達美航空 (DAL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines March 2011 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).

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

Thanks, Cynthia.

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

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

In the room for Q&A are Glen Hauenstein, our EVP of Network Revenue Management and Marketing; Paul Jacobson, our Treasurer; Ben Hirst, our General Counsel; Mike Campbell, our EVP of HR and Labor Relations; 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 and we will then conclude the call with a 10-minute Q&A with the media.

When we get to the Q&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 our SEC filings.

We will also discuss certain non-GAAP financial measures.

All results exclude special items unless otherwise noted.

And you can find the reconciliation of our non-GAAP measures on our Investor Relations website at delta.com.

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

Thank you, Jill, and good morning, everyone and thank you for joining us on the call today.

Today, we reported a $320 million loss for the March quarter.

That was $128 million worse than last year's result.

The strong revenue environment produced good top-line growth of 13%.

Our operating expenses grew 17% as a result of increased fuel prices and other cost pressures.

I would like to thank the Delta team for their dedication and determination through this difficult quarter.

Their unwavering determination is critical as we build a better airline for our shareowners, our employees and our customers.

We faced significant pressures on our business from rising fuel prices, the impact of events in Japan, and significant industry overcapacity in the trans-Atlantic marketplace.

We are addressing all of these pressures on our business with actions we will be discussing with you today.

First, on the revenue front, I have said before that Delta's long-term success depends upon our consistent ability to include the full cost of fuel in our ticket prices.

Delta's fuel price for the quarter increased 30% year-on-year and based on current market trends, we now expect our fuel expense for the year will increase by $3 billion.

High fuel prices are the new norm for the industry and at Delta, we must get ahead and stay ahead of the effects of high fuel prices on our business planning.

Through domestic fare actions and international fuel surcharges, our revenue growth offset about 70% of our cost run-up in the March quarter.

Overall, we had strong revenue performance in a seasonally weak quarter.

Our success did vary by entity with the best results in the domestic and Latin entities where we largely covered the cost of the fuel run-up.

We had excellent traction in the Pacific prior to the earthquake and tsunami in mid-March.

But in the Atlantic, we had little success as the industry capacity increase of 11% put significant pressure on yields.

In fact, of the $200 million erosion and year-on-year pretax earnings, $150 million of that amount was attributable to trans-Atlantic performance.

We will fix that in cooperation with our trans-Atlantic partners by a significant capacity reduction commencing post-Labor Day.

70% cost recapture isn't enough.

We must fully recapture our costs on every flight every day to maintain and improve our earnings performance.

Second, where we cannot get the necessary revenue increases to offset the increased cost of operating the flights, we will remove capacity, particularly in our post-Labor Day schedule.

We have announced that we are reducing capacity by 4 points from our original plan for the second half of 2011.

This will result in our post-Labor Day system capacity being down 4% year-on-year.

Trans-Atlantic capacity, as I said earlier, was the biggest challenge in the quarter and in conjunction with Air France, KLM and Alitalia, Delta will be reducing our post-Labor Day capacity by 8% to 10% versus prior year.

Domestically, we are rescheduling our Memphis hub, which will result in a 25% reduction in departures.

We will also be making fleet changes as we retire 120 more of our small gauge domestic aircraft over the next 18 months.

And in the Pacific, while we see demand stabilizing in Japan, we are keeping a close eye on trends and are adjusting our capacity appropriately.

We have pulled our April and May capacity in the Pacific down about 15% and we will continue to make changes as necessary.

I would note that, prior to the earthquake, overall, the Pacific entity has been performing quite well.

I want to emphasize that we have flexibility with our business and we are assuming fuel costs remain high.

So we are committed to getting out in front of the cost pressures and removing additional capacity from underperforming markets.

If we assume fuel costs will remain high, we will be pleasantly surprised if fuel prices drop and we have our capacity well in hand.

Third, we are focused on being disciplined with costs and capital, particularly cash.

Our cost gross this quarter was higher than normal and while a portion of that pressure came from the weather impact and considerable maintenance volumes, we will keep our costs in line, a key competitive advantage.

For this reason, we are parking an incremental 20 mainline aircraft from our fleet this year, including a number of international widebodies, bringing our total reduction to 140 aircraft over the next 18 months.

These activities will be critical to keep our cost base stable as we implement the capacity reductions in the back half of the year.

As capacity is removed, we must pull the fully allocated costs associated with that capacity.

On the capital side, because of the flexibility we have for minimal fleet commitments, we have reduced our capital spend this year by $300 million from planned levels to $1.2 billion.

This should be the steady-state run rate for the business over the next five years.

Cost and capital discipline are important as we march toward $10 billion in net debt.

We reduced our adjusted net debt to $14.5 billion at the end of the quarter and despite the pressures on our business, we expect to make solid progress on this target for the full year.

The most accretive step we can take for our owners is to reduce our debt and hence the risk in our business.

With low debt and the best employee relations in the industry, Delta provides a solid investment and safe investment opportunity in this industry.

In summary, we understand our commitment to our shareholders and we know what we need to do to face the current fuel challenge.

We need to cover all of our input costs with higher revenues and where we cannot do this, we are adjusting our capacity in costs with a target of keeping our unit costs flat by the end of the year.

We must continue to delever the balance sheet and derisk the business.

The business is generating $800 million of operating cash flow in the first quarter and solid free cash flow of $500 million this quarter and we should generate another $800 million in free cash flow for the June quarter.

We will remain disciplined with costs and capital commitments.

