達美航空 (DAL) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines June 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).

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

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

Please go ahead, ma'am.

Thanks, Cindy.

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

Joining us from Atlanta today are Richard Anderson, Delta's CEO; Ed Bastian, our President; Hank Halter, our CFO; Glen Hauenstein, our EVP of Network & Revenue Management; Steve Gorman, our Chief Operating Officer; Mike Campbell, our EVP of HR & Labor Relations; Paul Jacobson, our Treasurer; and Ben Hirst, our General Counsel.

Richard, Ed and Hank will open the call with remarks on the quarter's performance and we will then move to the Q&A session.

To get in as many questions as possible during the Q&A, please limit yourself to two questions.

Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events.

All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements.

Some of the factors that may cause such differences are described in Delta's SEC filings.

We will discuss non-GAAP financial measures today.

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

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

Thank you.

We reported a $366 million profit for the June quarter with $1 billion higher fuel expense and a 7% operating margin.

The strength of our strategic plan and the dedication of our employees are evident in this performance, in that we produced solid profit in the face of a steep challenge from high fuel prices.

We appreciate the hard work of our people.

We had solid revenue performance for the quarter, growing the top line by 12% and generating a revenue premium to the industry.

We believe the high fuel environment is here to stay and the permanency of that condition must be a reality for Delta.

While revenue gains offset 70% of our total cost increase, we must increase revenues, make further capacity reductions, and non-fuel cost reductions continue to be very disciplined about capital spending, and continue our march toward $10 billion in net debt.

First, our primary means of recovering fuel increases should be through higher revenues.

Our prices have to -- at Delta, have to reflect the cost of goods sold.

We've built good revenue momentum from our revenue initiatives, corporate contract gains and revenues from new products and services.

Second, we've got to reduce capacity in markets where revenue has not kept pace with rising fuel costs.

There are some markets, including a number of small markets we serve, that simply are not profitable at these fuel prices.

That capacity will exit permanently.

Previously, our December quarter capacity plan has been a 4-point reduction.

Given the economic uncertainty, we believe it prudent to reduce capacity further as a hedge against the economy and higher fuel prices.

Therefore, our fourth quarter capacity will be down 4% to 5% versus last year and down 20% versus the summer schedule.

In the trans-Atlantic, we saw the weakest revenue performance last winter.

Delta and our JV partners, who represent a third of the capacity across the Atlantic, established our winter capacity levels as a single entity, leading to a combined 7% to 9% reduction in the December quarter.

Third, we are committed to bringing our non-fuel CASM down to 2010 levels by the end of the year.

With our fall capacity reduction, we will resize the airline's new flying levels and reduce the size of our fleet, staff and facilities.

We will retire 140 of our least efficient aircraft by the end of 2012 with half leaving the fleet this year.

2,000 employees elected to participate in voluntary exit programs.

Those exits will begin when we began pulling down flying in September and be completed by the end of the year.

We are consolidating facilities in Atlanta, Minneapolis, Cincinnati, and Memphis that will reduce our facilities footprint by 1.2 million square feet.

Finally, we will hit our $7 billion debt reduction target to get to $10 billion in net debt.

We generated $700 million of free cash flow this quarter and reduced our adjusted net debt to $13.8 billion.

In 18 months, we have used our cash flow to reduce our net debt by over $3 billion and making modest but prudent investments in our fleet, product, facilities and technology.

We will hold our capital spending to $1.2 billion for this year, including all airplane acquisitions, and we'll hold to that number for the foreseeable future.

Our goal is to consistently generate a 10% return on invested capital.

We have the right foundation in place, generating an 8.5% return on invested capital for the last 12 months with more than $2 billion of fuel increases during that time.

We are pleased with the actions.

We know we have a lot more to do, and we are determined to fix the business for our owners.

With that, I will turn it over to Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us on the call this morning.

Excluding $168 million of special items, we reported a net income of $366 million for this quarter, or $0.43 per share.

This is largely in line with First Call consensus of $0.44 per share.

Our operating margin of 6.9% was down 4.5 points from last year.

EBITDAR was $1.1 billion for the June quarter.

And over the last 12 months, we have generated $4 billion in EBITDAR.

We had $1 billion of operating cash flow and $700 million in free cash flow this quarter.

Delta's June quarter top-line revenue increased $985 million or 12% on a year-over-year basis.

Our passenger revenues grew 13% on a 2.5 point increase in capacity.

Cargo revenues increased 25%, driven by higher yield and higher volumes.

Our other revenue grew $50 million due to increased MRO in-sourcing revenues.

And for the quarter, our passenger unit revenue increased 10%.

I would like to offer my thanks to the entire commercial and operating teams for the strong performance they delivered this quarter.

Our revenue results led the industry and we look forward to building on this momentum over the balance of the year.

We had strong domestic revenue performance as unit revenue domestically increased 12% due to a solid pricing environment, as well as corporate revenue share gains.

In the trans-Atlantic, our unit revenues were up in the high single digits during this entity's seasonally strong period.

