達美航空 (DAL) 2011 Q3 法說會逐字稿

Good day, ladies and gentleman and welcome to the Delta Airlines September 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 the conference over to Ms.

Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Thanks Cynthia.

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

Joining us from Atlanta today are Richard Anderson, Delta CEO; Ed Bastian, our President; Hank Halter, our Chief Financial Officer; Glen Hauenstein, EVP of Marketing, Networking and Revenue Management; Steve Gorman, our Chief Operating Officer; Mike Campbell, EVP of HR & Labor Relations; Paul Jacobson, our Treasurer; Ben Hirst, our General Counsel; Holden Shannon, our Senior Vice President of Strategy and Corporate Real Estate; and Ned Walker, our Chief Communications Officer.

Richard, Ed and Hank will open the call with their remarks on the quarter and then we'll move to our question-and-answer session.

To get in as many questions during the Q&A, please limit yourself to 2 questions.

Today's discussion does contain 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 these differences are described in Delta's SEC filings.

We will discuss non-GAAP financial measures and all results exclude special items unless otherwise noted.

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

And with that I'll turn the call over to Richard.

Thank you.

Good morning, everybody.

Delta earned a $765 million profit for the September quarter with an operating margin of 11%.

We offset the majority of this quarter's $1 billion increase in fuel price with a 10% increase in top line revenue.

Delta's overall capacity was down 1% in the quarter.

We experience strong demand, particularly from corporate customers, which drove our unit passenger revenues up 11% from prior year.

We continue to see strong demand in the fourth quarter.

We ran a good operation with top-tier operational performance and baggage service on-time completion factor, which resulted in a 40% reduction in DOT complaints year on year.

As a result, Delta People earned $15 million in Shared Rewards for the quarter.

Business Travel News just recognized our accomplishments by ranking Delta number one in its annual airline survey based on the overall highest ratings by corporate travel buyers.

Delta also won awards as the best carrier for business and travel agents support from Recommend Magazine, a leading travel agent publication.

These accomplishments are a direct reflection of the dedication of Delta employees worldwide and their commitment to building a leading global airline.

I want to thank them for all of their good work.

We're on track to have another good profit sharing payment for 2011.

And while we are pleased with this quarter's performance, we have much work ahead.

For the second year in a row, we have proven that economic turbulence and inflated fuel prices will not prevent Delta from good profitability and cash flow.

We are determined to build a consistently profitable airline, one that can pay for wise investments through operating cash flow and that consistently returns its cost to capital.

To get there, we're focused on these key points.

Growing diversified revenues, treating our people well in a culture of positive employee relations, continuing our capacity discipline, keeping our costs under control, running an airline customers worldwide prefer, deleveraging the business, and limiting capital spending to investments with high IRRs.

We've had good success in passing on high fuel costs through ticket prices at Delta as higher revenues covered 85% of our fuel price increase.

Delta must cover its fuel cost in ticket prices.

Other fuel-intensive industries like railroads, trucking companies, utility operators and overnight express carriers routinely do so, and we must do the same at Delta.

Delta is developing new products and services that customers value and will pay for.

We are well on our way to a targeted $1 billion of additional merchandising revenue by 2013 through products like Economy Comfort, which we have announced that we are expanding to our domestic system next year.

Our ancillary and cargo businesses provide good revenue diversification with annual revenues of approximately $2 billion.

Tact in Delta's culture and positive relationship with our employees is unique in this industry.

We will always work to maintain that culture and take care of our people so they provide good customer service.

Third, we will be disciplined in capacity.

We trimmed our December quarter capacity by 4% to 5% year on year, with the trans-Atlantic down 10% to 12%, which is particularly important given the unrest in Europe.

And those capacity cuts will roll forward into 2012.

We're planning for 2012 capacity to be down 2% to 3% when compared to 2011.

Fourth, we will keep costs under control.

Our number one input cost is jet fuel.

We will minimize its volatility with a hedging strategy that utilizes a cost-effective approach in selecting hedge instruments and products.

This strategy saved us $100 million this quarter from settled fuel hedges and we expect to save over $400 million for full year 2011.

Our 4Q jet fuel cost will be $2.98 per gallon.

Our non-fuel unit cost will be only modestly up in 4Q versus 2010 levels despite a 4% to 5% capacity reduction.

We are resizing the airline by voluntary staff reductions and reducing fleet facilities and other assets in line with our capacity reductions while at the same time improving productivity through better operations and technology.

We are seeing maintenance savings as a result of the retirement of older aircraft.

Lastly, we are committed to the capital spending discipline and it is key to our debt reduction initiative.

We plan to keep our annual capital spending between $1.2 billion and $1.4 billion.