We are focused on delivering the required return on invested capital and believe we have the right plan in place to do so.

For the 12 months ended March 31, our return on invested capital was 9.5%.

As we look forward, we expect to be profitable in the second quarter and as we look out on the year, it is clear that we have made good progress at Delta and that the industry overall has made good progress.

Think about it.

Analysts expect the US industry to be profitable, generally profitable, in 2011 with jet fuel at $135 per barrel.

That is very remarkable progress.

But we still have a lot of work ahead of us at Delta to make our business consistently profitable regardless of fuel prices.

With that, I will turn the call over to Ed and Hank and we will take you through the details of the quarter and then do our best to answer your questions.

Thank you for your attention.

Thanks, Richard.

Good morning, everyone.

Thanks for taking the time to join us this morning.

Excluding $2 million of special items for the March quarter, we reported a net loss of $320 million, or a loss of $0.38 per share.

This compares favorably to consensus, which was a $0.50 loss per share.

On a GAAP basis, our net loss was $318 million.

Special items for the quarter were mark-to-market gains for fuel hedges that settle in future periods of $29 million, which were offset by $27 million in charges for the extinguishment of debt from our deleveraging initiatives, as well as the retirement of DC9s.

Our March quarter operating margin was a negative 1.5%, an improvement to the guidance we had provided as revenue gained some additional momentum in the closing days of the quarter.

Our EBITDAR was $340 million for the quarter and our free cash flow was $452 million.

As Richard said, we had our share of challenges this quarter due to weather and the tragic events in Japan.

Our inclement weather hampered operations this winter with a negative passenger revenue impact of $90 million, as well as the events in Japan negatively impacting revenue for the quarter by an incremental $35 million.

I would like to take the opportunity to thank the Delta employees for their dedication to keeping our operation running as smoothly as possible each and every day.

Their hard work during the inclement weather events and in the days following the Japan events was truly exemplary of the Delta spirit.

Turning to revenue, our revenue for the March quarter was up 13% versus the prior year on a 5 point increase in capacity.

Consolidated passenger unit revenues increased 7 points driven by a 12 point improvement in yields.

We have been aggressively adjusting our fares to account for the increase in fuel costs.

Of the 17 successful fare actions this year, Delta has led 7 of them.

Our pricing and revenue actions to date have mitigated roughly 70% of the higher costs we have experienced this quarter.

Our domestic, Pacific and Latin entities all saw double-digit yield improvements with our Pacific and Latin businesses approaching 20%.

Prior to the March '11 events in Japan, those three regions were on track to largely cover the higher cost of fuel and other costs in the quarter.

Our trans-Atlantic performance was disappointing with unit revenues down 1 point driven by a 6 point decline in load factor.

The poor performance is largely driven by overcapacity as industry trans-Atlantic capacity increased 11 points versus the prior year.

As Richard said, the majority of the reduction that we saw in our year-over-year profitability was $150 million in higher losses this quarter in the trans-Atlantic.

While spring and summer bookings and yields look much better, with the unit revenues up 10% to 12%, this still is a highly seasonal market and we recognize that we have work to do to right-size the trans-Atlantic business, particularly in the off-peak season in conjunction with our joint venture partners.

And as such, we are targeting an 8% to 10% capacity reduction in the trans-Atlantic post-Labor Day.

Should fuel increase further from current levels, you should expect us to do more.

Corporate revenue was strong and up 27% for the quarter, in line with both 2007 and 2008 levels.

Both domestic and international are showing increased volumes and yields.

We continue to see rebounds in demand throughout our corporate base, but notably in the automotive and the financial sectors.

Our cargo business is doing very well with revenue increasing 42% in the quarter to $250 million driven by 20% higher yield and an 18% increase in volume.

Hats off to our cargo team for the wonderful job they did for us this quarter.

Our net revenue grew $56 million, or 6%, primarily due to higher SkyMiles revenue, as well as revenues from other ancillary products and services.

In terms of our outlook, we are seeing solid bookings and yields for the second quarter as we move towards the peak summer season and we anticipate our April unit revenues to be up 7% from the prior year.

Our May and June revenues should be up several points more from those levels.

We are keeping a close eye on demand for any sign of weakness from the significant changes in pricing that we have seen over the last 90 days.

The domestic market continues to perform well and yield remains strong in the June quarter.

We anticipate double-digit unit revenue improvement for domestic through the summer.

Our Latin summer outlook is positive and we continue to see solid yield improvement for the region.

Summer advanced bookings are coming in particularly strong for our South American markets.

Trans-Atlantic load factors for the second quarter are coming in more in line with historical averages and we are seeing improved industry pricing for the peak summer season.

We attribute this improvement to seasonality, as well as the leveling out of capacity growth in favorable euro exchange rates.

The Pacific entity, which has been significantly impacted, as you know, by events in Japan, is stabilizing and we are beginning to see Japan point-of-sale begin to rebound, particularly business demand.

For April through July, our Japan point-of-sale demand for trans-Pacific flights is down 20% from pre-event levels.

However, US point-of-sale is still down roughly 50%.

Our beach demand hit its low point in March and has begun to show improvement.

Our Japan point-of-sale for resort markets is down 20 points; although we anticipate improvement as we start to move into peak season.

Last month, we indicated the net impact of events in Japan would be a $250 million to $400 million net impact.

And from the trends we are seeing, we anticipate that impact is coming in at the lower end of that range.

For the second quarter, we expect our Japanese revenues to be down $150 million from previous expectations, offset by roughly $75 million in cost savings for a net $75 million impact for the second quarter.

