達美航空 (DAL) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines December 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 the question and answer session following the presentation.

(Operator Instructions).

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

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

Jill Sullivan Greer, Director of Investor Relations for Delta.

Thanks, Cynthia.

Good morning, everyone, and thanks for joining us for our December quarter call.

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

Also with us for the Q&A is Glen Hauenstein, our EVP of Network Revenue, Management and Marketing; Mike Campbell, our EVP of HR and Labor Relations; Steve Gorman, our Chief Operating Officer; 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 financial and revenue performance, and Hank will conclude with a review of cost performance and liquidity.

We have allocated about 25 minutes for management comments.

After their comments, we have 25 minutes for questions from the analysts.

We will then conclude the call with a 10-minute Q&A with 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 in as many questions as possible during the 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, and some of the factors that may cause such differences are described in Delta's SEC filings.

We will also discuss non-GAAP financial measures on today's call.

All results exclude special items unless otherwise noted, and you can find a reconciliation of non-GAAP measures on our IR page at delta.com.

And with that, I will turn the call over to Richard.

Good morning, everyone, and thank you, Jill.

We appreciate your joining us this morning for our earnings call.

This morning we announced $158 million profit for the December quarter and a $1.4 billion profit for 2010.

These results reflect the success of our merger; the success of our network fleet and alliance strategies; the ongoing investments in our business; our stable employee relations; and our commitment to cost discipline and debt reduction.

We also recognize that these results would not have been possible without the dedication and determination of Delta employees worldwide, and I heartfeltly thank them for their hard work.

We are pleased to recognize their contribution to this success with a $313 million profit-sharing payment to be awarded in mid-February.

Looking back on the past year, we completed the merger integration.

We had top line growth of 13%, driven not only by higher passenger sales and revenues from ancillary products and services, but also contributions from cargo, our MRO business, SkyMiles, Delta Global Services, MLT Vacations, and Delta Private Jets.

We showed capacity discipline limiting our all-in capacity growth for 2010 at 1% with unit revenues up 12%.

And while our 2011 capacity plan is currently planned at 1% to 3%, we are watching fuel prices and are prepared to adjust capacity with flexibility provided by a significant number of paid for airplanes.

We maintained our focus on our low-cost structure and debt reduction, keeping our non-fuel unit costs flat for the year and reducing our adjusted net debt by $2 billion with another $2 billion reduction targeted for 2011.

Our goal is to get to investment grade.

When we review our multiples, we generate $4 billion to $5 billion in EBITDAR.

The multiples should be higher, and over time we believe the reduction in debt to an investment grade level and stable productive employee relationships without threats of disruption should engender a higher multiple.

On the network side, we improved the efficiency of the fleet better matching capacity with demand while reducing the total number of airplanes in our fleet by 5%.

In the past two years, we have reduced our fleet by 101 shells and will continue these efforts in 2011 and beyond with another 100 aircraft to be retired over the next 18 months.

We improved our alliance position by incorporating Alitalia into our transatlantic joint venture and added new Asian and Latin partners, including Vietnam Airlines, China Eastern, Garuda Indonesia, and Aerolineas Argentina and soon to add Saudi Arabian Airlines, and we will be signing and extending our relationship with GOL in Brazil.

We successfully resolved the issue of employee representation.

In each of these elections, Delta employees voted to keep the direct relationship and culture Delta has maintained over the decade.

I believe we had nine representation matters, and we won each of them.

Unfortunately both the AFA and the IAM have filed interference claims, putting their own self-interests in collecting dues above those of the Delta people who have made their opinions clear.

Our employees are ready to move forward and have their pay, benefits, work rules and seniority aligned.

As we have said for the past 27 months, we are ready to begin the process of aligning pay benefits and work rules as a complete package when representation is finally resolved.

We can start immediately if the AFA and the IAM would withdraw their spurious interference claims.

Looking ahead to 2011, we expect the global economy to continue growing at an overall pace of 2% to 3%, and we expect another good year of profitability in 2011.

Obviously the biggest issue we are facing is the steep run-up in fuel prices we have seen since September.

We believe we have the right pieces in place to address this issue.

In the short term, through the momentum we have built in the business, we expect to be able to keep our March quarter margins flat year over year despite $350 million in higher fuel costs.

Longer-term we must, like any other energy-intensive industry such as oil companies, utilities and railroads, pass on these higher fuel costs to our customers.

Recent industry-wide fare actions, combined with the growth we are seeing in ancillary products and services, give us guarded confidence that we are moving in the right direction.

We believe fuel hedging is an important and necessary strategy to reduce risk in the business.

Our fuel hedge program not only provides a financial benefit but also reduces the impact of price volatility.

It gives us the ability to have prices catch up with the true cost of fuel.

Our hedge book is worth more than $300 million on a full-year basis for 2011, and we are 36% hedged for 2011 as of Friday.

On the fleet side, as I said earlier, we will continue to reduce fuel efficient aircraft in our fleet, primarily DC-9s and 50-seat regional jets.