Our adjusted net debt currently stands at $14 billion and we will reach the goal of $10 billion by mid-2013.

So, in conclusion, we've made good progress toward our goal with an 8% return on invested capital for the last 12 months despite a $3 billion increase of fuel price.

As we look out, our demand is good as we are seeing solid bookings in yields in 4Q, which will result in strong profitability in the December quarter.

I'm happy to turn it over to Ed so he can provide you the details.

Ed.

Thanks, Richard.

Good morning, everyone.

We appreciate you joining us this morning.

Excluding $216 million of special items we reported in the September quarter a net income of $765 million or roughly $0.91 per share, largely in line with where first call consensus was.

These results are $164 million lower than last year as we offset 85% of the $1 billion impact of higher fuel prices in the quarter.

Our results came in at the high end of the guidance we gave in mid-September.

However, that guidance did not include the $31 million or $0.04 per share impact of foreign exchange losses in non-Op expense due to the strengthening of the dollar as of September 30th against our foreign currency assets.

We generated an operating margin of 11% and EBITDAR of $1.5 billion for the quarter.

Our $216 million of special items was primarily non-cash mark-to-market adjustments on our forward fuel position due to the late September market sell off.

Hank will give you more details on the current value of our hedge position shortly.

I would like to thank the entire Delta team for their strong performance this quarter, both in delivering industry-leading unit revenues and in running a great operation.

And I'm pleased to report that we've set aside $167 million in profit sharing this quarter to reward the team for their hard work.

Turning to revenue.

Our September quarter top line revenue increased $866 million, or 10% versus the prior year, on 1 point decline in capacity.

Our passenger unit revenues were up 11% on a year-over-year basis.

For the September month, our passenger unit revenues were up 13%.

However, after adjusting for a one-time benefit of $50 million in September month last year due to the expiration of Northwest ticket stock, our September month unit revenues were really up 15.5%.

Our cargo business continues to do well, with cargo revenue up 13% on 10% higher yields.

Other revenue increased $43 million largely driven by increased MRO revenues.

We had solid revenue performance across all entities as demand remains strong in the face of a tepid economic recovery.

Domestic unit revenues increased 12% on a 2 point decline in capacity.

Strong business demand contributed to a 10 point increase in yield, while load factor increased 1.86%.

Our trans-Atlantic unit revenues grew 10% driven by a 10 point increase in yields.

Capacity was down 4% for the quarter as we began our pull-down of secondary markets following our summer peak.

We're pleased to see our Pacific unit revenues increase 7% on 14% capacity growth as we annualize new markets.

Japan continues to show steady improvement and we're almost at pre-earthquake demand levels for point of sale Japan this quarter, which is traditionally the strongest season for the Pacific.

Our US point of sale to Japan remains somewhat weaker, but is certainly recovering.

We anticipate continued improvement over the near term with peak seasons recovering quicker than the off peak.

Our Latin unit revenues improved 13% with strong performance in South America driving yields up 12%.

Corporate revenues across all regions continue to post solid gains, even against increasingly strong comps.

Our latest booking data as of last Friday showed forward corporate revenues up 13% year-over-year even though our forward capacity is down 5 points.

We have had good success with our merchandising initiative as Richard mentioned, including our International Economy Comfort and first class upsell products.

Economy Comfort has been so well received internationally that we've made the decision to expand it to our 800 domestic aircraft and will be in place by next summer.

We anticipate our new merchandising revenue streams will generate $200 million for the full year of 2011 and are on track to reach our goal of $1 billion in new revenue streams by 2013.

As we move into the December quarter, we continue to see solid revenue trends.

Our October unit revenues were up 10% from the prior year with all entities posting improvements.

The domestic market is showing particular strength in October, again, driven by corporate revenue gains.

Looking further out into November and December, our book yield trends remain stable and our system load factor is running 2 points ahead of last year.

We're staying in close contact with our customers and agencies.

And while we continue to see some industry softness in the trans-Atlantic, we currently see no signs of a pull back on overall customer demand at a system level.

That said, our winter capacity reductions had us well positioned if this indeed occurs.

Regarding the December quarter, we expect to be profitable in the December quarter with an operating margin in the 5% to 7% range.

This is a bit better than last year's results despite more than $500 million in higher fuel expense.

As we've previously announced, our December quarter capacity will be down 4% to 5% from prior year with a highly seasonal trans-Atlantic market down 10% to 12%.

Our domestic capacity will be down 3% to 5% as we retire DC9s, an inefficient regional aircraft.

Our Pacific capacity will be flat.