As we look forward, we are also working to improve our merchandising and ancillary revenues by offering expanded products and services on board and on the ground.

Our focus is on the development of new products that improve the overall travel experience for our customers.

We estimate the revenue opportunity from these programs will be a $1 billion run rate by 2013.

We are already seeing good results from our expanded seat-related offerings and expect an additional revenue bump starting in June when our international premium economy product called Economy Comfort launches.

Overall, we expect the 2011 revenue benefit from enhanced ancillary revenues will be roughly $150 million to $200 million.

On capacity for the June quarter, we expect our system capacity to be up 2% to 4%.

Domestic capacity will be flat to down 2% and our international capacity will be up 7% to 9%.

We are forecasting a profitable June quarter with a 7% to 9% operating margin.

As we have previously announced, we will be implementing significant capacity changes this fall taking effect post-Labor Day.

This 4 point reduction from our planned flying for the back half of the year is heavily weighted to the fourth quarter.

Our post-Labor Day system capacity is expected to be down 4% year-over-year and our post-Labor Day trans-Atlantic will be down 8% to 10% from prior year.

I will reiterate what Richard said.

To the extent we cannot offset the price of fuel through our revenue stream, we will be proactive in removing capacity from underperforming markets.

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

Thanks, Ed and good morning, everyone.

Turning to cost performance for the March quarter, operating expenses for the quarter increased $1.1 billion or 17% on a 5% increase in capacity.

The cost increase was largely due to the $610 million impact of higher fuel price, as well as maintenance volumes, employee wage increases and higher capacity and revenue-related expenses.

Excluding fuel, consolidated unit costs increased 2.8%.

The impact of weather and events in Japan accounted for roughly 50%, or 1.4 points of the year-over-year nonfuel unit cost increase.

Operating expense decreased $27 million, or 9% during the quarter, driven by the benefits of our delevering strategy.

I would note that our interest expense for the quarter includes $47 million of noncash debt discount amortization as a result of the purchase accounting treatment from the merger.

And our income tax benefit for the quarter included $71 million of AMT credit.

Looking ahead to the June quarter cost performance, we expect consolidated non-fuel unit costs for the June quarter to be up 2% to 4% from prior year.

Similar to March quarter, the increase in unit cost is driven by higher revenue-related costs, maintenance volumes and a one-time $28 million TSA credit recorded in last year's June quarter.

We are committed to maintaining our unit cost advantage to our network peers.

To do that, as we reduce the size of the airline this fall, we will also make an equal or greater reduction in our costs.

With regard to fuel and hedging, in the March quarter we hedged 41% of our fuel consumption.

Our consolidated all-in fuel price was $2.89 per gallon.

Net of all costs, our hedging programs saved us $78 million this quarter.

For the June quarter, we have hedged 49% of our anticipated fuel consumption and we forecast an all-in fuel price of $3.26 per gallon.

During the quarter, we repositioned our fuel hedge portfolio to change the majority of our existing WTI crude oil positions to Brent crude or heating oil collars.

We believe this strategy will be more effective in reducing fuel price volatility.

In terms of earnings performance for the June quarter, as Ed mentioned, we expect to be profitable with an operating margin of 7% to 9% despite nearly $1 billion of higher fuel price pressure.

Our ability to generate profits in a high fuel environment illustrates the strength in our business, the benefits of the merger and industry consolidation.

Shifting to liquidity, we closed the March quarter with $5.5 billion in unrestricted liquidity, which included $1.6 billion in undrawn revolving credit facilities.

Operating cash flow was $788 million reflecting strong advanced ticket sales for summer travel.

Delta had $340 million in capital expenditures for the quarter, including $274 million for aircraft parts and modifications and $66 million for ground property, technology and equipment.

March quarter free cash flow was $452 million.

Cash used for financing was $233 million for the quarter, reflecting the payment of $460 million in maturities, net of $237 million in proceeds primarily from aircraft refinancing.

As of March 31, Delta's adjusted net debt was $14.5 billion, a $500 million reduction from the start of this year.

In the last 15 months, we have achieved $2.5 billion of our $7 billion net debt reduction target.

Reaching our debt reduction target will produce interest savings of $500 million per year.

And we have been active in the capital markets.

So far this year, we have completed the refinancing of $500 million of $750 million EETC bullet maturity that is due later this year.

Normal amortization accounts for all other remaining 2011 maturities.

Just last week, we closed the refinancing of Delta's exit facility with a new $2.6 billion credit facility.

This transaction has an effective rate of 3.67% for five years.

As part of that transaction, we have secured a new $1.2 billion revolving credit facility, increasing our revolving credit lines to $1.8 billion, which are all currently undrawn.

The commitment on the revolver from 11 leading financial institutions, as well as the interest from the term loan lenders, demonstrates the confidence that the capital markets have in Delta.

With the exit facility now refinanced, our 2012 maturities have been reduced to $1.9 billion.

Looking ahead to June quarter liquidity, we are forecasting an unrestricted liquidity balance of $5.8 billion at the end of the June quarter.

Capital spending is estimated to be $300 million as we continue our targeted investments in product and technology.

Scheduled debt maturities for June quarter are $450 million.

And we expect to generate $800 million in free cash flow during June quarter.

Despite the pressures from fuel in Japan, we expect to be free cash flow positive for the full year and we will continue to make significant progress on our $7 billion net debt reduction goal.

In closing, I would like to give my thanks to the Delta team for their hard work this quarter.