And finally we have very low ownership costs on many of our airplanes, which provides significant flexibility to quickly and cost-effectively adjust capacity, and we are prepared to do that.

So, in conclusion, we are pleased with the results for this year.

We have a lot of work ahead of us in 2011, and we know we can improve on our 2010 results.

We are keeping a close watch on fuel prices, and we will make responsible decisions around capacity in this heightened fuel environment.

However, the momentum we have built with our profitable top-line growth, low-cost structure, solid hedge portfolio and debt reduction strategies position us well.

I would like to thank all the management team at Delta and the senior officers at Delta for a really good job in 2010.

With that, I will turn it over to my friend, Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us today.

Excluding special items, Delta reported a net profit of $158 million for the December quarter or $0.19 per diluted share.

This is a bit off from consensus of $0.24 per diluted share, which had not been uniformly updated for our disclosed winter storm impact for the December month.

On a GAAP basis, net profits were $19 million.

Special items for the quarter totaled $139 million and included $88 million in merger-related costs, $20 million in costs related to the consolidation of operations in Cincinnati, and $31 million on the extinguishment of debt.

This is the final quarter we will break out our merger-related costs.

Overall our total merger-related expenses, including transaction costs, totaled approximately $600 million since the merger completion, and that is consistent with the guidance we provided you when we announced the merger.

As we previously reported, the severe winter weather that we experienced throughout the US and Western Europe reduced our December quarter profit by $45 million due to approximately 4,000 flights cancellations and the associated effects.

For the full year, Delta's net income was $1.4 billion.

EBITDAR was $856 million for the December quarter and $4.6 billion for the full year.

Our free cash flow was $52 million in the December quarter and $1.6 billion for the full year.

Our unrestricted liquidity at the end of the year is $5.2 billion, down $300 million from September 30 due to normal seasonality of ticket sales, as well as the impact of the winter storms.

As Richard mentioned, we are committed to strengthening our balance sheet through debt reduction.

Our adjusted net debt as of the end of the year stands at $15 billion, down from $17 billion where we were a year ago.

And our target is to reduce our adjusted net debt to $10 billion by the end of 2012, and we are right on track.

I would like to offer my thanks as well to the Delta team for the efforts they have contributed to our strong financial performance this year.

It is the people who work here that truly make this airline great.

I'm also pleased to announce that we put aside $38 million for profit-sharing in the December quarter, which will bring our total profit-sharing amount for 2010 to $313 million.

Turning to revenue, Delta's revenue for the December quarter was up $984 million, a 14% increase versus the prior year.

This was on a 6.9% increase in capacity.

Our consolidated passenger unit revenues increased 8%, continuing the sequential quarterly improvements we have been seeing through the recovery and against the 2007 baseline year.

International unit revenues increased 14% with transatlantic up 8% on a roughly 12% capacity increase.

Our Pacific business unit was up 24% on an 18% increase in capacity with performance in new over-flight markets to Asia doing quite well.

Latin America was up 19% on a 5% lower capacity, driven by some capacity reductions we had in the Caribbean.

Our domestic unit revenues grew 6% versus last year, driven by a like amount of yield improvement.

Our business in New York, Detroit and Atlanta had the strongest year-over-year domestic improvements.

Corporate travel continues to show momentum, and we ended the year with overall corporate volumes in line with levels we saw in the 2007 and 2008 years.

Our most recent data has corporate revenues up 23% as compared to this point a year ago.

We are seeing notable improvements in key sectors with our automotive traffic driving improvement in the international field, and banking and retail contributing to strong domestic performance.

Cargo revenues were down $17 million; however, that was entirely attributable to the elimination of the freighter operations last year.

Our belly cargo volume increased 18% on a year-over-year basis, and yields increased 5%.

Other net revenues increased by $112 million or 14% due to higher revenues from SkyMiles and other ancillary products and services such as bag fees.

In terms of our revenue outlook, our demand strength continues into the first quarter.

Our January unit revenues are coming in approximately 6% higher than the prior year.

We have seen signs that the industry is generating a revenue-based response to rising fuel prices as we need to.

On the domestic side, there have been three successful industry-wide fare increases, and we led a new $5 to $10 domestic increase over the weekend.

Internationally just before Christmas, there was a successful $50 premium class fare increase.

The benefit of these actions, which were taken over the last 30 days, should be seen in revenues in the coming months.

Our domestic revenue outlook remains very solid through the first quarter with Detroit and New York again showing the most favorable year-over-year gains.

We expect the effects of last week's storm in Atlanta to reduce our March quarter results by a net $30 million as we canceled 4,000 flights in our largest hub.

Revenues for January took a $40 million hit, offset by about $10 million in expense savings.

Our transatlantic unit revenue performance for the March 2011 quarter will continue to be somewhat pressured by capacity add-backs in markets that we had temporarily reduced a year ago in the depths of the recession.

It is important to note that our year-over-year capacity increase in the transatlantic will level off as we progress throughout the year.

And, in fact, our summer schedule is expected to be flat to down 2 points from the summer level of 2010.