The only area of growth of the quarter will be in Latin America where our capacity will be up 4% to 6% as we respond to growing market demand in Central and South America.

Our strategy has been to reduce flying in those markets which cannot generate adequate returns in a high fuel environment.

We will not chase market share at the expense of earnings.

And I'm pleased to say that plan is working.

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

Thanks, Ed, and good morning, everyone.

Turning to cost performance for the September quarter, Delta's operating expenses increased $1 billion, or 13%.

We experienced $1 billion gross fuel price pressure, which was offset by benefits from our settled hedge portfolio and lower consumption.

Our all in fuel cost per gallon for September quarter was $3.09, up about 35% from last year.

Consolidated non-fuel unit cost increased 3% versus prior year on a 1% decline in capacity due primarily to higher revenue-related expenses and foreign exchange impacts.

These two items accounted for 2 points of the increase.

Excluding those 2 items, our core non-fuel unit cost increase was 1%.

Our non-operating expenses included $31 million loss on foreign exchange in September quarter.

And we ended September quarter with $5.1 billion of unrestricted liquidity.

Related to capital spending for the September quarter, our CapEx was $220 million, including $195 million in aircraft parts and modifications.

And net debt maturities were $200 million during September quarter reflecting continued progress towards our debt reduction goal of $10 billion adjusted net debt by mid-2013.

With regard to our December quarter cost performance, we remain committed to the challenging effort of reducing capacity and unit cost at the same time.

For the December quarter, we currently expect our non-fuel unit cost to be flat to up 2% on a 4% to 5% capacity reduction.

This increase reflects roughly 1 point of pressure related to revenue-related cost and foreign exchange.

Through a series of initiatives we have in place to bring our non-fuel unit cost flat to 2010 levels, we expect our cost performance will improve throughout the course of the December quarter.

And all areas of the business will contribute to our improved cost performance.

First all of, we're continuing to retire our most maintenance-intensive aircraft contributing to an expected double-digit percentage decline in maintenance cost on a year-over-year basis.

By the end of this year, we will have removed more than 70 aircraft from our fleet including our entire Saab turbo-prop fleet, 50-seat regional jets, older Boeing 757s and 15 DC9s.

We've consolidated facilities in Atlanta, Minneapolis, Memphis and Cincinnati to minimize our real estate footprint and we are aggressively working to sell vacant space.

And we're bringing our headcount down by over 2,000 employees by the end of this year as a result of voluntary programs, which is equal to 5% of eligible employees.

In addition to the voluntary programs, we're also streamlining our administrative staff.

We are lowering our distribution costs by continued investment in customer shift to delta.com, which is now our largest distribution channel.

Within the North American market, roughly 40% of tickets are sold on delta.com.

And finally, we're further tightening overhead and discretionary spending.

Turning to fuel and hedging, for the September quarter, our consolidated all in fuel price was $3.09, up $0.80 from prior year.

During the quarter, we realized settled hedge gains of $97 million, or $0.09 per gallon.

As Ed mentioned earlier, we recorded a $208 million charge for non-cash mark-to-market losses on our open fuel hedges.

Since we do not use fuel hedge accounting, we'll continue to record future changes in market value until the hedges settle.

However, with the changes in the fuel market in the past weeks, the value of our hedge book has moved from $120 million loss as of September 30 to $130 million gained as of yesterday.

And for the December quarter, we are hedged for a substantial portion of our fuel consumption and expect our all in fuel price to be $2.98 per gallon.

I would like to conclude by thanking the Delta team for their efforts in a running a reliable operation this quarter while at the same time generating a $765 million profit and revenue premium to the industry.

These results would not have been possible without their hard work and efforts.

Thanks, Richard, Ed and Hank.

Before we move to the Q&A, I did want to take a minute and remind everybody about Delta's Annual Investor Day, which is scheduled for December 14 in New York.

We'll be sending out more details shortly, but for now please hold the date on your calendar, and we hope to see many of you there.

So with that, Cynthia, if we could give the instructions for asking questions from the analysts.

Today's question-and-answer session will be conducted electronically.

We will first take questions from analysts and then from the media.

(Operator Instructions)

Gary Chase, Barclays Capital.

Good morning, everybody.

Wanted to see if I could probe with you.

What do you think the biggest proof point is going to be on whether or not you'll be able to achieve that cost goal for 2012?

Now, when you talk about cost being flattish with 2010 in the fourth quarter, we kind of understand that but the network has changed a lot.

Is that by itself, you know, demonstration that you're already on the run rate, or is there going to be more work to do as we roll into 2012?

Hi, Gary.

It's Ed.

I do think there is going to be more work to do as we get into 2012.