While we are not pleased with reporting a loss for the quarter, we are addressing the challenge of the current fuel environment.

We are producing solid top-line revenue growth and having success in passing through fuel costs.

We are making targeted investments in our fleet, product and technology, which are beginning to produce additional revenue.

We are exercising discipline with our cost, capacity and capital.

And we are continuing to strengthen our balance sheet through our strong free cash flow generation, strategic capital market transactions and solid progress on our debt reduction initiatives.

Richard, Ed and Hank, thank you.

Cindy, we are now ready for questions from the analysts, so if you could give the instructions.

(Operator Instructions).

Michael Linenberg, Deutsche Bank.

Hey, good morning, everyone.

I guess two questions.

Richard, in your open comments, you talked about the significant overcapacity in the trans-Atlantic and you would think now that the major carriers have sort of restructured around three JVs with the antitrust immunity that the industry should be able to kind of work through some of those issues on capacity.

That said, your structure is a little bit different than the others.

I believe you sort of break it down to the EBIT level.

I think the others sort of allocate and their JVs are structured at the top-line level.

Should that -- does that help you or are there maybe unintended consequences of the fact that you go deeper through the P&L and therefore make some of the cost reduction or capacity reduction initiatives a little bit more difficult with your partners?

I mean what is going on there?

Well, the alliance we have with Air France, KLM an Alitalia is a bottom-line alliance and so the benefit of that is you have both the capacity costs and revenue altogether so that you are really managing to a single P&L.

And as that alliance evolves, our goal is to really run it as a single airline from the standpoint of capacity planning and network planning.

And so it will be a continual evolution, I believe, Michael, but, in the end, organization of the trans-Atlantic marketplace is the correct organization.

And I think it will just continue -- and I know at Delta it continues to evolve in the partnership we have with AFKL where we really run it like a single airline from the standpoint of capacity, pricing and yield management.

Okay good, thanks.

Does that answer your question?

Yes, kind of.

I understand what you're saying.

You are saying that if you basically have Air France, KLM, Delta and Alitalia all in one alliance, how do you get the capacity right, correct?

That's right.

And I realize what is important to you from a cost perspective, or a focus -- a cost item that you can get out as you shrink your business may be a lot more difficult for some of your competitors -- excuse me -- some of your partners to get out given that they have different cost structures, different social costs that they have to deal with and so they may be somewhat hesitant about pulling down capacity as quickly as maybe you are or you are willing.

Mike, hi, it's Glen.

This is an evolution that we are going through with our joint venture partners.

And I would say that this planning season for the winter, we have worked very, very closely with them and I think we have gotten everybody to participate and we are very excited about the joint venture plan for the winter.

And that has been an evolution from where we started, which was planning as individual carriers to now planning jointly.

And it has been a transition over the last few years, but I think this year we have really successfully brought all the players together to understand the problems and to address them.

Okay, good.

That does help.

And just my second question, this is to Hank.

I think some time ago you gave us a view for net interest expense in 2011 and I think the number was coming in around $1 billion.

There has been a flurry of activity on the refinancing front.

It looks like your net debt position came in a little bit better than I think where we thought it was going to be at the end of the March quarter.

It seems like you are getting more attractive rates.

Does that move the needle that much on that $1 billion right now?

No, not really.

It is still in the $1 billion range.

The difference in rates on the refinancing, there is a little play there.

But you are right, we have paid down a little more than we expected to on the adjusted net debt figure.

So I'd keep the same number as you had before.

Okay, very good.

Thanks.

Jamie Baker, JPMorgan.

Good morning, Delta.

A question for Richard.

One of the things you and I discussed at your Investor Day, I guess that was in December, was the application of domestic fuel surcharges, some of the impediments that you face in terms of fare construction and advertising and what have you.

You indicated you are currently recouping about 70% of fuel's impact.

I am wondering if you are considering anything more, I don't know, unique in terms of cost recovery and/or fare construction from here?

Well, as I said in my comments, the weakness we had in recapture was principally across the trans-Atlantic, although obviously the earthquake had an effect in the latter part of March.

So overall, the domestic system, our performance has been pretty strong and given where the Department of Transportation is on its most recent rulemaking, I don't think that we are going to see any change in the regulatory environment around fuel surcharges.

Yes, actually that's a good point.

And a second question, you revised the capacity plan, some of the changes in fuel more recently.

Has that had any impact on your narrowbody RFP, either in terms of potential units and/or the urgency of making any decision there?

That decision is really just a replacement decision in the long run because when you look -- and you can see it in this quarter's results -- there is a cost involved in operating the current fleet and you can see it in the maintenance, repair and overhaul line.

And so really it just comes down to a couple of variables.

One, we are going to hold our CapEx over the next five years to the $1.3 billion number because then that generates the free cash flow we need to delever the balance sheet.

So that is the first really important piece of what our plan is.

And then the second piece is any aircraft that we take into the fleet have got to have an internal rate -- have got to hit a pretty high double-digit internal rate of return versus the alternative.

And so I think that the fleet RFP is really just about having a conservative number of opportunities to replace aircraft that have to retire from the fleet.

But it has got to be on an IRR basis and fit within the $1.3 billion CapEx ceiling that we have given ourselves over the next five years.

Got it.

Okay, Richard, thank you very much.

I appreciate it.

Glenn Engel, Bank of America-Merrill Lynch.

Good morning.

A couple questions.

One, the NMB, where are we in terms of ruling whether the union protest will hold or not and have you been able to give your people raises or is that still being held up by the unions?