Our capacity adjustments have started to kick in as our trans-Atlantic capacity by June was flat on a year-over-year basis, which will certainly help our second-half unit revenues.

Our Latin unit revenue increased 14% due to strong yields and load factors in South America and the Caribbean, while Pacific unit revenues increased 6% during the quarter, even with an approximately $125 million negative hit from the impact of the events in Japan.

Demand is recovering in the Pacific, particularly in the Asian beach markets and on Narita overflights.

Our Japanese point-of-sale traffic has recovered at a much faster pace than our US point-of-sale flights for Japan, and for this reason, we sought and received a temporary waiver for one of our two Haneda flights.

We estimate that the impact in the September quarter from the Japanese events will be a revenue hit of approximately $80 million.

Our corporate revenue continues to gain strength for both domestic and international travel with total corporate revenues up 24% year over year for the first half of 2011.

And as we have previously discussed, we are targeting $1 billion of incremental revenue by 2013.

To facilitate these new revenue streams, we are investing in Delta.com and our new e-commerce capabilities to bring new products and services to the marketplace.

This will include our new international Economy Comfort product, which was launched in June and has been met with great success.

We anticipate that these new products will generate $150 million to $200 million of new revenue streams in 2011 and a full $1 billion in new revenues by 2013.

Now with regard to the September quarter, we expect to be solidly profitable with a 7% to 9% operating margin despite having -- incurring over $1 billion in higher fuel expense.

Our summer bookings and yields remain solid, and we anticipate our July unit revenues to be up 8% to 9% over the prior year.

As we move into the second half of 2011, we continue to see high single digit growth in unit revenues.

And while we currently see no significant signs of demand weakness, our September capacity reduction should temper any slowdown in momentum.

For the September quarter, our system capacity will be flat with our domestic capacity down 1% to 3% and our international capacity up 2% to 4%.

Within international, our trans-Atlantic capacity will be down 3% to 5%, offset by growth in the Pacific from our new Haneda service and Asian overflights.

For the December quarter, we are reducing capacity by 4% to 5% with domestic down 1% to 3% and international down 4% to 6%.

As part of that reduction, we are reducing our trans-Atlantic capacity by 10% to 12%, which is down over 30% from summer flying levels.

We believe that the revenue momentum we have in the business, coupled with the capacity changes we are making in underperforming markets, and our actions to get our non-fuel costs back to 2010 levels, will generate the margins we need to hit our return targets in this high fuel environment.

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

Okay, thanks, Ed, and good morning, everyone.

Turning to cost performance for the June quarter, operating expenses for the quarter increased $1.3 billion or 18% on a 2.5% increase in capacity.

Fuel cost per gallon was up 39%, contributing to $1 billion in higher fuel expense.

Excluding fuel, consolidated unit costs were up 4.8% due to maintenance volumes and higher revenue-related expenses.

And non-operating expense decreased $111 million or 29% versus prior year due in part to our de-levering strategy.

Looking to the September quarter cost performance, we anticipate September quarter non-fuel unit costs to be up 2% to 4% from prior year.

As Richard mentioned, we have begun a series of initiatives designed to bring our nonfuel unit costs flat by the end of this year.

To accomplish this, we will take out all the costs associated with our capacity reduction and implement a series of initiatives to reduce cost further.

As part of these initiatives, we are expecting significant maintenance savings from our aircraft retirements.

Retiring these maintenance-intensive aircraft will generate $250 million in maintenance savings for the second half of 2011 as compared to the first six months of this year.

In addition, we are consolidating facilities as well as reducing our headcount by more than 2,000 through voluntary programs.

We're also lowering selling and distribution costs by shifting to a more efficient distribution system, including a 4-point increase in delta.com's share of bookings.

We currently sell 37% of all tickets through delta.com, making it our largest distribution channel and significantly larger than all online travel agencies combined.

With our merger integration completed, we will further reduce discretionary and overhead costs to ensure that we are running the most cost-efficient company that we can.

These initiatives, which target both fixed and variable costs, will bring down our non-fuel unit costs to 2010 levels by the end of this year.

Delta has a long history of having the lowest unit cost of all legacy carriers, and we intend to maintain that advantage.

In addition to reducing our operating expenses, we're also prudently managing our capital spending.

Our capital spending will be $250 million in the September quarter and $1.2 billion for the full year.

With regard to fuel and hedging, our consolidated all-in fuel price was $3.22 per gallon for the June quarter, up $0.90 from prior year.

During the June quarter, we hedged 54% of our fuel consumption, which resulted in $118 million of net gains for the quarter.

For the remainder of the year, we have hedged 49% of our consumption.

As of Friday's forward curve, these positions are worth $225 million net of premiums.

We are anticipating that our all-in fuel price will be $3.20 per gallon for the September quarter and $3.31 per gallon for the December quarter.

And with regard to our debt reduction program, as of June 30, our adjusted net debt was $13.8 billion, a $700 million reduction from the end of the March quarter.