Certainly, we're pleased with the work that we're already doing, and I think our fourth quarter guidance reflects that.

If you adjust out for the third quarter, the impact of the higher revenue-related cost and the foreign exchange impact on our cost, well actually in the third quarter we're at a 1% effective overall year on year non-fuel run rate.

And if you do that same math in the fourth quarter, we're actually less than 1% in growth relative to 2010.

So, I think we're on the path.

2012 will certainly bring some new cost pressures, some inflationary cost pressures across the business.

I don't know that -- we haven't given guidance specific to 2012 for the full year other than that is our long-term goal to get back to the 2010 levels.

And I feel confident over the next 12 to 18 months we'll get there.

And I guess as a follow-up to that, a lot of the conversation about this is about maintenance and fleet and the change in the structure of the fleet.

Should we be thinking that this is a sustainable kind of performance?

That's the other question is whether or not the reductions that you've achieved in 4Q will set you up to be able to deliver that outcome for years to come, or whether 2012 is going to be unique because of some of the maintenance -- some of the rotation of maintenance expense?

I'd say it's actually just the opposite.

2011 had some unique cost elements to it because of some higher maintenance levels and the full integration of the two airlines, what we needed to get the operation fully performing.

But I would say if you look at our track record over the last four years in 2007 through 2010, Gary you would see our non-fuel CASM, consolidation, was right at the 8.25, 8.3 level, and we think that's a sustainable level to target for the future.

As we up gauge our network as you mentioned, we reduce inefficient small gauge aircraft and continue to bring technology to improve productivity.

Okay, guys.

Thank you.

Michael Linenberg, Deutsche Bank.

Good morning, everyone.

Ed, just a follow-up on the capacity guidance.

It seems like may be a little -- (technical difficulties)

Michael, we can't hear you.

You're breaking up, Mike

Sorry, could you hear me?

Now we can.

Sorry.

I was just with a question to Ed regarding the capacity forecast for the fourth quarter.

It looks like there was a shifting around of between the different entities, and it looked like domestic was going to be down the 3% to 5%.

I think that the last that we saw was going to be down about 1% to 3%.

Is that the Economy Comfort?

Is that what is impacting that number?

No, it's not, Mike.

It's more taking some more of the regional jets out and shifting a little bit of pilots.

We had a modest little growth into South America.

So, no it's some modest shifts in network, but there are no strategic changes.

And then Ed, the 2% to 3% that I think you've come out for next year, down 2% to 3% for the Company.

That does incorporate the impact of moving to putting the premium economy products throughout the domestic fleet, is that right?

It does though I'd mentioned that is only a modest impact on the overall seat count for next year.

My last question and this is to Richard.

You've probably seen the news out that the House now has at least a piece of legislation basically disallowing the US airline industry from participating in the ETS.

And assuming that it ultimately passes Congress, how do you -- how does that work?

How would you operate within those confines?

Is that even possible?

How should we think about that?

That's a good question and I actually don't know the direct answer, but I do think it's a good thing that Congress is going to pass a law saying the ETS shouldn't prevail on US carriers.

Ben, what is its effect?

I don't know the exact language of the House, Bill, Richard, but the effect will be to strengthen the US government's bargaining position in dealing with the EU on this.

The EU Court of Justice has not helped at all, and -- but the US government is negotiating hard on our behalf and I think this will strengthen their hand.

Okay, so we just stay tuned on this one.

Good quarter, guys.

Thank you.

Jamie Baker, JP Morgan.

Good morning, everybody.

Question for Hank.

A follow-up on the headcount issue.

If you look at that metric, the seasonal decline that you experienced from the second to the third quarter this year was actually a little bit less than the decline that we saw a year ago despite the more favorable capacity comparisons.

Does this imply fewer takers for the voluntary exit program than what you had modeled before?

And, is my observation consistent with the headcount guidance that you discussed a few minutes ago?

No, I think, Jamie, last year remember with the networks coming together, I think there's the -- look in trying to compare last summer to this summer's headcount, there's a bit of noise there.

But no, our voluntary program that was completed in the third quarter, those head counts started exiting towards the beginning of September.

They will all be gone by the end of the fourth quarter and it was primarily after we get out of the shoulder -- get into the shoulder season.

But no, the take rate on that was as we expected and the headcount that you see running the airline now is the appropriate level given the flying that we're doing.

Okay, good.

And second question for Glen.

You cited or it was cited that there was a bit of weakness on the North Atlantic.

I was hoping you could expand on this.

Is this still a capacity issue that you and the industry are facing?

Is it confined to sectors that are more heavily traveled by financial services employees, that sort of thing?

Any additional color would be helpful.