Hi, Glenn.

This is Mike Campbell.

Everything is pending now before the National Mediation Board, so all the filings have been made and we are waiting to hear from them as to whether there is going to be further investigation or whether there will be -- whatever action they will take.

In the meantime, the laboratory conditions continue and that means that no pay adjustments are being made with either group, except those that were already previously committed to.

Second, the cargo performance was pretty spectacular I thought.

Usually it drops in the fourth quarter to first quarter.

Can we expect that type of sales growth to continue on the cargo line?

And on the maintenance end, when do we expect to see that to start to come down again?

Glenn, this is Ed.

You are right, the cargo performance was spectacular in the quarter and we are expecting our cargo revenues this year to exceed the $1 billion mark and that is all just belly business as you know.

In the old Northwest system, we had the dedicated freighters and those are out, completely out of the system.

So I think a little bit of the benefit was the completely -- this is the first clean quarter on a year-over-year basis where we didn't have any freighters in the prior year comp period.

But we are making great progress with our cargo team and our cargo customers and we expect that that momentum to continue.

Maintenance should start to tail down.

As Richard indicated, the cost of operating the fleet we have had, there has been some deferrals over the last -- not just this quarter, the prior quarter as well -- and you have seen our maintenance costs get a little bit ahead of where we would like it to be.

You'll start to see it tail down over the balance of the year.

We are hoping next year it will start to bend the curve down a bit to bring our maintenance costs a little bit lower.

What do you think a steady-state number is down the road?

It is lower than where we are at today.

I would hesitate to give you a number.

Okay, thank you very much.

Gary Chase, Barclays Capital.

Good morning, everybody.

I wanted to just ask a couple of things on the trans-Atlantic situation.

First, can you just tell us where you expect the all-in JV capacity to be?

Is it going to be down as much as what you're talking about Delta being down?

Gary, we can't speak for our partners yet.

We are still working that.

It will be down.

We can tell you what we are going to do and it will be up to them to make their own announcements.

Okay.

Then could you maybe elaborate a little bit on what is changing?

I mean the revenue dynamic that you have described I would -- at least the way we interpret it -- is a pretty sharp contrast between Q1 and Q2.

I would acknowledge that, at least as we read your filings, you are downshifting somewhat significantly in terms of trans-Atlantic capacity even in Q2.

But I wouldn't make that characterization about the broader market, at least not on the same scale.

So it feels like there is a big change in the demand environment.

Can you elaborate a little bit on that and whether or not you expect that to sustain itself beyond the peak?

Hey, Gary, it's Glen.

First, the trans-Atlantic has always been a seasonal game.

And I remember Freddie Laker with his famous speech about any idiot can make money in the trans-Atlantic during the summer; it is the winter months that count.

And that goes back to 30 or 35 years ago.

And still what is true then still remains the same today is that the trans-Atlantic is quite a seasonal market and the game is to not give back the profits you make in the summer in the winter.

This past year, due to our increased capacity and due to the industry's increased capacity, we didn't do a very good job of that and our commitment to our shareholders is to do a better job of that moving forward.

And so we are looking for a relatively good summer in the trans-Atlantic because of the high demand, but then as we pull out of the high demand season post-Labor Day, we are going to make, with our partners, those necessary adjustments so that we do not return all of the profits we make over the next several months in the winter months.

Okay, and then I thought I heard Richard, I thought I heard you say you were thinking that your cost outcomes would be flat by year-end.

I mean did I hear that right and if so, what is going to be the driver of that?

You did hear that right and we mentioned this quarter, we did have some catch-up costs that we have had on the maintenance side.

We've had some incremental costs as we have now gotten all of our employees, the bulk of our employees at industry-standard wages.

We do not see the same level of escalation in future quarters because we are already at those run rates and we will be able to now start to pay down through productivity to bring our costs back in line with really where they need to be, which is flat on a year-over-year basis.

So from a run rate perspective, you should expect us to see us get down I think next year another couple points from where we are running this year.

And flattish by year-end despite all the capacity headwinds.

A flattish trend by year-end, that is right.

And it is going to require us to resize the business a bit.

Okay, guys.

Thanks very much.

Helane Becker, Dahlman Rose.

Thanks very much, operator.

Hi, guys.

Can I just ask one other clarification question on the 8% to 10% decline in Atlantic in the second half of the year?

Is that capacity that starts going down in September and goes through December, A?

And B, can you just say -- I think you said, Richard, in your remarks that industry capacity in the first quarter was up 11% in the Atlantic and then you didn't say how much your capacity was up in the Atlantic in the first quarter.

So is the 8% to 10%, how does that compare to the industry and to where you were in the first quarter?

Helane, it's Glen.

We were up more than the industry.

I believe the number was 17%, 16% versus the industry of 11%.

And back to one of the questions that was poised at the beginning of the conference relative to the JV partners and the planning process, I think that this has been a learning process for us as we go through the first two years of our joint venture and we, in hindsight, think that that was excess capacity from the industry and from us.

So we are going to do our part.

Of course, we can't speak for the industry, but we think that we are going to peg as a joint venture the winter capacity offering in the trans-Atlantic at a much better -- to a much better position than we had this past winter.

Okay, great.

And then can I just ask a domestic bookings question?

I think from your comments you are basically saying that you are seeing domestic being up significantly in the second quarter and for forward bookings.

Can you just talk about book to load factor maybe by entity for the second quarter?

Thank you.

Helane, it is Glen again.

Book load factor in the second quarter were down slightly in the trans-Atlantic.

