達美航空 (DAL) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Delta Airlines December 2011 quarter financial results conference call.

My name is Katie and I will be your coordinator.

At this time all participants 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 call over to Miss Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Thanks, Katie.

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

Speaking on the call today will be Richard Anderson, our CEO, Ed Bastian, our President and Hank Halter, our CFO.

We also have our leadership team here for the Q&A including Glen Hauenstein, Mike Campbell, Paul Jacobson, Holden Shannon, Ben Hirst and Ned Walker.

Richard will open the call, Ed will address our financial and revenue performance and Hank will conclude with a review of our cost performance and liquidity.

To get in as many questions as possible during the Q&A, please limit yourself to one question and a follow-up.

I do have to tell you 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 these differences are described in Delta's SEC filings.

We will also discuss non-GAAP financial measures.

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 and thank you for joining us this morning.

Today Delta reported a $379 million profit for the December quarter, beating first call by $0.07.

Our operating margin increased 3 points to 8% as revenue growth covered more than $500 million in higher fuel cost.

This is Delta's most profitable December quarter in its history.

We are continuing our successful strategies to make this business healthy.

Strong RASM growth fully covered fuel, capacity discipline, superior operations and customer service, healthy employee relations, debt reduction, wise capital budgets and innovations across our businesses.

For the full year we had top line growth of 11% with about 30 fewer airplanes, generated a net profit of $1.2 billion and $1.6 billion of free cash flow, with $3 billion in higher fuel expense.

This is the most important factor for investors because fuel cost increases were covered by revenue.

Our CapEx came in below $1.3 billion.

Our 9.1% return on invested capital represents the second year in a row that we have returned our cost of capital and we have returned our extra cash flow to shareholders by reducing net debt to $12.9 billion.

During the year we significantly improved our operations in customer service with our 2011 performance coming in at the top of the global airline industry for reliability, baggage and customer service.

The Wall Street Journal Middle Seat column recognized Delta for its significant operational turnaround in 2011.

At the same time, we continued to invest in our product and customer service and we are pleased that we earned top honors from Fortune, Business Travel News and Travel Weekly, and most recently PC World selected Delta as the top tech friendly airline in the US.

These results would not have been possible without the hard work of the Delta people and I congratulate them and thank them.

They will earn $60 million in shared rewards during 2011, as well as $264 million in profit sharing to be paid out on Valentine's Day.

As we enter 2012, we are well positioned to build on our 2010 and 2011 performance and take advantage of solid demand.

This momentum continues in 2012 and as reflected in the 1Q guidance, we issued this morning projecting a 2% to 4% operating margin in 1Q.

Ed and Glen will provide more color on the forward demand as our unit revenues for January are up double digit, continuing the trends of 4Q.

We continue to see revenue momentum from corporate share gains and new merchandising revenues which will be about $400 million incremental revenue in 2012 which, when coupled with our revenue premium to the industry, bode well for strong 2012 performance.

We are keeping a conservative stance on capacity with a planned reduction of 2% to 3% system in 2012.

We will remain flexible with the ability to further reduce capacity if conditions so dictate.

We are making needed facility improvements in our key hubs and we are on track to begin operating from Atlanta's new international terminal this spring, 12 new wide body gates and from our new world class terminal 4 in JFK in 2013.

We finally closed LaGuardia slot transaction and we are implementing our new schedule which will give Delta nearly 50% of LaGuardia departures, and solidify Delta as the leading carrier at New York's number one business airport with over 250 daily departures by this summer.

As part of our expansion, we are combining and renovating terminal C and D to create a 26 gate complex with the best facilities and operations for business travelers in New York City.

Our biggest opportunity in 2012 is to improve our cost structure and effectively manage our fuel expense.

First, we will not use capacity to manage non-fuel unit cost.

Second, we showed in December quarter with non-fuel CASM below 2% on a 3.5% reduction in capacity that we can reduce our fixed costs as capacity is pulled.

It just takes a bit of time.

We expect fuel prices to remain at current levels or higher and we will keep Delta's capacity in equilibrium with demand and fuel price.

We will continue to pass along higher input cost and ticket prices, while at the same time working to manage volatility of our fuel expense.

In 2011 our fuel hedging program generated $450 million in savings net of all premium costs.

On the non-fuel side, we have seen cost inflation over the last couple of years that we are structurally working on improving.

We outlined some of these changes at Investor Day in December and we will continue to update you on our progress as we move through 2012.

So to conclude, we are committed to permanently fixing our business model and our 2010 and 2011 results show that our plan is working.

2012 is setting up as another good year for Delta.

We are committed to grow and diversify our revenues, cover fuel costs in our prices, while taking a disciplined approach to capacity, costs and capital spending.

Our goal is to continue derisking the model while generating proper returns for our shareholders.

Thank you for your time today and I'll turn it over to Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us today.

