreement, a frequent flier sharing program, allowance sharing arrangement, and that's about it.

It's almost just a glorified interline arrangement if you don't really -- and it's a little bit harsh, but it's a bit more than an interline arrangement but it's not the full potential of what you can develop for the marketplace.

That's perfect.

Thanks.

Okay.

Cynthia, we have time for two more questions.

Okay.

Our next question will come from Kelly Yamanouchi at the Atlanta Journal Constitution.

Hi, there.

I'm interested in finding out what your strategy is to adjust to the shift in the competitive landscape in Atlanta with Southwest?

Any changes in capacity expected here or will there be any programs to encourage AirTran frequent fliers to convert to Delta?

I think we've been really successful competing against Southwest across the US.

If you look at our competing against Southwest in Salt Lake City, where they have a hub, they're down 11% in the last 12 months and we're up a bit.

AirTran's down about 11% in Atlanta over the past 12 months.

When you look at the cost structure, Southwest is a substantially higher cost operator and when you get -- look at the Delta network in Atlanta and the small amount of local traffic that we carry here, we're pretty confident that we'll do just fine competing against Southwest.

Okay.

And I was also wondering what Ed meant by the reference to the removal of business class feeding into the equation of how Delta will compete?

Well, I think I know exactly what Ed's talking about.

AirTran had first class.

They had assigned seats and Southwest has no first class, no assigned seats, doesn't sell through global distribution systems.

It's a very different product than what AirTran offered in the market, so it's very distinguishable.

If you want international service, if you want high frequency, all around the world, a club, business class, first class, don't have to stand in line to get on airplanes when you're a business traveler, that's the product Delta offers.

All right.

Thank you.

Final question, Cynthia.

Thank you.

Our final question comes from Mary Jane Credeur at Bloomberg News.

Hi, Richard and Ed.

I wondered if you could talk a little more about what's going on with LaGuardia slot swap.

US Airways said a few weeks ago that they intend to seek further review from regulators and wondered if you've been able to renew any talk or discussions since Continental agreed to divest some slot swaps from Newark to Lub?

This is Ben Hirst.

Obviously, Richard or Ed chime in.

You answer.

As you know, DOT said they would approve the slot swap.

They acknowledged there were significant benefits to consumers from it.

But they required, in order to approve it at least when they issued the order, more divestitures than US Air and Delta felt were appropriate and that the transaction could support.

Since then, there have been significant changes in the marketplace.

The marketplace, of course, has continued to evolve.

The slot swap transaction represented a change in the competitive status quo and what happens in this business is whenever there's a change in the status quo, there's a competitive response and a counter response and we felt that those changes have addressed a lot of the concerns that DOT had about the increased concentration from the transaction.

Slots have continued to evolve into the hands of low cost carriers, both at LaGuardia and particularly at Washington National, and we think those changes create a different environment in which it may be possible for the transaction to be reconsidered and we're still working with US Airways and with DOT on that.

Are you proposing the earlier counter offer that you guys had made in which you were trying to auction a few to some hand picked recipients?

No, not at this point.

We're looking at, along with others, at the changes that have occurred.

They very significantly changed the competitive landscape and in fact, at Washington National there are more slots in the hands of low cost carriers today than DOT said were necessary by divestiture.

So what specifically are you pushing for now?

Well, we're working, as I said, we're working to try to get the DOT to understand the changes in the competitive environment and working with airways on possible different iterations of the transaction, but nothing is concrete yet.

And do they seem to be open to it?

I really can't comment on who's open to what at that point.

We'll go ahead and wrap it up there, Mary Jane.

Thanks very much.

Thanks, Richard, Ed, Hank, Jill, Ben.

Do appreciate it.

That does conclude our third quarter conference call.

We'll go ahead and see most everyone, as Jill said, on the analyst side at the December 15, Investor Day in New York and we'll be back in January with our fourth quarter and year end numbers.

Thanks so much.

Again, that does conclude today's conference.

Thank you for your participation today.