We are intentionally down slightly in the Latin entity because we are taking a yield strategy there.

The Pacific is down a couple of points related to Japan and domestic is relatively flat.

But of those, I would say that the Latin is a very intentional drivedown on our part and Atlantic is also a little bit of a drivedown on our part because we are taking yield strategy for the summer and we think we will sell those seats as we move forward into the peak.

I think the big question is on Pacific and how fast Japan comes back.

Okay.

Thank you very much.

Bill Greene, Morgan Stanley.

Hello?

Cindy, let's move to the next caller.

Bill Greene, Morgan Stanley.

Hello?

Can you hear me okay?

We can hear you, Bill.

Okay, great.

So Ed, I just had a question for you on some of the comments that you made in your prepared remarks and those are related to the double-digit growth rates I think you said through the summer.

Does that mean sort of through August?

And secondarily, how much of that is FX and how much of that is more sort of pure price moves?

Yes, we are seeing -- we are expecting double-digit yield improvements in many of our markets through the summer.

FX certainly is helping us particularly in the trans-Atlantic where the euro has moved in the last -- just in the last couple months alone about 10 points against the dollar.

I don't have the specific numbers in terms of broken out how much of that is FX.

We can get that to you.

Okay.

But we are looking at, I would say broadly speaking, a double-digit yield improvement throughout the summer in almost all of our entities.

And when you look at kind of the comments about the 70% pass-through, is some of that also timing?

In other words, are you seeing an improvement in your ability to pass it through in the summer or is it sort of not clear yet and that is why you will address capacity if necessary?

Well, it is a series of things.

First of all, our capacity in the summer is going to be down from where we have been over the last six months.

So we are looking at flat to down capacity trends in most of our markets for the summer months.

That is going to certainly help us on the pricing front.

As you are pricing into a stronger travel period, you obviously have a greater ability to get your costs covered as well.

So I would say those are the two factors we are seeing in our forward bookings.

All right.

And then just one quick follow-up on ancillaries.

Are you able to see the same kind of pricing power in ancillaries as you are in your overall fare environment or is it just a different market altogether?

I think it is a different market altogether and it is something we are just starting to -- we have done the easy things, which are bag fees.

Merchandising and actually upselling the product is going to be driven by technology and our ability to execute across the system and we are just starting to scratch the surface.

So more to come in that area.

But not raising?

Literally pricing?

Yes, raising revenues through pricing and other unbundling activities.

Okay, I guess I was talking about increasing the fee number, actually, like you would raise the fare.

No, we are not planning to increase the fee numbers, nor would we comment on this call about fees anyway.

Okay, thanks for the time.

Kevin Crissey, UBS.

Good morning, everyone.

Thanks.

Can you talk about why it is that May and June are meaningfully stronger?

Is it the capacity solely?

Because April should have had some Easter impact, and I don't think it -- it seems like this is a trend across the industry that April is modest.

And in May, June, there seems to be more optimism, and I am just not sure I understand why with the volcano and with Easter and so forth.

So if you could comment on that.

You're right, Kevin.

Easter, I think across the industry, we were a little bit surprised.

We thought we would see a little bit better of an Easter bump.

I think the lateness of the holiday threw us all off a little bit, and I think the volcano in the prior-year comps also made the baseline a little hard to read.

But when we look forward to May and June, you are moving into a higher travel period, and certainly that is allowing us to get some greater price stability.

We are also -- capacity is a big part of that.

And as you have taken supply out through the summer, you're going to see us firm up pricing.

And as we get into the fall, hopefully our ability to do that will be even more enhanced.

Okay, thanks.

Can you talk about the Farelogix and the GDS antitrust cases?

I know they are currently not your cases, but I assume as it relates to the ancillary and in general?

This is Richard.

We are very focused on both controlling our product, controlling our data and controlling the relationship with our customers.

And our Economy Comfort product will be sold through our website, so our upgrade for international Economy Comfort will be sold through delta.com.

And the second point I would make is we have increased the market share with our distribution strategy of delta.com by about 400 basis points this year, and have been booking at delta.com at all-time record levels pushing nearly 39%, most of which has come from the online travel agencies.

So we are continuing to pursue a strategy where we control the quality, quantity, and consumer relationship in our distribution.

And Farelogix fits into that as another means to access travel agencies of the same general process; is that the idea?

Correct.

I mean Farelogix is another avenue.

There are a number of distribution avenues in this industry.

So we have the distribution through travel agencies, distribution through online agencies, distribution through our reservations, distribution through Farelogix for those entities that want to hook directly to Delta.

We still have some consolidator business in places overseas, particularly in Japan.

So we are really looking at making certain that we are maximizing the revenue from each of the distribution channels, and Farelogix is another opportunity to do so.

Thank you.

Hunter Keay, Wolfe Trahan.

Thanks, good morning.

Can you guys hear me?

Yes.

Thanks, sorry.

I am wondering why -- I don't know if we should comment on future pricing action for ancillaries.

I know that is a touchy subject understandably, but why is it so hard to charge for other bag fees?

You said it was easy before, and you say you are not going to do it again.

I mean something like 40% of the bags you guys transport I think have fees attached to it.

What is held up?

I mean look at Spirit Airlines.

They charge customers for absolutely everything and they still fill their planes and they are one of the most profitable airlines in the world.

Just wondering why this is so hard.

I wasn't commenting on bag fees.

I was distinguishing between bag fees and our ability to actually sell products that our customers are actually asking to buy.