Our Pacific demand remains robust with strong year-over-year yield improvements.

Our new flights from Detroit and Los Angeles to Tokyo-Haneda will start next month.

They are booking well, but that additional capacity will bring some modest pressure to our Pacific unit revenues in the short-term.

Our Latin outlook is strong with solid improvement in the Central and South American regions and the impact of reduced capacity in the Caribbean.

On capacity for the March quarter, we expect our system capacity to be up 5% to 7% with our domestic flat to up 2% and international up 12% to 14%, driven in part by increased flying in restricted markets such as Tokyo-Haneda and London-Heathrow.

For the full-year 2011, we expect capacity to be up 1% to 3%, but are actively monitoring those plans based on conditions and our ability to recoup the recent impact of fuel price increases.

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

Thanks, Ed, and good morning, everyone.

Turning to cost performance for the December quarter, operating expenses for the quarter increased $657 million or 10% on a 7% increase in capacity.

This increase was driven largely by $286 million in higher fuel price, as well as higher volume, maintenance and revenue-related costs, as well as profit-sharing expense.

The increased maintenance expenses were due to returning aircraft to service after temporary storage, as well as higher engine and aircraft volumes.

We also saw higher volumes attributable to our MRO business whose revenue was up nearly 20% year over year during the December quarter.

Excluding fuel and profit-sharing, consolidated unit costs decreased 2% during the quarter.

This reduction is slightly lower than our initial guidance due to the impact of the December weather events.

Non-operating expense was $242 million for the December quarter, down $67 million year over year.

This improvement was driven by benefits from Delta's delevering initiatives.

Looking to March quarter cost performance, we are striving to keep consolidated unit costs flat excluding fuel, but we do see some cost pressures in the March quarter from higher volume and revenue-related expenses, customer product and employee investments, as well as maintenance volumes.

As a result of these cost pressures, we expect March quarter consolidated unit costs to be in the flat to up 2% range as compared to the March 2010 quarter.

With regard to fuel and hedging, in the December quarter, we hedged 58% of our fuel consumption.

Our consolidated all-in fuel price per gallon was $2.47.

And for the March quarter, we are hedged 49% of our anticipated fuel consumption.

And based on the current forward curve, we anticipate that our all-in price for the March quarter to be $2.60 per gallon.

In terms of earnings performance for the March quarter, we are forecasting a positive operating margin in the 1% to 3% range, despite nearly $350 million of higher fuel price pressure and the $30 million winter storm impact, which Ed mentioned earlier.

Shifting to liquidity, we ended 2010 with $5.2 billion in unrestricted liquidity, which included $3.6 billion in cash and short-term investments and $1.6 billion in undrawn revolving credit facilities.

Operating cash flow was $318 million, driven by the December quarter profit, which was partially offset by the usual seasonal decline in advanced ticket sales.

Cash used for investing during the quarter was $266 million.

Capital expenditures during the quarter included $178 million for investments in aircraft, parts and modifications as we began our announced investment in our onboard product, including flat-bed seats and enhanced in-seat entertainment.

And during the quarter, we took delivery of three MD-90 aircraft.

Free cash flow was $52 million during the December 2010 quarter and $1.6 billion for the full year.

Debt payments in the December 2010 quarter were $1.3 billion, and we issued $987 million of debt, including the 2010-2 EETC.

At December 31, Delta's adjusted net debt was $15 billion, a $2 billion reduction from December 31, 2009.

And looking at March quarter liquidity, for the March quarter, we expect capital spending to be approximately $375 million.

Our disciplined capital spending plans include targeted investments in customer service and operational improvements and capital investment for aircraft and aircraft modifications.

We have debt maturities of approximately $350 million in the first quarter, which will be fully funded by free cash flow.

We are forecasting an unrestricted liquidity balance of $5.3 billion at the end of March quarter and expect to pay down our adjusted net debt another $400 million.

So, in conclusion, 2010 marks one of the best years in Delta's history, and I would like to join Richard and Ed in thanking our employees for their great work this year.

Their accomplishments have contributed to the strong momentum we have built in the business, which will serve us well as we adjust for higher than expected fuel price levels.

I'm confident that we have the right pieces in place and that we will continue to build a business that succeeds for our shareholders, employees and the customers and communities we serve.

Thanks, Richard, Ed and Hank.

Cynthia, we are now ready for questions from the analysts if you could review the process for asking a question, and again, we ask everyone to limit themselves to one question and a follow-up.

(Operator Instructions).

Bill Greene, Morgan Stanley.

I'm wondering if we can talk a little bit about some of the news reports that you were thinking of placing a larger narrowbody plane order for delivery in 2013.

If I understood your comments in the past, you had talked about that order being a 2015 event.

So did we pull it forward, or is this just off some of these reports?

I'm not certain which reports you are referring to, but we, at the investor conference last month, mentioned that we were going to be putting an RFP in the market, which we have done the first part of this year.

Our expectation is that we would look to start taking some deliveries in the 2013 period, so I'm not sure where 2015 came from.