We have now completed $3.2 billion of our stated $7 billion debt reduction goal while making important investments in our fleet, product, and facilities.

I would like to thank the Delta team for their great work this quarter.

Throughout the entire operation, our employees pulled together to run a safe, clean, and on-time operation while generating double-digit unit revenue improvements.

And I am confident that we will continue to build on our successes in the quarters to come.

Thank you, Richard, Ed, and Hank.

We are now ready for questions from the analysts.

So Cynthia, if you could please review the process for asking a question, and again, we ask everyone limit themselves to two questions during the Q&A.

(Operator Instructions).

Jamie Baker, JPMorgan.

Good morning, everybody.

Hey, Richard, unfortunately, the two airlines (technical difficulty) with the airline that has ordered planes and the airline, yours, that is about to order planes.

Obviously, there are other factors at play here.

(technical difficulty) about that, but I am curious if this level of value destruction has impacted your thinking about how you are going to allocate capital for new airplanes and whether there might be a plan B vis-a-vis the narrowbody RFP that is currently outstanding.

Jamie, we obviously have a pretty conservative view given our focus on our net debt reductions.

So whatever efforts we make in that regard have got to take into account our de-levering initiatives and the proper use of our free cash flow.

So, when we think about those airplanes, one, its replacement capacity.

Number two, it's the intersection of where the cash flows are more positive.

We saw pressure in this quarter from maintenance expenses, and we have a significant opportunity to take airplanes that are almost 30 years old that have very significant cash requirements to maintain.

And so what you have to do is, it's almost a shell-by-shell analysis of can you improve the P&L and the cash flow by taking a new airplane.

Our bias is much more toward owning airplanes, not leasing airplanes because I think the only way you ultimately get a payback on an airplane is to own it for 30 years.

It's a long-lived asset, and you don't want to have the residual value belong to somebody else.

So, our view is a very conservative view of that, and we're not going to destroy value by doing that.

We actually think that if we are modest in the number of airplanes, that in fact, we can improve our P&L with it.

And if we can't improve our P&L with it, we're not going to do it.

Okay, perfect.

And just a clarification, Hank, on the RASM and the margin guidance, I presume this excludes any one-time benefits associated with the FAA situation?

That's correct.

And also, I missed your comment on the 2010 ex-fuel CASM, or getting to a level commensurate with 2010 ex-fuel CASM, what was the timing that you indicated?

That's a full year 2012 or a year end 2012?

We will end 2011 with our CASM flat to 2010 levels, so that would be at the end of 2011.

Our goal, Jamie, is to bring our 2012 non-fuel CASM into line with 2010 levels.

Okay, got it.

Thanks for the clarification.

I appreciate it.

Bye.

Jamie, did I answer your question on the fleet?

Yes, you did.

The risk is that you are swapping variable fuel exposure with fixed ownership costs or fixed lease costs, so your point on ownership is well taken.

Yes, I thought it was a good answer.

Well see -- but let me give you -- let me be crystal clear about it because I think this is important for our shareholders.

We are not buying shiny objects here.

We are -- our goal here is to improve the P&L with a modest order of airplanes because if you look at the [MM&R] line, 30- to 35-year-old airplanes have higher maintenance costs.

If you can take down the maintenance costs and have more efficient operations, you improve CASM.

And if you stay within our march to get to $10 billion in net debt, you will actually improve the P&L of the airline if you integrate the airplanes the right way and take out much higher-cost airplanes.

And it really is conditioned upon owning the airplane and not leasing the airplane.

Okay.

I definitely appreciate the follow-up, Richard.

Good luck.

Dan McKenzie, Rodman & Renshaw.

Good morning.

Thanks, guys.

My only first question is really a housecleaning question here relating to the debt extinguishment.

What were the upfront costs and what portion was recognized in the current quarter?

And then related to that, what are the total transactional savings you expect over a two- and five-year period?

Dan, I don't have the numbers right in front of me.

We can get back to you with the details.

It was not a significant amount of debt extinguishment in this current quarter.

On a run rate basis, we are anticipating that we are going to be -- we have already generated close to $200 million of go-forward P&L savings on our early debt extinguishment program, but we can get you the details on the specific quarter.

Okay.

And then related to the incremental cut in capacity, how is that being accomplished?

Is that day of the weeks that is getting cut?

And I guess what I'm really getting at is whether investors should assume that these capacity cuts in the fourth quarter annualize into 2012, or if they should assume that the capacity cuts are temporary.

Well, obviously, there's some of both, right, because we are continuing to seasonalize our schedule.

Our fourth-quarter flying levels are going to be down 20% in total from where they were during the summer, so there's going to be a little bit more of that.

But I would say more than that, they are going to be permanent in nature and it's adjusting to this higher fuel level.

And as we look to the end of the year, we anticipate fuel levels are probably going to rise from today's levels.

Okay, thanks.

Appreciate that.

Gary Chase, Barclays Capital.

Good morning, everybody.