Oh, I thought you said bag fees were easy and in terms of the ancillary revenue gain, that was sort of an easy one.

Bag fees were one of the first steps in the ancillary game and then as you bring technology to the table, you can actually get a little more sophisticated in how you merchandise and upsell your product.

Okay.

So then I guess the question is, is it a regulatory concern?

Are you concerned about alienating customers?

I mean what makes it so hard to pursue a concept because, Richard, I mean you even said the name of this game is obviously covering your costs with your revenues obviously and who says that has to be all base fares?

I think there just seems to be a lot of low-hanging food out there that other airlines are capitalizing on and that customers are largely already used to.

We can't be discussing future fare actions that you are asking us to comment on.

No, of course, of course.

I am just wondering what has taken -- why it hasn't happened yet, not so much why you are not going to do it in the future, but is it a -- are you concerned about alienating your high-value customers?

Is it a DOT thing?

What has been the main holdup, if you can answer it that way maybe?

I would rather not go there.

All right.

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

Dan McKenzie, Rodman & Renshaw/Hudson Securities.

Hey, good morning, everybody.

Thanks for squeezing me in here.

It is evident that you all are working really hard to run the airline like a real business, but one of your biggest competitors has concluded that despite losing hundreds of millions this year, it nonetheless makes sense to grow domestic capacity 21% at New York and 8% at Los Angeles, all in the hopes of winning back some corporate travel business.

So I get Delta's capacity cuts.

I get Delta's PRASM outlook, but how are you thinking about your share of corporate business later this year?

And I guess are you worried or is this -- is it the power of the network that gives you comfort?

How should we think about perhaps competitive actions that may not make sense from an industry perspective?

Well, I think you are seeing the benefits of the merger really coming home to roost.

It has taken us a couple years to get our product and our technology and our network fully seamless and lined up.

And we are having some great progress in many of those key business markets, particularly in New York, as you mentioned.

And that gives us the ability to put the product out there that we feel that our customers are seeking.

We are not looking to expand offerings though our capacity in New York is up despite our overall domestic capacity being down.

And we do see -- we are having some great success in those key business markets.

That was one of the promises of the merger and we are certainly seeing it come through on the revenue front.

Dan, this is Richard.

We are not going to focus on chasing market share.

We are focused on operating margin because operating margin ultimately is what our shareholders want us to produce.

And so trying to take market share with very poor operating margin and negative cash flow doesn't work for Delta.

So we are going to just stay focused on keeping our capital commitments in check, generating free cash flow, putting that cash flow back on the balance sheet and keeping our capacity in line with what will produce an operating margin.

Great.

I would just add an exclamation point to that, Richard.

Thanks.

This isn't a hobby.

The second question here, regarding the 140 aircraft coming out over the next 18 months, you mentioned that you are also removing the fully allocated cost associated with the capacity reductions.

I guess I am wondering what kind of actions you will need to take with respect to labor costs to bring those down.

Does that suggest that there would perhaps be a lower headcount at the end of the year or how are you thinking about managing that part of the cost equation?

No, we are not signaling that there is going to be lower headcount, certainly not in any of our frontline areas.

It is really just Delta I think across the business.

And as we have grown over the last couple of years, I think our costs have gotten a little bit in front of us and we need to tighten it back up.

Okay, thanks, guys.

I appreciate it.

Cindy, that is going to conclude the analyst portion of the call and so I will turn it over to Ned Walker.

Thanks very much, Jill.

And Cynthia, if you could once again go over the process for asking questions, that would be appreciated and also for members of the press, if you could have one question and a brief follow-up, that should allow us to accommodate most everyone.

Cynthia?

Thank you.

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

We are now moving to the questions from our media audience.

(Operator Instructions).

Josh Freed, Associated Press.

Good morning.

Could you say a little more about which planes you are looking to park later this year, the timing and whether they will be more focused on Atlantic or Pacific?

We have already commented on the bulk of those, which are the smaller gauge regional jets.

We are retiring the DC9s.

We are retiring the Saab fleet.

We are going to be sitting -- parking some of our international widebodies.

We haven't made final decisions which aircraft yet.

We are working through that.

Yes, that was what I was focused on I guess was the 20 incremental.

Those, we are still in the process of finalizing, but we haven't decided the number.

Now, we are trying to determine which aircraft and which market would be best to sit.

Okay.

And there was some talk about the idea that markets that don't pull their weight from a revenue standpoint, that that is where the capacity cuts will be focused.

Can you say a little more about that?

Are you thinking more in terms of very, very small markets that are way out at the end of spokes or are you thinking about frequencies in larger markets?

Really it is principally in the long-haul trans-Atlantic market.

If you look at how we have managed our capacity and the revenue performance in the Latin entity and in the domestic entity, we have actually done a good job managing those entities from a network perspective.

And I would say that Pacific -- we have done a good job managing the Pacific.

We, of course, had the unforeseen natural disasters there, earthquake and a tsunami that have affected it.

But if you look at the 12 to 14 months prior to the tsunami, some of our very best performance in a decade occurred across our Pacific network.

So the underlying fundamentals with the yen in the low 80s in the Pacific are good.

We have just got to get past the recovery of the tsunami and the earthquake.

So when you look across the network, the real place where the focus needs to be is in the trans-Atlantic marketplace.

And we have got to do that with our partners at KLM, Air France and Alitalia.

All right.

Thank you very much.

Timothy Martin, Wall Street Journal.

Hi, good morning.

You guys mentioned several times that you are monitoring very closely how ticket prices are sticking with consumers.