Jamie, I think what you see is that the summer outlier season extends to the end of October.

And given the recession that's occurring in Europe, that there was a lot of industry capacity growth that ran all the way through the month of October.

As you get to November, that comes much more in line with what we think the real GDP is.

So, we're back to close to zero growth in the trans-Atlantic for the winter outlier season, and we think that bodes well for the winter season, which, as you know is historically the worse.

So, I think October may have been the worst of it, but in terms of year-over-year performance.

But the winter in Europe is never very good.

Jamie, I would make two points unique to Delta.

One is we've evolved our joint venture with Air France-KLM and Alitalia to the point now where we are really seriously jointly planning the capacity at all the airlines together, which has taken a while to evolve to that where you're really treat it as a single network.

And the second piece is when passengers do get to the United States from those networks, the KLM, Air France and Alitalia network, all of that traffic is on Delta.

So we're really the exclusive partner for all the feed that comes off of those networks.

Those two pieces are pretty important from our prospective in terms of our being able to continue to improve our unit revenues across the trans-Atlantic.

And on the North Atlantic or anywhere else on the network, are there any particular corporate channels that jump out in terms of outperforming or underperforming right now?

Jamie, this is Ed.

I want to echo what Richard and Glen both mentioned.

While the trans-Atlantic shows some softening, continued softening relative to the overall system, trans-Atlantic is still growing in terms of its unit revenue performance.

And, our corporate volumes are strong.

I don't have it broken out by region per se, but let me give you a couple of sound bites.

If you look at the overall banking sector, which I think is what your question was.

Exactly.

Our bookings over the last four weeks in the banking sector across the board were down about 4% on a forward-looking basis.

However, over that same time frame, our bookings in the consulting and business service firms, which account for us for more than 2.5 times the revenue than our banks do were up 24%.

So, while the banking situation has a trend of softness to it, our overall corporate revenue streams are very strong.

Okay, that's great.

I have gotten color from 4 executives in the room there, so that should do it for me.

Thanks a lot.

(laughter) Does that include me, Jamie?

(laughter) That does indeed, Richard.

Thank you very much.

Bill Greene, Morgan Stanley.

Good morning.

Hey, there.

I just want to make sure I sort of understand what I'm hearing here, which is 4% to 5% capacity cuts here in the fourth quarter.

Some decent trends here so far in October, but as you look to next year, taking capacity down a bit, but we're not seeing any signs of weakness on corporate.

So, that seems a little bit like either we're anticipating that maybe that will happen.

We will see some signs of weakness, so let's get ahead of that.

Or, maybe some of this stuff in the trans-Atlantic you're starting to see effect other markets.

But I didn't really get that from the commentary.

Help me think about what we should take from the 2% to 3%.

It's just anticipatory, or there is something you can see from the corporate demand side that makes you worried about next year?

Bill, this is Ed.

I think clearly part of it is being cautious, and it's as much in the face of high fuel prices as it is in the face of any strains of economic weakness that we're seeing in the business.

Certainly, if we do see some strains of economic weakness, reduced capacity is going to help.

We're obviously in a lot of dialogue with our corporate customers, our corporate agencies, as to what their thoughts are relative to 2012.

And since most of those companies are right now in the planning process for next year, the information we're getting from them is that they're anticipating modest growth in corporate travel next year.

Probably something in the mid-single digit range, which when you take that coupled with the share gains that we're earning this year for Delta should position us nicely for another solid year of corporate revenue activity.

So cautious outlook on fuel price, which is driving more of the supply restraint.

We still expect corporate revenues to be strong into the next year, and as a result should set up nicely for us for our earnings picture.

Okay, good.

That's helpful.

Let me just add one thing to that that you should bear in mind.

When you look at the annualization of where we are pulling capacity, it's in places that make really good sense.

So, we pulled capacity out of the Middle East and Eastern Europe.

And, we're keeping much of that traffic as I said earlier.

We're really the exclusive partner of our joint venture in the US, so, we can still carry that traffic.

It just goes over Paris, Amsterdam or Rome.

But pulling out of the Eastern European -- some of the Eastern European markets, given the economic turmoil and pulling out of a number of the Middle East markets because of political unrest, and then taking those actions from 2011 and annualizing them over 2012, represents a fair amount of what that capacity reduction is.

Okay.

No, that makes sense.

And then just on Japan, how far are we to get back to kind of where we were pre-tsunami?

Sort of give us a sense for how much there is left to recapture to get back to what might be, I don't know if it's safe to say normal?

Plenty of sales in Japan were largely back already.

US point of sale to Japan were down somewhere in the 10% to 15% range from where we were pre-earthquake levels.