Excluding special items, Delta reported net income of $379 million for the December quarter, or $0.45 per share, ahead of consensus estimates of $0.38 per share.

These results are $221 million better than last year as we fully covered higher fuel prices with higher revenues.

Our operating margin was 7.7%, 2.6 points better than the previous December quarter.

Special items for the quarter resulted in a $46 million net gain and included $164 million in mark-to-market gains on fuel hedges, which reversed the mark-to-market charge we took the last quarter, $43 million gain associated with the divesture of slots at LaGuardia and Reagan national airports, an $81 million impairment charge and $80 million charge for severance and other items.

For the full year, Delta generated a net income of $1.2 billion which was $250 million lower than the previous year.

While there's more work to do, I consider these results remarkable and that Delta faced over $3 billion in fuel price pressure during 2011 which we are able to mitigate through strong revenue performance, capacity discipline and a sound fuel hedging strategy.

I'd like to thank the Delta team for their work in achieving these financial results.

Together we are building a resilient business, one that generates proper return for shareholders and positions the Company well for 2012 and beyond.

Shifting to revenue, our December quarter top line revenue grew 8%, or $610 million, despite a 3.5% decrease in capacity.

Passenger unit revenues increased 12% year over year and we again produced a unit revenue premium to the industry.

For the month of December, our unit revenues increased 13%, continuing the strong performance we have seen all year.

Cargo revenues grew $20 million, or 8%, driven by yield improvements.

Other revenues increased $35 million driven by a 24% growth in MRO revenues and for the December quarter, our capacity and revenue initiatives combined to produce double digit unit revenue increases across most of our business units.

Domestically our unit revenues grew 13% on a 3% decrease in capacity.

We saw strength in our core business markets.

Our Atlanta and Minneapolis hubs in particular produced strong year over year unit revenue improvements and we are seeing nice improvement in the transcons as well.

The benefits of our capacity reduction are especially apparent in the trans-Atlantic where we generated an 11% unit revenue increase despite a weak economic back drop.

In the Pacific, our unit revenues for the quarter grew 14%, driven by a 20% improvement in yield on flat capacity.

Nearly a year after the earthquake and tsunami in Japan, we are now seeing US to Japan traffic that's close to pre-event levels.

Our Latin unit revenues increased 6% against a 5% increase in capacity, with South America driving the largest increase in unit revenue.

Corporate revenues were strong in the December quarter with total corporate revenues up 15% versus prior year, despite the 3.5% decline in system capacity.

We saw strength across many sectors.

Financial services sector was up 18%, technology was up 15%, manufacturing was up 10%, combined these three broad sectors represent half of our total corporate revenues.

Banking, which represents only 3% of our corporate revenues, was also up 5%.

In terms of our revenue outlook, overall system demand trends remain strong for the March quarter and we are forecasting January unit revenues to be up 15% from the prior year.

Our February trends appear largely consistent with what we are seeing in January.

The comps in March get a bit more difficult as we start to lap some of the fuel driven price increases we saw last year, but we still expect a double digit year on year growth that month.

Corporate travel bookings maintained solid growth rates in spite of our capacity reduction and we anticipate seeing additional demand as a result of our expanded schedule in LaGuardia, which begins at the end of March.

Our trans-Atlantic unit revenues are up 17% for the month of January as compared to prior year, as we see the benefits of the capacity rationalization we implemented after Labor Day and we continue to see strong trends in February and March as well.

In the Pacific, we are seeing steadily improving demand trends in both coach and BusinessElite cabins.

We are also experiencing improved market share and yields in markets where we have implemented our flatbed seating.

And finally, our outlook for Latin remains positive for the March quarter with both loads and yields showing strength.

Mexico is improving in both the beach and business markets and South America continues to be solid.

Now turning to guidance, as you know, the March quarter is our seasonally weakest quarter of the year, however despite that we are expecting a positive operating margin of 2% to 4%.

This is a substantial improvement over the $390 million pretax loss during the first quarter of 2011.

On capacity, we expect system capacity to be down 3% to 5% in the quarter.

I would note that capacity would be an additional point lower if not for the inclusion of an extra day this quarter due to leap year.

Domestic is down 2% to 4% and international will be down 4% to 6%, primarily driven by our 10-point reduction in trans-Atlantic capacity.

Finally, beginning with our January traffic release, we will begin providing monthly unit revenue information and actual fuel prices to provide additional transparency for investors.

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

Thanks, Ed and good morning, everyone.

Turning to cost performance for the December quarter, operating expenses for the quarter increased $360 million or 5%.

Our all-in fuel price per gallon was $2.97, up 20% from prior year which drove $515 million in fuel expense pressure.

As fuel price pressure was offset by $150 million in settled hedge gains.

The hedge gains came as a result of our decision to take advantage of a low fuel environment in September to lock in a substantial portion of our December quarter consumption.