But we would -- at the same time, we are looking to this fleet order as largely a replacement and a replenishment effort as compared to a growth effort.

And if you look at your guidance of 1% to 3% near-term, I guess if you look at what you're guiding here for the first quarter, it seems logical to think that if fuel is higher, you will address that to the downside.

Is there a scenario whereby you address that to the upside?

I don't think so.

And then just the second question -- I guess this is kind of more for Richard -- which is, if you look at what is going on with some of these efforts of American to try to reduce distribution costs, I guess I have been surprised that Delta has not weighed in more on this and taken an action as well.

Are the reasons that you can't do it?

Is it a technology reason?

Is it related to contracts that you have, or why sort of the -- I guess I just would thought that Delta would have been more aggressive on this front.

Well, we actually have been fairly aggressive on that front.

We have probably terminated a dozen online agencies, and we have made some pretty significant changes on L, U and T fares in terms of allowing online agencies to bundle those fares with other airlines.

So we have put a number of restrictions on what fares and how they get sold and how they get displayed, and we are going to continue to do that.

We have compelled Kayak to refer all of their customers if it is a Delta ticket directly to delta.com.

And you are going to continue to see us work to control the quality of our distribution and our brand.

We have seen about 400 basis point increase in delta.com share as a result of those actions.

We expect to continue to do much of what is done in a lot of other successful businesses, and I think what Southwest has done a really good job at, which is controlling our distribution and controlling -- it is not just about cost.

It is as much about controlling the content and the customer service and being able to support customers in the event of irregular operations like the snow event we have had.

So you should expect us to continue that trend.

I will not speak specifically about any future actions we might be contemplating.

But I think if you look at what we have done, we have been -- while not as aggressive as American, we have been pretty aggressive, and you should expect us to continue that trend.

Can you just remind us maybe then what the spend is that you have on GDS is?

Our GDS spend is about $300 million a year.

Well, GDS plus OTA.

That is just GDS.

That is just GDS.

Let me look here.

That was a real test there, Bill.

We have got a lot of numbers here in the room.

We can get back to you.

(multiple speakers) But the GDS number is about $300 million here.

I think if you put GDS and OTA together, you are pushing about $400 million a year.

That is GDS and online travel agencies, about $400 million.

Gary Chase, Barclays Capital.

I wondered if I could just ask a quick nit, and then I wanted to focus on CapEx for a second.

Just the ASM growth that you are planning for January, is that materially different than where you are for the quarter?

Not substantively.

We do have obviously the impact of the Atlanta shutdown that has pulled some of that January capacity down, but not in a kind of significant way.

We would have to go back and look at month versus quarter.

I don't have those data points in front of me.

But from a schedule point of view, it was not slated to be meaningfully different, right?

It was not.

I wanted to focus on CapEx and understand that you have been spending a lot over the last couple of years as a function of the merger with technology upgrades, the fleet modifications.

I am wondering when those types of expenditures might wind down and wondered if you could give us maybe some flavor for what you think a good run rate for maintenance CapEx is if you're not buying aircraft?

I'm just trying to get a little context around what an aircraft replacement program might mean for capital and for the cash generation.

Well, first of all, if you look at the run-rate of the two airlines, the run-rate was pushing $3 billion, and we have cut that back to about $1.3 billion.

And we do have a bolus of spend coming up because of the lie flat mods, which -- year ending 2010 were at about net CapEx of about $1.2 billion.

And I think that is probably, if you look at fleet replacement and the like, we are going to be in that $1 billion to $1.2 billion range, probably on a pretty consistent basis.

As Ed said, our RFP on the fleet is just simply, if you think about the size of the domestic fleet, about 700 airplanes, mainline domestic airplanes, and what you would have to do to just keep that kind of at -- we are going to continue to fly the airplanes their depreciated life, but even if you do that, you hit a point where we need to replenish.

So I think that $1 billion to $1.3 billion -- obviously we would like to keep it as low as we can because then it goes back on the balance sheet to pay down debt, which gets us to investment grade, and we pay down debt, we get -- that is the most accretive thing we can do with respect to EPS.

So I would in answer to your question in summary, that $1 billion to $1.3 billion I think is probably the long-term sustainable rate.

Inclusive of a replacement program, Richard, or --?

Right.

Because the sort of bolus runs down here after 2012 in terms of the investment in the existing fleet.

And so once you get rid of the CapEx that we are spending on flat-bed mods and the like, you know, that is about $350 million each of three years in a row.

And we are still not going -- if possible where we can add, if we can add used airplanes, we will add used airplanes instead of new airplanes.

Because we really are focused on getting a return on our invested capital.

Kevin Crissey, UBS.

Can you talk about your thoughts on the Google ITA acquisition?

You know, I don't -- I have not candidly -- Kevin, I have not looked at it that closely.

As a general rule, I think that market should be allowed to work.

And if that means that Google is offering the people that own ITA a good price for their product, I think markets ought to be allowed to work and that government as a general rule should not interfere in kind of free-market decisions like that.