And we see that continuing to improve as we move forward.

Okay, that's great.

Thanks for the time.

Jim Higgins, Ticonderoga Securities.

Good morning, everyone.

Your fuel price outlook for the fourth quarter appears to be a bit more favorable than most of the other airlines that reported so far.

I know you're moving towards a more dynamic hedging strategy.

Do you think that somewhat slight different outlook account for that lower price?

Jim, I think we've done well as this quarter shows and what our fuel price outlook is.

We're pretty private about how we manage our fuel risk, given the fact that they're counter parties and other parties that are involved in those transactions.

Very good.

Thanks very much.

Glenn Engel, BofA Merrill Lynch.

Good morning.

Two questions.

One, while 10% is really good in October, it was you were saying it was 15% in September.

Was the deceleration all Europe, or were some other markets also slowing?

This is Glen.

I think what we saw in September all the way through the booking curve, which was also in May, was that the shoulder seasons of May and September all through the booking curve stood out.

And so if you look at the whole quarter, what we're seeing sequentially from the third quarter to the fourth quarter is really relatively stable in terms of what we expect the quarter to come in at.

And it was just really the mix between the months that we were looking at.

I would say September, and I can't give you all the reasons why September was an outlier, or I can't give you all of the reasons why May was an outlier, part of it was the baseline was particularly weak.

But it looks like a very stable environment through the third quarter and the fourth quarter in terms of aggregate quarter results.

A follow-up with you, Glen.

At the beginning of this year, I remember you telling me that you thought the fares in your point to point market were actually pretty reasonable.

It was in your connecting markets that you thought you had better opportunities on fares and yields.

Has that worked out this year?

Is that where you're seeing bigger gains when you drive the RASM this year?

I think what you're seeing is really remarkable.

It's that we've been able to recover the fuel price pretty much as we went through the year.

The first quarter because of the quick runoff we were behind because we had sold a lot of tickets before fuel ran, but as we're coming into the third and fourth quarter you're seeing the pricing environment being very, very robust.

And as experienced by the fare increases that went through this past week and one that is out there floating today.

So, I think we've been able to make it across the board.

And I think it's a remarkable testament to the durability of the model.

But from point to point to connect, there really isn't anything to distinguish in the rate of improvement this year?

It's really across the board that we've seen this.

Okay.

Thank you very much.

Kevin Crissey, UBS.

Morning.

Thank you for taking the call.

Slot swap, can you remind us what you had indicated on the financials for that and the latest on that transaction?

Ben can answer the transaction question and Glen will answer the financial question.

With respect to the transaction, the DOT issued a final order approving the transaction last month and has begun an auction process that should culminate in a selection of carriers to receive the slots to be divested by Thanksgiving.

And we would anticipate being in a position to close the transaction early in December.

And from the financial prospective, while there is ramp and spool as you begin any new markets, we believe that the transaction will be accretive in the first year of operation.

So, I think that's all the color we've given on that.

Okay.

Thank you.

So I know you keep your fuel hedging close to the vest or a bit more than other carriers.

Is there anything else you can -- did I miss any type of detail in the ratio?

You usually have something a little bit more.

Maybe I missed it in here?

Is there anything to go by if we want to do any sensitivity analysis?

Yes, Kevin.

The earlier question tried to get into what was driving the strategy and we tried to as Richard said we prefer that to remain with Delta and we will report the results.

On the forward look.

From the fourth quarter we are -- we've got obviously a bulk of the fuel purchase for the quarter, so we're largely locked down and feel pretty good about the estimate we gave you at $2.98.

For 2012, we're about 40% hedge for the first half of the year, and about 15% to 20% for the back half of the year at rates at or below today's market level.

With what type -- what type of instrument should we think about?

Your heating oil basis or?

It's heating oil basis and we continue to use collars and a variety of instruments.

Okay.

Thank you very much.

Hunter Keay, Wolfe Trahan.

Thanks.

Good morning.

You guys talked a little bit about the evolution of the trans-Atlantic JV.

I'm wondering how Pierre Henri Gourgeon's departure is potentially going to impact how you guys think about that, how you plan with them.

I know that the French were a little bit less eager to trim capacity.

Now that Spinetta is coming back in, obviously he's been involved with the company to some capacity.

But how do you expect that to sort of impact the way the French kind of view capacity discipline and planning?

Well, first, Pierre Henri Gourgeon made a lot of contributions to Air France and a lot of contributions to our joint venture.

And, we wish him well in his retirement, but at the core Jean-Cyril Spinetta and Leo van Wijk are, have been and continue to be Chairman and Deputy CEO.

Leo is Deputy CEO and Jean-Cyril is the Chairman and CEO.