Wondering if you could just give us a little bit more precision on how revenue played through this quarter, the RASM month by month, just as a cleanup so we understand sort of how the sequential trends are progressing into that July number you gave.

During the second quarter, you're talking, Gary?

Right, right.

I think you had started with May up 6% -- or April up 6% and you said May -- in mid-May you said plus 12%, but what were the actuals?

May came in a little stronger than that.

It came in closer to 14%, and June is in the range that we are seeing for July, in the 9% to 10% range.

More importantly, I wanted to kind of follow up a little bit on the cost guidance and sort of how you are thinking about it.

If I am getting this right, what led to some of the cost creep to begin with was you were dissatisfied with the level of operating performance that you had achieved last summer.

As you think about sort of taking the cost structure down, and I know you want to make that permanent, what kind of safeguards do you have in place, or how should we feel confident that we are not going to go a little too deep again and that that 2012 goal isn't a little too aggressive for the kind of operation you want to run?

It's a fair question, Gary, and certainly it's the balance that we need to maintain.

We are running a wonderful operation and our summer stats, certainly for the month of June, led any of our network peers.

I think there was levels of investment that have been made over the last year to finish out the integration of the two airlines.

And now that we have a full year of operating performance under our belt and we know what it takes to run and get back to running a great operation, I think we can go through and surgically pull out some of the buffer and some of the costs that got built in.

I will tell you a good chunk of the savings we anticipate are in the maintenance area.

And that was much more of a catch-up nature in terms of volumes and some return to service costs than anything that's going to affect our go-forward maintenance reliability program.

So we're confident we can get there.

Okay.

Thanks, guys.

Glenn Engel, Bank of America Merrill Lynch.

Starting on maintenance, so you averaged $45 million in the first quarter -- in the first two quarters; you're implying about $360 million a quarter in the third and fourth?

What's normal?

The run rates you will see in the second half of the year, Glenn, are going to be down about $250 million I believe from the first half of the year.

And while, again, there's a seasonality to maintenance because we do a little bit more in the shoulder periods, that run rate -- you should expect to see that run rate of about $250 million of savings continue into 2012.

So the second half is what you would consider a more normal rate?

Well there's a I wouldn't say a full $250 million repeated again in the first half of the year, but certainly our maintenance costs will come down in that level.

So if you look at the second half of 2011, you should see that balance to the second half of 2012.

And certainly we would expect some reductions in the first half of 2012 as well.

Glenn, this is Richard.

Just a little more color on that.

One, we are taking a number of older airplanes and retiring the airplanes, so the DC9s are going to be retired, and we have some 75s that are going to be retired.

So those costs on higher-maintenance airplanes are going to be out permanently.

And then second, we still have some integration costs that we are absorbing.

Obviously at the end of 2010, we stopped any separate callout on integration costs, but we still have a fair amount of integration work going on that's flowing through the P&L that we will be done in 1Q 2012.

Second question is on other revenue.

You I guess implied that since it was MRO activity driving it, that the ancillary revenues weren't growing much at all.

So if I'm looking at in the third quarter, should I assume very little growth in the other revenue line?

In the second quarter, our cargo revenues are up strongly, as you can see.

We did have a reduction in baggage fees; our baggage fee revenues were down $30 million in the quarter.

Some of that is our new American Express program.

Some of that is waivers on our elites, and some of it is just volume.

However, other ancillary revenues are offsetting a large part of that, so net-net in the second quarter, I would say our ancillaries were close to flat, though we anticipate starting to grow that stream again as we get into the new e-commerce and merchandising activities that we have been talking about.

Finally, can you go over corporate share and how corporate travel revenues are doing?

Corporate travel revenues are doing well.

We're up 24% first half of the year over last half.

Our share goals continue to improve.

Thank you very much.

Kevin Crissey, UBS.

So you said July, 8% to 9% RASM in July and then kind of running in the high-single digits for the remainder.

Is that what I heard?

That's what you heard.

Well, did I do the math wrong on your guidance, because it looked more like a 5% to 8% to get to your operating margin; or was there something going on in other line items that I might have done wrong, burning an unusual amount of fuel or something else that was going on?

If I kind of take the midpoint, I get more of a 5% to 8%.

And maybe I did the calculation wrong because I did it quickly this morning, but --

Kevin, obviously fuel prices have increased since we last gave guidance.

We took a snapshot based on current markets.

Our revenues are going to be in the high single digits for the September quarter, so I'm not sure what's in your model, but that's leading to it.

Okay, thanks.

And on the move towards more delta.com distribution, and I applaud that.

Covering both OTAs and the airlines, it's good to see from the airline side at least.

But what has caused it -- the shift?

Is it the Kayak issues or strategy?

And then what will lead to so much more in the future?

It doesn't necessarily feel like it's a natural thing to have more share shift go to you.

Well, I think, Kevin, it has to do with the value that is created by those travel sites, so we've taken a number of steps in our strategy.

One, very significant investments in delta.com to make it much more functional, much more easy to use, and we have seen about a 400 basis point improvement in our share.