Excluding fuel, our operating expenses were flat as the benefits of our capacity reduction and maintenance savings were offset by higher revenue-related expenses and profit sharing.

Consolidated non-fuel unit costs grew 1.8% year over year on a 3.5% decrease in capacity, driven by selling related expenses and our shared rewards program which rewards employees for meeting operational goals.

Non-operating expenses increased $37 million year over year, primarily due to FAS 133 gains in the December 2010 quarter.

Looking to March quarter cost performance, we anticipate March quarter non-fuel unit costs to be up 3% to 5% from prior year, and the main drivers of the March quarter increase are higher selling-related expenses, employee investments including wage harmonization, strategic initiatives including the implementation of the LaGuardia slot swap and the new Atlanta international terminal, and the impact of the March quarter 3% to 5% capacity reduction.

With regard to fuel and hedging, for the March quarter we are 66% hedged between $3 and $3.25 per gallon.

And for the June quarter we are 58% hedged between $2.75 and $3.25 per gallon.

As of Friday's curve, we are forecasting our March quarter all in fuel price to be $3.16 which includes $0.05 of net hedge gains and our June quarter at $3.10, which includes $0.10 of net hedge gains.

We are primarily using collars and call spreads as our hedging instruments.

Shifting to liquidity, we ended 2011 with $5.4 billion in unrestricted liquidity, which included $3.6 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.

Operating cash flow for the December quarter was $1.2 billion and free cash flow was $750 million.

Operating cash flow includes $675 million of SkyMiles purchases by American Express in the December quarter.

Capital expenditures were $400 million, which included $230 million in aircraft parts and modifications.

And during the quarter we paid $725 million in debt maturities and amortizations, which includes $435 million in early retirement of debt.

We ended 2011 with an adjusted net debt of $12.9 billion and we have now achieved over $4 billion of our $7 billion debt reduction target.

As a result of our debt reduction progress, our annual interest expense is roughly $300 million lower now as compared to 2009.

And looking at March quarter liquidity, for the March quarter we expect capital spending to be $450 million and we have net debt maturities of $200 million in the first quarter and we are forecasting an unrestricted liquidity to remain solid at $5.5 billion at the end of the March quarter.

So in conclusion, 2011 was a challenging year in many respects but in spite of that, we were able to deliver solid results and generate $1.2 billion in profit.

We reduced our adjusted net debt to $12.9 billion, a $4.1 billion reduction in two years and we generated a 9.1 return on invested capital.

We entered 2012 as a stronger airline and I'd like to thank the Delta team for their hard work and efforts to build a resilient and sustainable airline model which is successful for our employees, our customers and our shareholders.

Thanks, Richard, Ed and Hank.

Katie, we are now ready for questions from the analysts.

Thank you.

(Operator Instructions).

We will take our first question from Jamie Baker.

Good morning, everybody.

Hi, Jamie.

Can you hear me?

Great.

Richard and Ed, I want to ask an M&A-related question in a way that hopefully you're willing to answer so here it goes.

First on labor, do you think your relationship with ALPA is strong enough right now that they would have a seat at the table should Delta choose to pursue any further industry consolidation?

Second, given the strain you went through on the slot swap, do you think that regulators, broadly speaking, are currently in a position where they are willing to negotiate with multiple parties, multiple airlines?

And third, if every airline out there hypothetically was for sale, all of their hubs, all of their aircraft, et cetera, all of the international routes, where would you see the greatest need to beef up the Delta network?

So again labor, regulatory and beefing up the Delta network.

Over to you.

Jamie, this is Richard.

No comment on all three.

Do you want to go ahead and reuse your questions?

It's so plausibly, reasonable what I'm asking, though.

What if we framed the last one in terms of Delta's current network construct, where do you see through organic growth, for example, a need to round it out in any way, shape or form?

How about that?

Strike two.

You get -- you can ask, but we are not going to make any comments on any of the speculation.

So, that's no comment and if you want to ask a question on our earnings and the quarter or what's going on otherwise, we would be glad to entertain that.

Okay.

Well, you can't blame me for doing what I'm paid to do.

I will turn it over to others because I thought you did a very thorough job with the guidance, good quarter.

Thank you very much.

Thank you, Jamie.

It's always a pleasure.

We will take our next question from Dan McKenzie with Rodman and Renshaw.

Good morning, guys.

Richard, you mentioned that Delta is committed to growing and diversifying the revenues while taking a disciplined approach to costs and capacity, and Latin America remains a smaller part of Delta's network.

Can you talk about the ultimate end gain for this region, how big do you need to be versus where you are today and how do you get there?

Well, one, we have done well in Latin America.

I'm sure Glen has the numbers and he can add to what I'm going to say, but if you look at the investments that we made last year in Aeromexico and GOL and the Aerolineas position that we have through SkyTeam and look at the positioning of the Atlanta hub and our position in Florida, it's been a profitable operation for us and we have significant opportunity to grow organically.