Can't hear you.

All right, can you hear me better now?

Yes.

My apologies.

You mentioned several times that you are closely monitoring how ticket prices are sticking with consumers.

How much more wiggle room do you think there is for fares to go up, for fares to push through industry-wide?

We just don't comment on future fare actions.

Okay.

Thank you.

And you also mentioned that you're going to be monitoring fuel prices very closely and depending on if they keep rising, it could force your hand to make a move with capacity.

Can you just provide a little specifics or what exactly will you be looking at and is there a certain tipping point that might force some action?

Tim, this is Ed.

We are continuing to monitor where our costs are.

As you see fuel rise and continues to rise over the course of the next few months, you can expect ticket prices to increase.

I think that is a fairly basic fundamental.

Where and what regions is really dependent on what supply conditions in each market are.

That was a capacity question, not a ticket fare question.

Repeat your question then.

I didn't understand it.

Yes, my apologies.

You guys said you guys might make a move with capacity if fuel prices keep going up.

I am just wondering if you can give any guidance on what might make -- what might trigger that reaction?

Relative to supply considerations or capacity?

Yes, what factors would you guys be looking at if you guys do make a move on capacity going forward?

Well, we are looking at our ability to cover our costs.

In any area where we can't cover our costs, we obviously have too much supply in the market.

Okay, thank you.

Mary Jane Credeur, Bloomberg News.

Hi, gentlemen.

What is the status of the slot swap discussions at LaGuardia and DCA?

And can you give us a sense of -- we have heard over the last couple months everybody expected it to happen soon and it seems to be one step forward, two steps back.

Is that still very much in play?

This is Ben Hirst.

The transaction we think continues to make good strategic and commercial sense for both US Airways and Delta.

It is complicated because there are two government agencies, both of whom have asserted an interest in it.

And we are continuing to work with all the parties to see if there is a transaction that makes sense.

As I say, I think it does make sense strategically and we think it makes good sense competitively from a public standpoint because, during the two years that this transaction has been pending, United and Continental have merged, American and British Airways have strengthened their position in New York by getting antitrust immunity for their alliance.

It appears that the AirTran Southwest merger will be approved shortly and the competitive situation in Washington National has improved from the perspective of an increasing share of low-cost carriers operating there.

So the world has evolved and we think this is a sound competitive response for us and we are continuing toward it.

And you have got tentative approval or you do have approval sitting there on the table, granted with more divestitures than either party wanted to make.

Has there been a decline in value to US Airways with some Japan liberalization and more capacity in Sao Paulo and Rio?

Well, I think you could probably ask them that question in a couple of hours at their earnings call.

That is really not for us to say.

But obviously, when it takes as long as it has for a regulatory agency to process an application like this, when you have two agencies both seeking to exercise jurisdiction over the competitive effects, time marches on and the competitive balance and the commercial balance changes a bit and that is frankly one of the complexities that have been reintroduced and introduced into the transaction that we are trying to address.

Okay, Cynthia.

We have time for two more questions.

Kelly Yamanouchi, The Atlanta Journal-Constitution.

Hi there.

On the Southwest AirTran merger getting close to closing, I was wondering if you could explain your thinking in the current environment about what effects it may have on your Atlanta market in terms of competition or pricing power and the potential impact on the business versus leisure travel segments?

Kelly, this is Ed.

It hasn't changed.

We compete with Southwest all throughout the country and we welcome the opportunity to compete with them here.

Okay, thank you.

Final question, Cynthia.

Christopher Hinton, MarketWatch.

Good morning.

I want to ask about the house reauthorization bill for the FAA that was passed earlier this month and it was the equipage fund suggestion.

I don't know how familiar you are with it, but it seems to suggest that there is some hesitancy on the part of the airlines of getting too committed in terms of capital to next gen.

I want to ask why that might be.

Why is it that this fund might be needed by the airlines to raise the money to start purchasing the avionics equipment needed for this project?

Well, first, the industry, through the Air Transport Association, is supportive of the NextGen project.

Number two, we believe that there is significant latent capacity with the existing equipage.

Many carriers -- Delta, Southwest, American, United -- we have all made significant investments in equipage on our existing fleets today that we are not using.

And so we believe that there is a very significant uptake if we were just to use required navigation procedures and RNAV procedures at airports around the country and utilize the existing latent capacity in the air traffic control system.

And the controller's handbook needs to be amended to utilize the existing airspace that we have before we make additional investments.

When we do make those additional investments, which we support, we want to be certain that it results in block time savings and fuel savings and is not just a big sales program by the avionics sales people.

So we have got to see a demonstrable improvement in the air traffic control system before we can make that kind of investment.

And if we do make that kind of investment, it should be funded as part of the NextGen process and it ought to have specific paybacks in terms of reduction in block time and fuel burn.

Okay.

It sounds like you're also saying that just because you could purchase more avionics equipment, the reason -- I guess the reason to have that onboard won't necessarily be switched on.

Well, the point is simple.

Look, we support, as an industry, NextGen, but our experience so far has been with very significant investments in our fleets.

I mean Delta today is putting investment in its fleet to utilize GPS technology.

But we aren't using the capabilities that we have today across the system.

And so we want to leverage the technology we have today before we add more technology and more cost.

Okay, thanks very much, Richard.

With that, we will conclude the March quarter 2011 analyst and media call.

We will be back in July with the June quarter.

Thanks so much, everyone.

Thank you.

Again, that does conclude today's conference.

You are free to disconnect at this time.