I think it is very hard to make predictions about what the effect of that kind of an acquisition would have.

So while we have not taken a formal position, our general bias is against government intervention in free-market activities.

Okay.

Because when I think about it, I think about what you have done to entice Kayak to push to delta.com.

That feels like something that you can control.

Google and Kayak are quite different in terms of your ability ultimately to push that traffic.

So if Google were to become a Kayak, which is kind of a fear that a Kayak would probably have, I imagine your negotiating stance is diminished relative to that.

So it's interesting to me that it is not just Delta, just most airlines have not had much of a strong stance on it.

Maybe they are just not sure where it's going nor am I, in fact, but it does seem like something that should be thought about pretty carefully I would say.

Second, I guess, would be interest expense and non-operating run-rate for Q1.

And, Hank, maybe that is for you.

Yes, Kevin, our non-op expense for Q1 on the interest expense line is not going to be significantly different than it was for 2011.

We are still in the process of paying down debt, and we will pay down another $400 million or so in the first quarter.

But that will have more impact as we go forward.

So I had would model first quarter consistently with what you saw in interest expense for the December quarter.

Richa Talwar, Deutsche Bank.

I'm actually calling on behalf of Mike Linenberg.

Most of my questions were actually answered, but one that I wanted to ask is, I notice that your implied Pacific RASM growth was quite impressive and it was mainly driven from solid improvement in yields.

And you did touch upon this, but hoping you could comment further on the contributing factors there and particularly discuss progress you're seeing on new routes in the region such as service to Tokyo-Haneda and the like?

I could not quite hear the full question.

If your question was talking about the month of January?

No, I was just talking about the progress you are seeing in the Pacific region.

Particularly I saw that your Pacific RASM -- (multiple speakers)

Specific to the Pacific revenues in the fourth quarter of 2010?

Yes.

Okay.

Actually I will turn it over to Glen Hauenstein here who has got a little more color on that.

We really have three separate units in the Pacific.

We have the transpacific, which was growing at a quite rapid pace with the addition of several new markets.

That had a very, very strong quarter.

We have the Japanese markets, which are leisure-oriented Japanese point of sale.

That also had a very strong quarter.

And last but not least, we had our points that are west of Japan in our hub in Narita, which probably had the best year-over-year performance than any one of those sectors.

Of course, the yen is at 82 or 83, and that has also contributed in our heavy weighting in Japan to the positive momentum we have had in the Pacific.

Okay.

Perfect.

And also with regards to your guidance for the first quarter, I was wondering if that flat to up 2% in CASM growth, if that is inclusive of the $30 million you said that hit from the storm in January?

It is, yes.

Jamie Baker, JPMorgan.

A question for Richard or Ed.

You know, you mentioned watching fuel costs, but it looks to me like the annualized increase in jet fuel, I guess, just using mid-summer as a baseline, it is up about $2 billion a year.

So if this does not warrant some sort of a supply response, I'm not sure what does.

Could you outline for us what changes you have made in response to this increase?

I mean three fare increases and a fourth underway does not really seem to do it, unless my math is just really, really off.

I will start, and then Richard I'm sure will want to chime in and add his color as well.

Obviously the run-up in fuel has come here pretty quickly over the last 60 to 90 days.

There's a couple of different things that you look at.

If you look at what we are expecting for the first quarter of 2011, as Richard said, our margins are flat to the first quarter of 2010, and that is despite about a $350 million price increase.

So one way to look at it is that we have covered the run-up in costs and not eroded the margins that we have built in the business.

But obviously we need to keep pushing forward to do better than that.

Certainly in the last 60 to 90 days, while the industry has put forth a number of price increases, we certainly have not had a lot of time to start to see the effects of those price increases start to impact revenues, and the structured actions that we are talking about will be one that we monitor capacity pretty aggressively.

We announced this morning in Richard's remarks that we are going to be retiring another 100 aircraft of the small gauge variety over the next 18 months, and I think that is a pretty significant step forward to address some of the issues you are talking about.

So from our end, we are going to be watching it pretty aggressively.

We have been able to cover its impact in the first quarter on a year-over-year basis without eroding the margins in the business, and we hope the combination of the structured impacts, coupled with the price increases we are starting to see across the industry, should give us a better baseline to manage it from.

Okay.

And for my allotted follow-up -- and this is for Richard specifically -- I have always thought it was a bit of a softball question when analysts would ask management about their stock price.

But I mean stock -- that is my job -- you run the airline.

But if you look over the last year or so, your stock is down.

Everybody else -- and this includes American even -- is up, in some cases substantially.

Any insight on this topic, Richard, would be welcome.

Well, we obviously want to continue to move up our multiple.

If you look at our total market cap, our total market cap is still at, I believe, the highest in the industry.

So if you look at where we were at the time of the merger and where we are today, we had the run-up since the time we closed the merger, and today we still have the highest market cap in the industry.

You know, our multiple EV to EBITDAR is trading at about where Southwest is trading, and we think that there are several pieces, and most all the sell-side analysts have us as a buy.