I think we secured two great partners last year, which I think are pivotal and if you take Aerolineas and Argentina, and you take GOL in Brazil, and you take Aeromexico, we think we have a great partner footprint in Latin America to be able to grow that franchise over time.

Okay.

And I guess if I could turn domestically here with a question on domestic capacity, Atlanta ranks as 11th largest city in the United States but it nonetheless ranks number 1 for capacity and it's a similar story at nearby Charlotte.

So, as I look at the industry domestically here, I see capacity at two nearby airports that has not been particularly the restructured versus just about every other larger market in the country, and so my question is could Delta's returns be improved by readdressing capacity in this region?

Well, Dan, it's Glen, Atlanta continues to lead the hubs in terms of its core profitability and I think one of the things we have to look at is what -- in the quarter trends in the industry, I think 5 years ago or 10 years ago you had 50 seat regional jets that were flying 1,100, 1,200, 1,400 miles which somewhat diminished the pull, if you will, of the geographic historical hubs which Atlanta is well positioned in southeast and it is by far the largest market in the southeast.

So, I think when you look at the core profitability, when you look at the region it stirs, and when you look at the industry trends which are not to fly 50 seat RJs in uneconomic markets over time, you'll see that the hubs geographic pull becomes more and more relevant over the next cycle, and I think that's why Atlanta is well positioned.

Thanks.

I appreciate that, Glen.

We will take our next question from Bill Greene with Morgan Stanley.

Yes, hi.

Can I ask a question on the slot swap?

We've got to start to think about how we model that in.

Is there any sort of guidance or help you can give us in terms of thinking about the impact, the timing and sort of sizing it?

Well, it's big for New York it's not that big in terms of our total network and it really is about 100 departures which are moving from underperforming assets and other parts of the airline to New York where we think they have much higher potential over the short to medium term.

Initially there are a lot of markets that will be flown in the period of April and May and the beginning part of June by both carriers, US Air and Delta and that would probably be not the optimal situation, but that's the way the government asked us to transition the markets.

And beyond that, when we get to the second phase, which is in July, we believe that it will be accretive from that point on.

So, a little bit of choppy waters during the transition in certain markets but as soon as we get to July, we think the transaction becomes very accretive and, remember, it's only about less than 5% of our assets moving and then moving from underperforming markets that they are in today.

This is Ed, Bill, the other thing to consider is that we will put a little bit of incremental cost pressure in the current year as we build that capacity footprint out at LaGuardia.

But that was in your first quarter guidance?

It is, it is.

Okay.

And then Richard and Ed, back when we look at the Delta bankruptcy, there seems to be this sort of rule of thumb that a company goes into bankruptcy and sort of cuts 10% of capacity.

I actually think that was more of a domestic specific view for Delta.

Do you think that, that's sort of the right way to think about what happens to companies in bankruptcy?

Was that your experience or is it sort of more the way we can think about this is this is a post financial crisis world and the world is very different and the industry is cut enough that you're seeing this come through in the industry's results pretty clearly?

Bill, if you're trying to get our views on what American is doing, we simply can't comment on that.

For Delta, we had a very specific set of circumstances, we did -- you're right, we did cut substantially the domestic network, a lot of it was coming out of the regional, the regional space and we grew our international footprint going back over that time.

Okay.

Thanks for the time.

We will take our next question from Gary Chase with Barclays Capital.

Good morning, everybody.

I had a couple for Glen, if I could.

First I wanted to just quickly see if you could differentiate for us the -- how Japan is doing versus non-Japan Asia in the Pacific numbers which are obviously outperforming.

Okay.

Actually, we are very encouraged by both of those and if you could think of our Japan transpacific, that's a very stable environment.

We are actually taking a little bit of capacity out as we put the flatbed seats into the marketplace which we think ultimately will be very accretive to the Company, but the Japan trans-Pacific has moved through the year since the events of 3/11 and continue to gain strength.

The over flights, which are non-stop US gateway cities into Asian markets, are doing quite well.

They are absorbing the capacity and they have high single digits, low double digit unit revenue increases.

And then the third component is the Asian beach markets and that would be the Japan to Hawaii and Micronesian Islands and that continues to be very strong demand as the Japanese economy recovers and as the yen exchange rate is very favorable and continues to remain very favorable.

Then also in the prepared remarks, I think Ed mentioned share gain.

Wondering if you could elaborate a little bit on where that's occurring and what the catalyst for it is, what's driving that at this stage?

It wouldn't seem like it would be merger synergies this far out.

The share gains we were talking about were in the corporate space, Gary.

Is that what you're referring to?

Yes, yes.

Does that --

Certainly, yes, the merger continues to play a very important role in the product and the opportunities we offer our corporate accounts.