Second, we -- our view on OTAs is fairly straightforward.

We've terminated 21 small OTA's.

And our strategy really is to control our content, both with respect to combine-ability and scheduled display criteria, so that we make certain that our schedules are accurately displayed and that there is no combine-ability.

We have signed a Farelogix agreement, and we have removed OTA links from meta-search sites.

So meta-search sites can only be linked to Delta.com.

So when a meta-search completes, it has to come to Delta.com, or we won't maintain a relationship.

And ultimately, if our fare rules are followed and our display and content rules are followed by OTAs, then the only question is their fees have got to be similar to what it would cost us to distribute directly on delta.com.

So it's a pretty straightforward strategy.

I just don't think it's a practical matter.

While the OTAs are a good partner and we want to work with them, it's important that you add value in that chain.

And I just -- there's -- that OTA distribution has turned into more of a commodity than a value add for consumers, and I think that's where our Delta.com strategy gives us an advantage.

Okay.

Thank you very much.

Bill Greene, Morgan Stanley.

Hey, Richard, I was thinking about the industry's return profile, and as we think about it, some would argue you can't really do much unless you fix the industry structure.

And you guys are doing a lot at the Delta side to try to fix the company's returns, but how much patience do you have to sort of see if these actions play out before we have to return to the theme of consolidation?

Bill, you always ask that question.

Yes.

I keep thinking I might get a different answer.

Well, you've gotten a pretty straightforward answer at our Investor Day last December, you will recall.

First, the slot swap transaction that we've gotten tentative approval of with USAir is a really important step in making the industry -- or making Delta more viable.

And, I said at investors -- at our Investor Day last December, I recall saying that the industry is probably three-quarters of the way there in terms of having a profile that will give a return on capital.

The biggest pressure is fuel prices.

Our fuel prices, when you look at where crack spreads are these days for WTI, we are -- the fuel prices are very high, and that's going to continue to put pressure on Delta.

And we are determined to continue to have free cash flow to put on our balance sheet.

So we are determined that we are going to figure out and continue to make progress in figuring out how to have a return for our shareholders.

Okay.

Can I ask just one question on the capacity cuts?

You can ask whatever questions you want, Bill.

Is it safe to say that we should be thinking about capacity impacting RASM kind of on a one-for-one basis?

Or do you see sort of trends in the data that suggests no, it's not going to quite offset that much when we get to the fall?

I'm not quite sure how to think about that.

We haven't heard from Glen on this call.

Thanks, Richard.

I think what we're looking for in the fall, and again, just to give you a little bit more clarity on the revenue side, is, we have about two-thirds of August booked.

And August actually looks a little bit better for us going into the month than July did, realizing that we have about a third of the revenue to go.

And then in September when our first capacity cuts start to hit, we do see a bump in the forward yields and the forward booking curves.

So I think it's a slightly better than a one-for-one trade that we are getting, and we'll see as we get to September.

Of course, it's very early to call September.

We have two thirds of our bookings still to go.

But the early indications are that it's doing what we had anticipated and hoped for it to do.

Very helpful.

Just one question on -- any change in AirTran behavior since Southwest took over?

That is it.

Thanks.

We would never comment on that, Bill.

That was a nice try, though.

Yes, well, good try.

Okay.

Thanks.

Michael Linenberg, Deutsche Bank.

Good morning, everyone.

Richard, this is a question for you.

In the past, you have been on this path to reduce debt, and in the past, you have talked about that being probably one of the most attractive uses of cash.

When you look at the stock and today you are down almost 9%, at what point does it make sense to at least consider maybe repurchasing stock and where the calculus makes sense?

And I recognize you have several times indicated that you do aspire to have investment-grade, and so I do recognize that the repo of stock would maybe be incongruous with that.

But it's got to be at some point just looking at it where it becomes an attractive use of some excess cash.

What are your thoughts on that?

Well, we are still focused on the debt reduction because the debt reduction is important for our non-op expense.

And we still have -- we had to write in -- I think our merger write-up on debt was $1.8 billion.

So we are still carrying a non-op; some of it is non-cash, but it's very accretive to our shareholders to continue to pay that down.

Obviously, we want our stock price to go up, and we think that's the best lever to get it up.

But given where our debt ratio are, the capital priority needs to be to de-lever the balance sheet.

Okay.

And then my second question, and I guess this is another one for Glen, we have had -- there's been a lot of changes in the forward schedule for the industry.

Anything notable in your markets, competitive capacity changes, that you could comment on?

Well, clearly, I think that our results for at least the industry show that we're in a relatively good competitive position.

And so when you look at the fall capacity cuts, not only ours, but those of other carriers, I think that we are quite pleased as to where we sit.

I don't really want to go into specific geographies, but all across our network, I think we feel very good about our offering and the competitive offering that surround us.

Okay.

Very good.

Thank you.

Helane Becker, Dahlman Rose.

Thank you very much, operator.

Hi, everybody.