One, we have labor stability, and the industry at some points has been characterized by labor instability, and we have, I think, very good labor stability.

Second, we are continuing to de-lever the balance sheet and take out risk.

And by doing that, it is very accretive to our shareholders because the non-op goes down.

And it also de-risks the business so that the long holder does not have to worry about the risk incumbent in our business model.

The third thing is to keep costs -- unit costs the last couple of years to stay flat, even though we have taken capacity out, and we are going to continue to do that.

And then fourth is trying to keep CapEx as close to $1 billion as we can so we can plow the cash back into retiring debt.

And we think the combination of all of those things, we continue to hit our numbers, we will continue to drive the stock price up.

So we are very focused on it, and obviously we all have a very significant vested interest in being certain with 15% of our Company owned by our employees and 15% profit sharing, we are very focused on moving the stock price up.

Okay.

I appreciate the answer, and just for the record, I have actually never personally bought an L, T or U fare.

I just wanted to get that out there.

Thanks a lot.

And we appreciate -- Jamie, just for that, you get one more question.

Okay.

I will ask one question.

Ask Ed a question.

Okay, Ed, it was not you but somebody in your organization was quoted on Delta today as targeting significant year-on-year earnings growth in 2011.

That language was not included in the release this morning.

Was that intentional or an oversight?

I realize the quote did not come from you, Ed.

We did not give full-year 2011 guidance.

Obviously Jim has mentioned we are wrestling down with fuel prices for this quarter.

So being able to keep our margins flat on a year-over-year basis for the quarter, we feel is a good first step, but there is more work to do.

And I would not -- certainly our expectation is that you will see 2011 as another year of earnings improvement on a year-over-year basis.

(multiple speakers) -- and I will stop there.

Glenn Engel, Merrill Lynch.

The question is on time performance over the last several quarters, you have been towards the bottom end.

Is that a sign that perhaps you have cut too far?

No, if you actually look at the relative performance of Delta over the past six to eight years, last year was actually one of the best years, actually better than the last time we won the on-time performance among the network carriers, which was 2007.

I think relatively the whole industry has been improving dramatically, and it has typically been because of additions in block time.

Block times have increased in the industry from historical -- historically the industry block did about somewhere in the mid-50s, and the numbers have been going as high as the 80s and sometimes into the 90s.

So we have increased our block times a bit this year and expect to get on parity with the industry with the block ads.

But I would say overall with the reduction in capacity by the industry, the additions in block time, you're really seeing the best absolute performance both for Delta and the industry that has been seen in several years.

And second, on the labor side, you mentioned that the union protests were holding up some of the votes.

Have you pushed through all the wage increases you had planned to, or has that been held up also by the protest?

The elections have not been held up.

The elections actually were held, and the results were that the unions lost.

On the other hand, with the IAM and AFA, they have filed election and appearance charges even in the elections where they lost 70% to 30% and 73% to 27%.

And we have not been able to align the pay, benefits and work rules for those groups so long as we have those pending.

And we urge the unions to withdraw so we can go forward and do that.

And how much will that cost on an annual basis?

Well, the amount is -- has been baked in to the financial plan each year going forward, so it will not be a material change from the guidance we have given.

Can you give what that cost is, though?

We have not given that specific level of detail out yet.

Hunter Keay, Stifel Nicolaus.

12 months ago on the earnings calls, you guys thought that -- you guys indicated that cargo and other revenue was going to increase by $500 million on a year-over-year basis, and it only increased about $240 million, which I think is a little surprising given the industry-wide strength that we have seen on the ancillary revenue line this year.

So I guess this is kind of a two-part question.

What was softer relative to what you thought?

Was it cargo or was it other?

And secondly, could you maybe identify where you fell short and how that can be improved this year if, in fact, there was something that was sub-optimized?

Your first part of your question did not come through.

Could you repeat that?

I did not hear this part of your question.

(multiple speakers)

Maybe it is a headset issue.

So 12 months ago -- can you hear me now?

Yes.

Okay.

You guys mentioned that cargo and other revenue was going to -- I think you said it was going to be up $500 million on a year-over-year basis, but it only increased about $240 million.

So what I was saying was that is a little surprising given the industry-wide shrink we have seen in the ancillary revenue this year across the industry.

So it is a two-part question.

What was softer -- was it cargo or was it other?

And secondly, have you identified what was softer -- what went wrong and maybe how it could be improved this year if there was something that was sub-optimized?

Well, if you look at the fourth quarter, our total other revenue was up, I think, $111 million, which on a run-rate basis would extrapolate to close to a $400 million to $500 million year-over-year improvement in terms of run-rate.

So I don't know exactly the $500 million number that you are referring to.

Certainly we took a hit on the cargo side as we shut the freighters down.

That was a significantly margin accretive move, and we have been able to replace most of that lift in bellies with our belly volume being up 18% on our yield up 5% or 6% on top.

So I don't think from a cargo standpoint there is anything that we are off plan.

In fact, we are running -- our internal numbers are running ahead of plan.

In the other areas of other revenue, we continue to perform well.