We are seeing a -- certainly in New York we are seeing a very substantial improvement in share we have been picking up, being able to bring some new Latin partners to the table and the Latin footprint is helping as well.

So, we -- back a couple years ago when we did the merger, we talked about the revenue synergies and I think we were all waiting for them to materialize.

I know you guys were.

And I think this past year we certainly have seen them show up.

Just wondering if there was an identifiable catalyst that we should think about timing-wise or is this more ongoing process that you're describing?

I think that the scale, and the product, and the technology, and candidly the service of our people are making a very big difference in the marketplace, and having a lot of impact.

Okay.

Thanks, guys.

We will take our next question from Glenn Engel with Bank of America Merrill Lynch.

Couple questions.

One just on maintenance.

I thought after the second quarter you were looking to see second half drop about $250 million from the first half and the drop was big but it was only $175 million, so that's a $75 million difference.

Glenn, part of that is because in the maintenance space you've got the MRO and we had growth in the MRO, so you would have to look at the net recurring maintenance and we actually came in pretty close to the numbers we were expecting.

And how does maintenance look in 2012?

Yes, Glenn, it's Hank.

Hi, the first quarter we will see a little bit higher maintenance expense then it will be reduced the balance of year.

And the March quarter is traditionally a high maintenance quarter because the planes are in there getting the visits before the busy summer schedule.

So, you'll see it trail off as the year goes, but the first quarter will be up just a bit.

Final one for Glen, if I looked at the Latin RASM it was up 5.9% but the industry was up around 10.5% for the quarter.

Is there any mixed reasons why you would lag?

I think if you look at our Latin versus our competitive set, we have a very different Latin America.

It is much larger gauge and it is much longer length of haul, and so when you look at other carriers that have 50 seat regional jets going to short haul we don't have that component.

So, what we have been growing has been the longer haul into South America so you have a have a little bit of length of haul in there.

And I think from a profitability standpoint, we are very, very excited about a Latin performance and the outlook moving forward and while we continue to strive to improve all of our sectors, we are pleased with where Latin sits, but we think there's more for 2012.

Thank you very much.

We will take our next question from Michael Linenberg with Deutsche Bank.

Oh, yes, hi, everyone.

I guess just two quick ones.

Hank, back at the Investor Day I remember you provided some color on the pension piece.

Where -- you probably have a better number now, now that you've closed the books.

For 2012, what should we be thinking about with respect to both pension expense and then your cash contribution to the plan?

Yes, hi, Mike.

Pension expense for 2012 will be about $400 million.

It will run about $100 million a quarter, which is almost flat to 2011.

I think we were running about $85 million a quarter.

Then in terms of funding for 2012, you can expect somewhere between $650 million and $675 million or so, and that is a bit up versus 2011.

Okay.

Good and then my second question, this is actually to Glen, you've done a great job on closing the revenue gap, in fact, you're now running at a nice premium relative to the industry.

Glen, how does that compare in New York?

In the New York market, are you at a premium or are you still lagging?

If you are lagging, does -- will the dual hub structure in New York, will that close that difference?

I think that's a very good question and I think that is where we see a lot of our upside opportunity as we move through 2012 and beyond.

Historically, we haven't had the position that we will have in New York and I think if you look at the government data that was just released for last quarter for the first time in Delta's history, it was really a neck in neck race between Continental and Delta, and that's pre United merger and pre LaGuardia transaction.

So, you see really two carriers operating in the New York space, one is Continental primarily based in Newark and one is Delta, primarily based in LaGuardia and Kennedy.

And we think it's very synergistic that we will be able to capture the business traveler who wants to use LaGuardia in and out when they are doing business meetings, but when their travel takes them outside the perimeter for the long haul and for the international, they will use us on Kennedy.

That is the one area of our network that does not command a premium, but the deficit has continued to be reduced and we think that the upside to our P&L is just getting to parity in the short run and getting to a premium over time.

And the JFK terminal, that comes online, what is that, 2013 or 2014?

Before summer of 2013.

Okay.

Okay.

Very good.

And great quarter, guys.

Thanks.

Thanks, Mike.

We will take our next question from Kevin Crissey with UBS.

Thank you.

Good morning.

Wanted to ask corporate travel seems to be -- have rebounded kind of normal cyclically.

Wanted to talk about where you think we are in the overall cycle.

I know oil and jet fuel prices have really changed what the earnings results look like in a cycle, but I wanted to see if you thought we were just starting this cycle or are we kind of three years in with corporate travel having recovered nicely?

Kevin, this is Ed.

I think we are clearly at a midpoint in the cycle.

If you look at the strength we have had over the last couple of years, has helped pace what the industry broadly is seeing and I think contribute a lot of that to our merger.

It's hard to say what the future is.

You're looking at a pretty dim view in the Eurozone and a recessionary outlook, yet our trans-Atlantic corporate revenues because of the capacity discipline we have implemented have been pretty strong and the corporate base really hasn't shown much weakness in the -- on the European side.