Richard, I really applaud this whole decision to pull capacity down especially in the fourth quarter.

And I think what you managed to do with the joint venture on the North Atlantic is even more impressive, but you can't do this alone.

Your peer group seems to be still focused on either maintaining capacity or maintaining -- or growing capacity.

How do you handle market share, or I don't know, profitability in an environment where some of your competitors keep putting more capacity in roots that have historically been strong Delta roots?

I may have Glen speak specifically to your latter point, but we are just really focused on free cash flow.

And while I can't speak and won't speak to what anybody else does, we know what our flight profitability system shows at these fuel prices.

And if you assume that these fuel prices are here to stay, we have made a decision within Delta that those kinds of market shares at cash loss levels are not good for our shareholders.

So, we're very focused on being certain that the flying we do is -- creates positive cash flow.

It's that simple.

And I can't -- I won't -- we're going to act unilaterally at Delta to do what we need to do to make sure we are successful.

This is Glen.

Just to add a little commentary is, I think one of the issues that we have in the industry is that the winter schedules have not been completely loaded yet.

So if you look out into the November/December time period, our complete schedule is not loaded.

It won't be loaded over the next several weeks here.

And we're hopeful -- and we know that Air France and KLM's has not been loaded yet for that period either, so we will see where the capacity for the exact winter winds up, but when you say in markets that are historically Delta, we don't see a lot of competitive incursions into what we would consider to be our core strengths markets in Europe.

So if you have specifics, we could probably deal with that off-line.

Okay, great.

Thank you so much for your answers.

I appreciate it.

Hunter Keay, Wolfe Trahan.

Good morning, everybody.

Richard, this is one for you.

I guess I ask you this not just as CEO of Delta, but as President of ATA, I understand -- I want to talk about the European -- the EU emissions trading scheme for a second.

I understand the industry's philosophical push-back on this.

You never want to have undue taxes imposed on you, but I'm having trouble conceptualizing the imposition of this ETS as something that's not going to help this industry significantly.

If you assume for a second that these airlines are -- this gets back to everybody's question, really -- Helane's too, some of the international flags that you are competing against are adding capacity irrationally.

If they benchmark capacity to say 85% of some predetermined metric, how is that not an absolute slam-dunk positive for this industry, if you consider the trans-Atlantic PRASM has been suffering only because of excess capacity in the first half of this year?

Well, set aside those capacity issues, just as a basic point, even the US government is on the side of the US industry to stop the ETS trading scheme.

One, it's a patchwork, and our position at the Air Transport Association -- and we have a position paper on this, is that you, because this a global business, you can't have a patchwork of emission regulation around the world, because the airplanes flow all around over different continents in a 24 to 48-hour period.

So you need a consistent approach.

And number two, that's just an additional cost.

And we are trying to -- as we said earlier in our call, we're working really hard to manage our costs.

And when you add those kinds of fees, particularly given that this industry probably has the best track curve for fuel efficiency of -- we match ourselves against any industry.

If you look over the past 30 years, this industry has done a phenomenal job.

We probably have almost 100% improvement in fuel efficiency in the last 30 years.

We're taking the equivalent of 18 million cars off the road.

So bottom line is don't add unnecessary costs on the environmental side that create an incomplete patchwork of regulation around the world for an industry that has, by far, the very best environmental track record.

Okay.

Thank you for that.

And I guess maybe one for Hank.

As I'm looking at my model here, we strip out -- you guys strip out the in-sourcing expense, the cost associated with third-party MRO, which I understand, but it jumped up pretty significantly here in the second quarter.

I think it was something like $230 million, and that's well above the run rate for prior quarters.

And if you actually assume maybe $170-ish million in the quarter, which is what it was roughly for the last four quarters, your CASM ex, actually jumped something closer to 6%.

So how should I think about modeling that out in the back half of the year, particularly if you're trying to model to this CASM ex fuel number flat to 2010 levels.

How is that going to trend?

Well, the MRO expense, as well as the expenses of similar businesses, is backed out of our CASM calculations; when we show a consolidated non-fuel CASM, that is excluded.

And that excluded in both years.

While we were up 4.8% in the June quarter, the initiatives are kicking in.

And as we go forward, you will see the non-fuel CASM up in the 2% to 4% range for the third quarter.

And then as we said, we will be flat by the end of 2011.

So, this is an unusual year because we have so many initiatives kicking in that causes the change, but overall, you should be modeling the reductions and, again, making sure that your model is free of those year-over-year variances due to the MRO in similar businesses.

Okay.

Thank you, Hank.

Ray Neidl, Maxim Group.

Yes, just the overview with your long-term commitment to bring down debt, it looks like your liquidity cash position now is a little bit light compared to other airlines -- compared to 12-month revenues, and I'm just wondering -- is your -- being that we're heading into cloudy economic environment here, would it be wise to maybe get your cash position up?

And if you did that, would that slow down your commitment to taking down debt and possibly CapEx as well, maybe the JFK terminal project?

Ray, this is Ed.