And we did our first joint venture agreement with Jean-Cyril back 5 years ago.

So, it's business as usual and I think we're going to continue and evolve that model, so that we treat the trans-Atlantic joint venture as a single network for planning and pricing and yield management and distribution decisions.

Okay.

Thanks, Richard.

And, on some of the 2012 CASM stuff.

Hank, have you given any thought to how pension is going to factor in on that?

Does this CASM flat to 2010 assume sort of ex pension noise?

And on that note, can you give us maybe an early cut on how you expect CASM both funding requirements and GAAP basis to come in next year?

Thanks.

Actually, Hunter, that's a good question for Investor Day.

We're currently working it up and we will be sure to go over all of that, those points in mid-December.

All right.

Thank you.

Dan McKenzie, Rodman & Renshaw.

Good morning, guys.

In its dispute with Sabre, AMR mentioned that they've been able to document a revenue book-away from its corporate clients.

And I am wondering to what extent the corporate travel trends you cited might have been positively impacted by this phenomenon, and if there was an impact in the third quarter?

Does that outlook factor in a reversal as we look ahead?

Dan, this is Ed now.

We don't believe there has been any share shift to Delta corporate travel as a result of whatever the allegations between Sabre and AMR are.

We see sustainable trends going forward and I don't think that accounts for any share shift we've seen.

Fantastic.

Thank you.

And then just it's perhaps a little bit early, but I'm wondering what your best read is regarding the final legislation on FAA reauthorization?

I don't know that we have a final read yet.

Obviously, we think it's in the long-term interest of the industry to have a long-term reauthorization that hopefully reduces our taxes and funds in air traffic control system that allows for the industry to operate efficiently.

So, we don't have any more prognosis than what you have in terms of the press reports this morning from Chairman Mica.

Okay, great.

Thanks, guys.

Helane Becker, Dahlman Rose.

Hi, everybody.

I noticed that you guys paid down on I think it was around $175 million to the Minnesota -- I guess the Minnesota airport, Metropolitan airport to allow, I suppose what you to lay off people in that market, or are you anticipating adjustments there, or is that just coincidental?

No, Helane.

It's totally unrelated and we don't have any intentions to have any layoffs as a result.

Let me give you a little bit of background.

Those monies were not borrowed from the airport or the state of Minnesota.

Those are private bond holders that were issued general airport revenue bonds.

So, it's a private loan with bond holders who are holding in essence a bond that pays very high interest rate.

It's a secured transaction.

I think it pays 7.5%.

Paul?

8.5%.

It's 8.5% interest on good security.

So, it just makes good sense.

When you look at our delevering initiatives, as you would guess, we try to find the instruments that are callable and have the highest interest rate, particularly in relation to the value of the collateral.

And this one was just at the top of the list.

So, the most important thing we can actually do for our employees is pay down high cost secured debt, and that's really all we're doing.

We're very committed to Minnesota.

The hub is doing incredibly well, and the employees there are great.

So, we've made a lot of investments there and will continue to make a lot of investments there.

Thank you.

And then just one question on -- I'm mortified to say I don't remember what you're calling your new terminal at Delta, at JFK.

Is that T4?

It is Terminal 4, yes.

Yes.

(laughter) So, can you give us an update on construction and where you stand and are you on target to open?

I think what was that mid of 2013?

Yes, Helane.

Just real quickly, we're making great progress out there.

We're on track for opening in spring of 2013 and it's going to be a great facility so we look forward to having you out there.

Thank you.

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

Jeff Kauffman, Stern Agee.

Thank you very much and thank you for taking my question.

Glen, I just want to follow up on the corporate travel.

You mentioned the plus 13% on the forward booking curve with service and consulting up almost 24%.

I guess two questions.

Number one, how much of this is existing customers growing their business with you versus new customers?

And I guess the second question is, although your customers are still finishing off their 2012 budgets, how are those discussions changing in terms of the questions you're being asked?

Jeff, this is Ed.

I'll take it since I mentioned the stats.

The first question is that share shift or is that just increased spending levels.

And I'd say it is both.

We're gaining considerable amount of share as we continue to invest in our product and technology, the benefits of the merger and having the integration behind us.

You're seeing both the overall demand levels grow as well as the demand towards Delta grows.

And on 2012, obviously it's still early stages for some of the companies as they're setting the plans for the new year.

But I would say most of the corporates we deal with are taking a cautious outlook but realize that their travel needs are going to continue to grow into the new year.

And, we'll be ready to serve them.

Thank you very much and congratulations.

That is going to conclude the analyst portion of the call and I will now turn the call over to Ned Walker for the media portion.