So it's a -- it's clearly driven by the big US corporates, as compared to the global corporates and I think we have a -- we have a pretty solid outlook for 2012.

The GPTH just came out recently with their travel survey and they are expecting the corporate space to increase another 5% to 7% again this year and that's consistent with what we are seeing.

Though I think our number is probably a little bit higher given some of the market share movement we have seen.

Okay.

Thanks.

And thanks for putting out the traffic with RASM and fuel.

Can you just give us what the capacity changes year over year look like by month?

Because I thought maybe February had less capacity cut than maybe the other months, but I could be wrong.

This is Richard.

On a system basis, our current forecast for February is down about 4.5% to 5% system.

Okay.

So, basically the change in capacity is relatively stable throughout the quarter so we should --

It is, yes, it is relatively stable throughout the quarter.

Terrific, that's what I need.

Thank you.

And February, again, you have an extra day due to leap year.

Thank you very much.

We will take our next question from Helane Becker with Dahlman Rose.

Thanks very much, operator.

Hi, everybody.

Two questions, one, to comp the 15% PRASM percent increase you're talking about for January, do you have a base number that we should use?

And my second question is related to regional jets.

Can you just -- I think you own most of the regional jets, so maybe if some of your regional providers aren't operating up to snuff, you can move those aircraft.

So, can you just talk about whether or not you would consider an RSP for regional feed at some of your hubs in the next few months, I guess is how I would ask that question.

Well, I can take the last one, which is we are not considering any RFPs for regional feed at any of our hubs in the next few months.

And on your first question, Helane, you were looking for the January monthly RASM base?

Yes, yes.

Do we know what the 15% compares to?

It was 11 at 1.

Okay.

Thank you very much.

We will go next to Hunter Keay with Wolfe Trahan.

So, assuming you hit the $10 billion net debt target by mid '13, what's the next strategic step because at that point the business should be spinning off a good amount of cash flow and assuming it isn't to buy a bunch of new planes and lever up again, which I don't think it is, would you consider turning to the pension plan, maybe over funding it?

I think a number of investors still consider that unfunded obligation to be debt when valuing the equity of the Company.

So, how do you think about the next step to cash deployment as it may or may not relate to the pension plan in mid '13?

Hunter this is Ed, yes we certainly would look at the pension plan as one place where we would make some incremental investments if we had that cash flow flexibility.

We do believe we are on track for the $10 billion by 2013 and, as you can appreciate beyond 2013, we expect that net debt level to continue to decline as well, so it is not going to be a stagnant number.

Okay.

Thanks, Ed.

And Richard, I'd love to hear your opinion on foreign ownership restrictions.

I know it obviously requires an act of Congress to change and this is deeply embedded and it is a very sensitive issue for a lot of labor unions out there.

Do you think there's an appetite to potentially address that in Congress and if so, would you be supportive of that kind of a bill?

I don't think there's any appetite to address that in Congress.

Number two, I believe through immunized joint ventures, the industry has found a mechanism that allows it to organize trans-border effectively.

Okay.

Thanks a lot.

We will take our next question from Savi Syth with Raymond James.

Thanks for taking my question.

I was wondering just with the capacity cuts that we were seeing this year and you provided a little color on the maintenance, if you could just kind of provide a color on how you expect costs to be as you progress through the year.

Yes.

Our costs will be up for the full year in the 2% to 4% range, which is consistent with what we talked about in the December Investor Day.

The March quarter is particularly challenging because that's the time of year where we've got the fewest ASMs.

It's seasonally -- capacity is down, we also have higher maintenance expenses in that quarter and then as the year progresses you see improvement, and then certainly by the fourth quarter as we have our strategic initiative continuing to be implemented, that will provide further benefit to us for the back half of the year and then that will take us into 2013 with additional benefits.

Okay.

Great.

And just another follow-up question.

It looks like well your -- the frequent flyer revenue, if you look at Delta's frequent flyer revenue, it comes to roughly about 5% of total revenue, but if you look at United or Alaska, their's comes to about 10% of total revenue.

Just wondering why that discrepancy was and if there was potential for that to increase.

Yes, I suspect -- I'm not familiar with the specifics of United's, but I suspects it's differences in the deferred revenue accounting.

Each airline has the specific values and that will impact comparability between carriers, while the treatment may be the same, it's unique per carrier.

So, I think it is somewhat difficult to try to match up the specifics one carrier versus another.

We certainly don't think that our frequent flyer plan is any less revenue producing than any other carrier out there.

All right.

Great.

Thank you so much.

We will take our next question from Jeff Kauffman with Sterne Agee.

Thank you very much.

A lot of my questions have been answered, so I'll just ask two shorter ones.

You talked a lot about what you see in corporate travel.

What are you seeing on the leisure booking window side right now?