There was a little bit of softness in the year on our MRO business as our technical -- our maintenance requirements from our third-party customers had come down a little bit, but we had a nice improvement towards the back end of the year there.

So I don't see anything in the other revenue categories that would imply that we are off track.

Alright.

Thanks.

And as a second question is, at the Analyst Day, I asked you guys about the antitrust immunity situation that you have with Korean Air.

I kind of got that impression that there had been very little done with it in the 10 plus years you have actually had ATI.

And you dominate a lot of Asian routes now with your network, but at least some of the network stuff that I have seen has been more sort of transatlantic-focused recently.

Are there any kind of incremental opportunities that you might be able to monetize with the Korean Air antitrust situation in 2011 that could be incremental to years past?

Maybe it is a question for Glen Hauenstein.

We are working very closely with Korean.

After the merger with Northwest, it was unclear to the Koreans whether or not ATI was in place, so we had to wait until we had clarifications with that.

That clarification was finalized just a few months ago, and we have met with them several times.

And so we do think there is upside as we move forward to exploiting the ATI that we do have with Korean.

Dan McKenzie, Hudson Securities.

I'm not sure who to direct this question to, so I guess I will throw it out there as a jumpball.

First-quarter margin guidance suggests that the second and third quarters would need to be exceptionally strong for Delta to hit its targeted 10% to 12% margin for the year, which in turn seems difficult based on schedules dated through June 30.

I know it is early to be looking at second-quarter capacity, but the specific worry just looking at first quarter is that capacity being redeployed by Delta and the industry into the larger markets like New York, Los Angeles and even Atlanta may dampen pricing and revenues in the markets that matter most.

So my question is, what data points are you looking at that we cannot see that would justify some of the capacity increases we are seeing into these bigger markets?

I guess I'm wondering if you can provide some more demand data points with what you are seeing or whether you think the industry is ultimately going to need to cut capacity here.

Thanks.

This is Ed.

We will not get into any specifics about second or third quarters since we have not given any detailed guidance in those areas.

But the 10% to 12% margin that you're referring to, that is our long-term goal with respect to operating margins.

We did not say at the Investor Day that that was our goal for 2011, just to clarify that, but that is the goal that we have over time for the business.

With respect to schedules and what is out in the second and third quarter, our capacity will be close to flat on a full system-wide basis.

In fact, the area we have had the largest growth over the last six months is in transatlantic.

In fact, our summer schedules are going to be down on a year-over-year basis.

So I think we are being pretty responsible with respect to discipline and management capacity.

We will watch it with respect to the most recent fuel increases.

Those increases have come in a pretty short time over the last 60 to 90 days.

So we are actively looking at it now as to what any further detailed actions we ought to take.

But with respect to where we do have our capacity planned for the second and third quarters, obviously they are going into our strong core markets, and we have done very well in those business markets.

And specifically, as you referred to, the transcon has probably been the source of the greatest improvement we have had in the system on a year-over-year basis.

We are going to have time for one more question from the analysts.

Ray Neidl, Maxim Group.

This is more of a longer-term type of question.

You are going into I think aircraft order potentially in a few years, and that is needed because your current fleet of narrow bodies is becoming kind of ancient.

The workable high fuel cost environment becoming very uncertain.

Now moving in that direction, if you do go with new aircraft, whether it be Boeing or Airbus three years down the line and you are committed to 200, 300, 400 aircraft, what is going to happen, say, like in the year 2020 or 2022 when and if Boeing and Airbus come up with a completely new product?

You will have a new huge fleet of aircraft to a half-life where their values will decrease very rapidly.

Have you given any thought to that in your order, and will that be part of the contract if you do put through a big order?

We will certainly take those thoughts into consideration as we discuss it with the manufacturers.

So we understand the question, and it is premature to speculate as to what we might do.

Okay.

Great.

And the second thing is you are shooting for investment grade rating, which is hard to do with the rating agencies after the history of the industry for the past 20 years.

I was just doing some quick calculations here of your current debt to capitalization ratio.

And even if you reduce very strong cash flow and EBITDA and profits over the next few years, there is something on the other end that just will not balance out, your small equity base.

Would it be possible or do you think it is probable that you would do more than just try and reduce debt?

In other words, go to the equity markets and try and increase the equity portion of your debt to capitalization ratio?

Only through earnings.

Only through earnings?

Okay.

Great.

We are not anticipating any capital raise here.

And I am going to wrap up the analyst portion of the call now and turn it over to Ned Walker.

Thanks very much, Jill.

And Cindy, we are ready to go ahead with the Q&A with the media if you could go over the process, and once again, if you could limit yourself to one question and a quick follow-up, we should be able to accommodate most everyone.

(Operator Instructions).

Doug Cameron, Dow Jones.

A couple of cost issues to address as they rear their ugly heads.

You can choose who answers these.

Firstly, from the whole consumer rights -- the next package as it works its way through DOT, do you see the sort of second package on the domestic side creating a cost headwind as you expect it to turn out when the rule is finalized come April time?

No, not really.