Thanks very much, Jill.

Cynthia, if you could review the Q&A process for the media, we'll go ahead and begin the Q&A with the media.

And then if I could ask the media to leave it to one question with a quick follow-up we should be able to accommodate most everyone and still finish on time.

Thank you.

(Operator Instructions)

Mary Jane Credeur, Bloomberg News.

Can you talk a little bit about holiday demand and how that is looking?

Your friends in Dallas just launched another holiday fare sale despite saying last week that they didn't see any weakness in that period and wondered if you could give us a little insight into how things are looking now.

The holidays look strong.

Mary Jane, this is Ed.

We have obviously had some reduced capacity out there into the fourth quarter due to the higher fuel price levels, but the holidays for us look pretty good.

Okay, great.

And can you guys talk a little bit it sounds like you're looking for a 2% to 3% capacity reduction in '12 and that you've -- it sounds like you've got a bias toward caution and cutting more if you see some additional economic weakness.

Is that a fair takeaway?

That is.

Okay.

That and forward curve fuel prices continue to be high.

Yes, sure.

Kelly Yamanouchi, Atlanta Journal Constitution.

I'm wondering what impact you've seen from Southwest Airlines entrance into the Atlanta market from a sales standpoint, or that you expect to see, and if it requires any response from Delta?

Hi, this is Glen.

We're actually looking forward to competing with Southwest.

They're a great competitor.

They have a great product.

It's very different from ours and we're look forward to pointing out to the customer, our customer base in Atlanta, what those differences are.

So, we're enthusiastic and we're looking forward to competing with them like we have competed with AirTran for many years.

Will you need any more job cuts next year along with the capacity cuts?

No, we don't anticipate at this time any additional reductions.

If we do have additional reductions, they will be voluntary reductions.

We typically do not with our front line employees have involuntary reductions as a matter of policy.

Great.

Thank you.

Josh Freed, Associated Press.

A quick follow-up on the comments earlier about Japan.

I think you mentioned that USA point of sale was down 10% to 15% from pre-quake levels.

How is that measured?

Do you mean by revenue or traffic or what are we talking about there?

That's revenue, Josh.

Okay.

And can you say a little bit more about sort of how you are managing that shift in demand.

I mean is there anything specific you can say about maybe where you're shifting capacity to respond to that different level of demand that you're seeing today versus a little more than a year ago?

Well, I think the shifts already occurred.

The capacity adjustments, we're in a recovery mode as we speak.

We reduced some of the flying that we were doing into Haneda and we reduced some of the frequencies into Japan.

But much of that capacity is back online at this point and we expect next year to be a strong recovery year for us in the Japanese market.

I would just add to that we had a very strong 3Q in the Pacific.

And the second piece of that is we've been very successful in over-flying Japan to other points in China and Asia.

And lastly, we have really put a big investment in our premium product, in our Economy Comfort products.

So, we have a great product, a great network and we had outstanding financial performance in the quarter.

So have those overflights mostly stopped at this point or are they continuing for a little while?

No, they're a permanent part of our network.

All right.

Thank you very much.

Ted Reed, The Street.

I want to ask about the trans-Atlantic.

You are five years into this joint venture and you mentioned that you're just now getting the ability to make the capacity cuts that you want to make with your partners.

So my question is why does that take so long?

Well, no, I think I used the word evolution.

We had always jointly planned capacity at each one of the airlines, but now we're really viewing it in a much more sophisticated and integrated way because we now have integrated distribution on both sides of the Atlantic.

We've been able to hook up the systems the way the systems need to be hooked up on both the reservations and yield management side.

And, we now have integrated yield management and pricing on the trans-Atlantic, both from US point of sale and European point of sale.

So, it's an evolution and we're just getting to a higher level of sophistication.

Wayne Risher, The Commercial Appeal.

I was wondering if you could talk about the Memphis-Amsterdam flight and how it's performing now that it's down to 4 days a week?

And also could you speak to any plans for further reductions in the frequency of that flight in the near future?

Well, this is Glen.

We're looking at the financial performance real time on this and it seems to be doing better with a reduced frequency level.

And so we'll continue with that and analyze how the data comes in the peak winter.

Of course, we're not really in the peak yet.

We've got December and January to come and I think it would be a better question to ask next spring.

Okay, thanks.

Okay.

Thank you very much.

That wraps it up.

Thank you Richard, Ed and team, and thank everyone for joining us today.

We'll see many of you in December on Investor Day on the 14th.

Otherwise we'll be talking with you in January when we do the Q4 results as well as year-end results.

That concludes the call.

Thank you.

Thank you for your participation today.

You are free to disconnect at this time.