This is Glen.

The leisure side seems very strong as well.

We've had a lot of traction eliminating some of the lowest fares that were unattractive in the marketplace as demand continues to show strength, and so we have seen a very robust increase in leisure yields and that bodes well as we move into peak summer.

Okay.

The yields are moving up but what are you seeing in terms of the booking windows right now?

The booking windows, we are booked ahead in total aggregate and get out into March and beyond, what we are seeing is primarily leisure and we are ahead in all sectors of those today.

Okay.

That's great and one follow-up.

As we get more and more information on AMR's restructuring, whether it's the management ranks, whether it's what they are doing with the aircraft, which I think they are about to announce, is this -- might you rethink your capacity plan from what you laid out at analyst day or are you pretty set on that given all the capacity you have flowing in LaGuardia, so let's not worry about that?

We make our own independent decisions, Jeff, on capacity and, no, that has no impact on our plans.

Okay.

Very good.

Guys, congratulations, great quarter.

Thank you.

Thanks, Jeff.

We will take our next question from Justine Fisher with Goldman Sachs.

This is Josh for Justine.

Just wanted to see if we could get any more details on that $435 million of debt that you repaid early this quarter.

And then going forward, how you're thinking about which debt to potentially take out first if that option comes up.

Yes, Josh, this is Hank.

Some of the debt you may recall we repaid the MAC loan and that was at the end of the fourth quarter.

We also had some junior notes that we repaid, but as we think about the acceleration of the debt we are working towards that goal of $10 billion adjusted net debt.

We look at what's most advantageous from a cost perspective, and obviously we've got our scheduled amortizations and maturities and then with the excess cash we put it back on the balance sheet by continuing to reduce debt and it's working.

We are $300 million lower in interest expense this year versus where we were when we started the program and we will continue being aggressive to pay the debt down as quickly as possible.

We like to pay down debt that has high interest rates.

Got it.

All right.

That's it for me.

Thanks, guys.

Katie, we are going to have time for one more question from the analysts.

Thank you.

We will take our next question from Ray Neidl with Maxim Group.

Yes, I just want to try and clarify one thing on the pensions.

They are frozen, I take it, all the different plans are frozen, so they are not accruing any more benefits.

At some point, once they become fully funded, should that become a non-cost issue?

Ray, this is Ed.

We've got a ways to go before they are fully funded, so I -- that's -- obviously one of the things that's been causing the liability to grow is the continued reduction in discount rates.

So, over time, as we do expect interest rates to eventually start to inflate a bit, you're going to see that liability also start to decline, so that -- you should factor that into your calculus also.

Okay.

Great.

And the new policy of the government where you have to include taxes in your ticket price, customers won't see the government raising taxes and you will get blamed for prices going up.

Under this law is there any way that you can show taxes separately even though you'd have to show the total cost of the ticket when you're advertising?

Ray, this is Glen.

We do show the taxes separately today and we distribute our product through a lot of different venues, so how the customer ultimately sees them depends on how that venue displays them.

Through all of the channels that we control, whether or not it's our reservations agents or whether or not it's our online purchase, the taxes are broken out.

Okay.

Great.

So, the customer will be able to make the decision that way, then?

Yes.

Okay.

Great.

Thank you.

Thanks, Ray.

Katie, that's going to wrap up the analyst portion of the call, so I will now turn it over to Ned Walker.

Thanks very much, Jill.

And Katie if you could go ahead and go through the process for cueing up the questions for the media.

And also with the media, if you could have one question and a quick follow-up, we should be able to accommodate most everyone.

Thank you.

(Operator Instructions).

We will take our first question from Josh Freed with the Associated Press.

Let's see.

You mentioned that you're going to have some higher costs related to wage harmonization as you kind of finish the integration of the different labor groups and I know it's a big priority also to keep overall non-fuel costs down, so can you say a little more about how you do both of those at the same time?

And with capacity coming down a little bit also, it makes me wonder if you need to trim the workforce some more.

Well, it's a combination -- this is Richard -- it's a combination of actions over time.

From an employee standpoint, we have had a very firm policy of no front line involuntary furloughs and that will remain our practices, but if we look at where the opportunities really lie in the inflation and the opportunities lie in our maintenance area and we placed an order this past year for 100 new 737-900s, there will be significant benefits that come from reef leading the airline, both in terms of maintenance, operating costs and fuel costs.

Second, we need to get back to our historic productivity levels across the airline and that will be part of leveraging technology and generating efficiencies across the business.

Third is restructuring our regional carrier contracts and reducing the 50 seat lift as we up gauge.

And so all of those are part and parcel of a process to be certain that our non-fuel unit costs remain the best in the industry.

Okay.

So, no involuntary front line furloughs still.

How about at corporate headquarters level?

Our efficiency in the corporate, our productivity and efficiency in the merit or corporate level is double digit over the last several years.