I mean we think we have been interacting with DOT on aspects of the rule, along with the rest of the industry that we think may have some potential impact on the business.

And we think they are proceeding in a responsible way with this rulemaking, and we don't think whatever the outcome is as being material to the business.

Got you.

Okay.

And just a follow-up, and that is from looking forward into next year and the launch of the European emissions trading scheme.

Where are you to start the US airline industry at with regard to lobbying, informing, call it what you want with how you participate in that scheme?

Well, we are continuing to work with the industry generally on trying to find a responsible worldwide approach to emissions and emissions controls.

We don't think that the European approach for separating out Europe and treating it as a distinct area is good for the industry or good for the public.

And hopefully we think we are making progress in achieving a separate industry focus through Icao and international organizations that have a broader point of view.

Kelly Yamanouchi, Atlanta Journal-Constitution.

Hank mentioned that the capital spending plan includes plans to invest in customer service and operational improvements.

I was wondering if any of those are the types of things that would improve operations during future events like the Atlanta storm this month?

Definitely in the case of particularly and effectively and efficiently rebooking customers.

I think we are invested in that from a technology standpoint.

As well, we have made a lot of investments in the airports, whether that is investments in terms of additional staffing that we talked about last year and technology such as kiosks and handheld units for rebooking and communicating with our customers.

What are the future projects planned in those areas, and how much are you planning to invest in those?

It is a number of ongoing projects.

I don't think we probably have given very specific guidance at all in terms of the amount of capital we spend on them.

But it is a number that I already talked about, Kelly, in terms of the technology you are seeing at the airport to expand that even more and particularly in terms of from a systems standpoint.

As I said, a much more efficient and effective rebooking system.

Mary Jane Credeur, Bloomberg News.

When do you anticipate making a decision on that fleet order?

Three months, six months, next week?

It will be a while.

We are just commencing the process today, and I would guess it would take the better part of the year.

Okay.

And we have got the NEO.

We have got the CSeries.

In your early discussions with Boeing, are you asking for a fully redesigned 73, or should you end up buying from them, are you prepared to order from the existing lineup?

Well, we think that the technology, the geared turbo fan is a viable engine, which is the engine that Pratt & Whitney is building for -- which will have a 20% fuel reduction.

So we think that the Airbus, the new generation Airbus 8 narrowbody and the Bombardier geared turbo fan, are both really exciting opportunities.

When you think about where fuel prices are going, this industry needs more efficient airplanes, and a 20% fuel efficiency at $95 a barrel for fuel is a very important development.

So we are excited about the work that Bombardier and Airbus are doing.

And about Boeing?

Well, they are not -- they are staying with legacy equipment as I understand it.

So they will be in the running, but their numbers are going to have to match up against the efficiencies of the next-generation airplanes.

Have you specifically asked for a fully redesigned 73?

We just issued the RFP, and I have not gotten into the details of what the team is doing there with Boeing.

But the numbers will speak for themselves.

Josh Freed, Associated Press.

On the 100 aircraft that are coming out, are those over and above what you talked about before, or are those the ones we have already heard about, Comair and Mesaba and some of those?

Well, Josh, we have taken about 100 out over the last two years, and then there is a new 100 that we're talking about for this year and next year.

Some of the sources will be the same sources we talked about, the smaller gauge aircraft, the 50-seat regional jets, the Saabs and DC-9s.

Okay.

And it seems like there is a shift there with a greater proportion on mainline flying versus regional flying.

Is that the case?

Is there a certain proportion that you're aiming for and how much further do you have to go to get to it?

Well, I don't think that there is a specific number we have in mind.

I think with fuel at $95, the economics for the 50-seat regional jets in a lot of markets is changing, and we are changing the fleet to face the realities of the changing environment and demand on fuel.

So we have said publicly that we are about a gate strategy.

I think that this will be an evolving strategy as we look towards what the new fleet order is and how that integrates with the retirement of the regional fleet.

We have time for one more question.

Christopher Hinton, MarketWatch.

Could you just provide a little insight into some of the conversation around the Southwest takeover of AirTran and how that might impact your fare schedule and operations in Atlanta?

And then, as a quick follow-up, I just wanted to ask, how the 787 delay announcement today might impact Delta and where you left the conversation with them over reparations?

I can take the second one.

On the 787, we did an announcement I think two quarters ago, and we have pushed the 787 out, and we are in good stead with Boeing on that.

We have worked through all those issues, and we wish them luck to get the airplane flying as quickly as possible.

And on Southwest and AirTran, again, it is not appropriate for us to be speculating on future fare or price actions.

So when that occurs, we will be appropriately aggressive in the marketplace as we always are.

Are you expecting a large impact on your schedule and operations in Atlanta, though, as a result of this merger?

No, we are not.

Okay.

Thank you, gentlemen, thank you, Jill, and thank you, everyone, for taking the time to join us for our December quarter 2010 call.

We will be back in three months with the first-quarter 2011.

Thanks so much.

Again, that does conclude today's conference.

Thank you for your participation today.