We have, unlike many of our peers, we have $1.8 billion of revolver capacity, all of which is undrawn that's available to us when we need it.

So we feel from a cash efficiency perspective and asset utilization perspective, that's the best hedge we could have against some of those downturns.

You don't have to carry such a large cash balance on hand when you have access to it at a very, very small incremental cost.

So we feel very comfortable with our cash levels going into the next year.

Okay, good.

That's good to hear.

And just one little item I saw this morning, Senator Rockefeller was warning the airlines not to put the FAA tax savings into the bank.

He wants them.

Do you have any comment on that?

Ben?

Well, really, the tax is a tax on passengers, and what the industry has done is simply to maintain prices at market-clearing levels.

We're not quite sure what Senator Rockefeller is expecting the industry to do.

And we're not planning to do anything in response to it.

Okay, great.

Thank you.

Bob McAdoo, Avondale Partners.

Thank you; hi.

Just a couple of quick ones -- could somebody go over kind of what the timing of what you see going on relative to the slot swap in terms of when -- does it look like it really is going to get approved finally, in terms of the final approval?

Or is anybody in sort of any kind of objections in this comment period?

And I guess then, assuming it goes through, when would we see what kinds of steps, kind of the big chunks?

This is Ben Hirst again.

The DOT totally approved the transaction on July 21, and they call for comments within a 30-day period.

The approval order was very thoroughly written and analyzed, well-thought-out.

It establishes some divestiture conditions that are acceptable to Delta.

And we would anticipate that shortly after the 30-day comment period closes, DOT will issue a final order confirming the show cause order issued on the 21st.

At the same time, the transaction is being reviewed by the Justice Department under the Clayton Act.

We do not see any Clayton Act problems with the transaction.

And the Justice Department review process should be complete at the latest by the end of September.

We would anticipate being in a position, given the two reviews that are underway, to close the transaction at the end of September or in October.

But that's the timetable that we see playing out here.

Good, thank you.

And then one other thing, backing up over to the discussion about the OTAs; when you use the term no combine-ability, what specifically are you prohibiting there?

What are you keeping someone from doing?

What we don't want to have happen is to have our brand header at the top of a product that is not a full Delta product.

So several of the OTAs in previous iterations were selling under the Delta header a combination ticket where Delta was not the exclusive carrier.

And we did not want that to be represented to our customers because then you could have say taken Delta from here to Denver or to Bangkok and then thought you purchased a Delta ticket and realized that you're airlining with a carrier and then we weren't responsible for the entire carrier.

If you know most of the OTAs have mixed carrier itinerary, somehow that bled into whatever the first carrier was -- was the branded carrier on the product.

And so we did not want that to occur, so we now terminated that ability of the OTAs to continue to sell non-Delta flights as Delta.

So do you still participate in the mixed itineraries and just don't let them label it that way or you don't even participate in those kind of itineraries?

We have changed the rule; for mixed itineraries, we have changed the rules in which, for example, on a lot, the pricing we did not appreciate were pricing that consumers would never buy.

So if you were going from Cleveland to Atlanta and you had seven minutes between the time you arrived in Atlanta and departed back to Cleveland because of some arcane construction that they were making, we've really clamped down on the ability of the OTAs to do that by putting more rules in place that are more -- we believe, more customer friendly.

Right, because then we end up with the complaint because it was an itinerary.

I can understand that, yes.

Yes.

All right, thanks.

That's all I got.

Cynthia, we've got time for one more question from the analysts.

Duane Pfennigwerth, Evercore Partners.

Thanks very much for taking the question.

Just wanted to check your thinking on the AMR order and specifically with respect to delivery position availability, and maybe the rate at which you are retiring MD80s -- does this at all put pressure on you to put a larger order in maybe sooner than you otherwise would have?

Absolutely not.

Okay, fair enough.

And then just a little one, can you disclose what the hedge impact you expect in your 3Q fuel guidance?

I think, Duane, we're looking at about a $0.10 per gallon benefit, based on where market is today.

Perfect, and I will sneak one more in.

You're not sneaking.

You just keep asking.

The currency impact on your RASM in the second quarter?

We don't have that number in front of us, Duane.

We can get back to you with the exact number.

Obviously, we got a little bit of a benefit, but it was in the 1.1 to 2 points, but we can get you the exact number.

Ok.

Thanks so much for taking the questions.

Thanks, Duane.

Cynthia, we're now going to wrap up the analyst portion of the call and move to the media portion.

So if you could repeat the instructions again for members of the media on how to ask a question, and for the media, we ask that you limit yourself to two quick questions.

(Operator Instructions).

Mary Jane Credeur, Bloomberg News.

Hi, gentlemen.

Can you tell us a little bit more about where that additional 1 point of capacity reduction is coming from?

Maybe give us some regions, or is most of it domestic, Atlantic?

Mary Jane, we haven't loaded the schedules yet.

It's going to be a little bit from both regions across the trans-Atlantic as well as a little bit domestically.

Okay, great.