All right.

Thank you very much.

We will talk our next question from Kelly Yamanouchi with Atlanta Journal Constitution.

Hi there.

I was interested in more detail about why the unit revenues in Atlanta were doing so well.

Kelly, this Glen.

Could you repeat?

I'm interested in why the unit revenues in Atlanta had particularly good improvements.

I think you mentioned Atlanta and Minneapolis?

Right, Kelly, in the last quarter or so (Inaudible) unit revenues in Atlanta exceeded average by about (Inaudible) and to continue (Inaudible).

I would say the reason why Atlanta is doing so well is the Delta people.

The Delta people are doing a great job servicing the city of Atlanta and that superior service is coming through at record breaking performance.

Can I just say Katie, if you could check one of the mics, it sounds like someone is breathing heavily and it's hard for us to hear in a way.

Thank you.

Financial advantages of the operational improvements that you had in 2011?

Pardon me?

Is there a way to quantify the financial advantages of the operational improvements that you had in 2011?

Well, I think our operational improvement is -- we are clearly at the top in terms of customer service and operating performance and the Delta people have done a phenomenal job, and I think that's an important factor in having industry leading RASM.

Great.

Thank you.

We will take our next question from Mary Jane Credeur with Bloomberg News.

Hi, gentlemen.

I wanted to follow up where Mr.

Baker left off and see if I could take a step back and try to come at that question a different way.

Do you think there is another big airline deal left in the US industry or is the industry where it needs to be consolidation-wise?

Hi, Mary Jane.

It's Ned.

We really are not going to make any comment on any industry rumor or speculation on it.

So, go ahead if you want to ask another question, be happy to respond to another one off that topic.

Sure, sure.

Next one is for Hauenstein.

Glen, are you guys gaining any traffic since American's filing, anything notable in Ft.

Worth, DFW, New York, O'Hare, key markets where you guys overlap?

I think that the customer has really become used to Chapter 11 in the US airline industry unfortunately, and so we did not see any immediate shift in travel patterns that would fall under that kind of filing.

Great.

Thank you.

We will take our next question from Jeremy Lemer with Financial Times.

Hi there, thanks for taking my question.

Apologize if this question has already been asked in different guises.

I was pulled off the call to do something else a little while ago.

Could you give a little bit of color on the sort of demand environments and whether macro economic concerns are filtering through into slowdown in demand for travel in various segments, whether it's geographical or if you could cut it also by type of travel that would be very helpful.

We actually see good demand across all of the regions we operate in and corporate demand in particular is good as is leisure demand.

So, even though there is some concern about Europe, we have taken pretty dramatic steps to reduce capacity in those markets and right size our capacity to demand and so we have seen good RASM performance in all of our entities, Asia, domestic, Latin and the Atlantic and we see those trends continuing into the first quarter of 2012.

And as a quick follow-up, what explains that relative resilience?

Is it simply that if we got down to levels of demand that's essential, is it capacity slipping across the industry?

Is it other factors?

How do you sort of explain this resilience?

I think one, we have good equilibrium of capacity to fuel price to demand, so those are the three important factors.

And second, around the world, even though there is difficulty in Europe, the economic outlook, while not the 4% to 5% range that you usually have in the US after the downturn of 2008, we are seeing solid GDP performance in all the other regions of the world.

Okay.

Thanks.

We will take our next question from Darren Shannon with Aviation Week.

Can you provide a monthly breakdown by region for your 1Q international capacity cut?

And on the domestic side, what are your contingency plans should Pinnacle and Republic file for Chapter 11 and can you replace any or all of their feed?

Darren, we don't provide our monthly forward guidance, that level of detail international versus domestic.

Okay.

We gave a broad international down 4% to 6% for the quarter.

And we are not going to comment on any other speculation at any of our regional suppliers.

Okay.

Thanks.

Katie, we have time for one more call.

We will take our next question from Wayne Risher with The Commercial Appeal.

Good morning.

I wonder if someone would talk about how the Memphis hub is performing for you at the reduced capacity levels there and whether you think that Memphis is basically right sized for you or kind of close to what it needs to be.

And whoever speaks, please tell me who you are because I don't recognize your voices.

Sure.

This is Glen Hauenstein and we have had a lot of success in the reshaping of the Memphis hub.

Unit revenues are outpacing the domestic US industry at this point, not dramatically but substantially.

So, we are very pleased with the impacts that we have had in terms of our profit performance on a year over year basis.

It is still not where we need it to be and so we will continue with it to adjust capacity in the future as we need to, but I think generally we are in the vicinity of where we need Memphis to be in order for us to generate profits.

Okay.

Thank you very much.

I'd like to thank everybody for joining us on the call.

That concludes the December quarter call.

We will see everybody in April when we do the March quarter.

Thanks so much.

Appreciate it.

This concludes today's conference.

We appreciate your participation.