And can you also give us any update on your discussions with that certain carrier in the UK that is looking for a partner?

We do not comment on discussions with other carriers.

Josh Freed, Associated Press.

I was wondering if you could say a little more about Japan flying and sort of at what point the capacity to Japan sort of hits a bottom after margin and starts to come back up?

Is there anything you can say about kind of where you are headed with Japan, whether you think you have taken as much flying out there as you are going to or maybe there's more to come?

Well actually, we had planned to expand into Japan this year with the opening of Haneda and the two new markets from Detroit and Los Angeles.

No good deed goes unpunished.

We didn't foresee the tragic events of 3/11 and the ensuing decline in traffic when we applied for those routes over a year ago.

And Japan had been a very strong market for us.

Now, the good news is, is that the Japanese are continuing to travel.

And the bad news is, is that the Americans have not yet started traveling in the same numbers back, and it's a slow and steady build.

So what we are experiencing in the airline business right now is a little disequilibrium.

With the Haneda opening and the earthquake combining together, we are a little bit behind in terms of demand from the United States, not from Japan.

And we believe that that will continue; at the current rates it will continue to build back to historic levels by the fourth quarter.

So we're pretty optimistic about where Japan is headed for next year, and we think that the reconstruction of the northern part of Japan will take a lot of resources and a lot of investment and a lot of that will come from US companies and US travelers.

All right.

And related to that, we are seeing a lot of different uses of the 747 fleet.

It's coming off of one of the -- particularly Japan routes.

Are you sort of on your way towards possibly having more 747s than you need?

Do you end up parking some, or do you have lots of other places to use them?

I'm just thinking the combination of the Japan situation plus the Atlantic capacity reductions, it makes me wonder if you've got more big airplanes than you need right now.

Clearly one of the opportunities we have is to redistribute, and that's one of the things that the merger brought the combined Delta and Northwest.

And so we feel very comfortable that we will find good homes for those in other parts of the world until such time as they are required back into Asia.

Okay.

So do you have particular plans for them now, or is that still kind of a work in progress?

Some of them have been disclosed.

Some of them are a work in progress.

So I think that, not knowing which ones have been public and which one have not, I would probably like to defer the entire question.

All right.

Thank you very much.

Kelly Yamanouchi, Atlanta Journal-Constitution.

I'm wondering how much in additional revenue per day or per week Delta is receiving or expects to receive from the discontinuation of the ticket taxes.

The excise taxes are about $4 million to $5 million a day.

Okay.

And I was also wondering if the buyouts met your needs and your expectations and whether any layoffs or furloughs may be needed.

They have met our expectations, and we're not anticipating any furloughs, no.

Thank you very much.

Karen Jacobs, Reuters.

I wanted to refer back to the question on the call from Jamie Baker about the possible plane orders.

What do you mean by modest order of planes, in terms of numbers?

We haven't given out that information, Karen.

Modest means living within our means.

Could modest be 200, 100?

No, we have not shared any information on that.

Thanks.

Andy Compart, Aviation Week.

Just wanted to get back to the Capitol Hill issue and the FAA bill.

There's some legislators who are complaining that -- or asserting that Delta is behind the House Republicans hard line on the NMB issue and the FAA bill.

Do you have any response to that?

This is Ben Hirst again.

The issue on the FAA bill was an essential air service issue.

The Republicans insisted that as a condition of extending the FAA funding that 13 markets which were pretty clearly able to function without subsidy ceased to receive subsidy.

There was no labor-related condition attached to that.

Right, except that Representative [Mike] stated himself that he put that in there to give leverage on the NMB issue.

So it's tied to that.

That's an issue for the Republicans.

Does Delta have -- is Delta pushing on that?

That's what their complaint is from some Democrats.

That is not really a -- that's really at this stage not a Delta issue.

This is an issue between the Republicans and the Democrats in Congress.

And just to clarify on the excise tax, is that $4 million to $5 million [a day] -- are you just referring to the federal excise tax, or to all these taxes and fees that are in the suspension?

Those are the excise taxes that are suspended currently.

All of them, okay.

Okay, thanks.

Cynthia, we're going to have time for one more question from the media.

Wayne Risher, Commercial Appeal.

Good morning.

I want to ask you about the Memphis-Amsterdam flight.

You all have already said it's going down from daily to four days a week in September.

And I wondered if this latest reduction in trans-Atlantic flying this winter is going to take it down even further.

We have no additional plans to reduce Memphis-Amsterdam beyond what's already been announced for the winter.

Okay.

And, also, just the overall capacity is supposed to be down 8% to 10% in Memphis as of this fall, and I wondered if your latest calculations show even greater decrease here.

I think we are sticking with the previous plan.

There's been really no change to our announced plans in Memphis.

Okay.

Thank you.

Thanks, everybody.

That is going to wrap up our June quarter call.

Thanks for joining us and thanks to the entire team here in Atlanta.

And we look forward to speaking to everybody again on our October call.

And, again, that does conclude today's conference.

Thank you for your participation today.