達美航空 (DAL) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines March 2012 quarter financial results conference call.

My name is Cynthia and I will be your coordinator.

At this time, all participants are in a listen-only mode until we conduct the question-and-answer session following the presentation.

(Operator Instructions).

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

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

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

Thanks, Cynthia.

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

Joining us from Atlanta today are Richard Anderson, our CEO; Ed Bastian, our President; and Paul Jacobson, our Chief Financial Officer.

Also in the room for the Q&A are Glen Hauenstein, Steve Gorman, Mike Campbell, Holden Shannon, Mike Randolfi, Gary Chase, Ben Hirst and Ned Walker.

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

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

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

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

Some of the factors that may cause such differences are described in our SEC filings.

We'll 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'll turn the call over to Richard.

Thank you, Jill.

Good morning, everybody, and thanks for joining us on the call today.

Before we go through our results, I'd like to congratulate my friend, Paul Jacobson, on his recent promotion to Chief Financial Officer of Delta.

Paul started his career at Delta in 1997, and prior to his promotion Paul was our treasurer.

He spearheaded our debt reduction and fuel management strategies, among other very capable activities on our behalf.

He has a great track record and we're really pleased to have him in his new role.

Also, Mike Randolfi is a 12-year veteran at Delta.

We promoted Mike to the position of Senior Vice President of Finance and Controller.

He has the lead on our accounting reporting and controllership functions.

With his broad background at Delta.

Mike is well-suited to lead our cost reduction efforts.

And to round out our leadership changes, I'd like to welcome Gary Chase to Delta, where he is now our Senior Vice President of Financial Planning and Analysis and Investor Relations.

Gary brings a wealth of knowledge of the airline sector from his years as a very capable analyst, and we're really glad to have him on this side of the call for a change.

The great thing about it is, I was able to get all of his questions asked before the call started.

But congratulations to all of you.

We're humbled that you are here with us.

Getting to our results this morning, we announced a pretax loss of $36 million, which is a $355 million improvement over last year, despite $250 million in higher fuel costs.

We expanded our operating margin year-on-year by 4 points.

We had strong revenue performance.

Once again, we produce a revenue premium to the industry.

Our total revenues increased $665 million or 9% from the prior year against a 3% decrease in system capacity.

I'd like to thank our employees for running a great operation and taking care of each other and taking care of our customers in the March quarter.

Our DOT on-time arrival rate was 7 points better than last year.

Our completion factor was 99.6%, a 2.8 improvement year on year, and we had a 31% decrease in Department of Transportation bag claims, a new record low and, not surprisingly, our DOT complaints have fallen 53% year-to-date, through February.

Our international on-time performance is industry-leading.

Running a reliable operation is important to our customers and clearly contributed to our revenue outperformance.

The consistent ability of our employees to deliver a great operation and provide courteous customer service plays a big role in our success.

And for their great performance, our employees earned $22 million in Shared Rewards for the quarter.

Our March quarter improvement in results and operations is evidence of the momentum we've built by executing consistently on our plan year in and year out.

We have been successful at passing along higher fuel costs and have implemented a number of initiatives designed to ensure we are compensated for the services we provide.

As a result, our revenue performance outpaced the industry and we saw margin improvement in every region and in every hub across our global network.

You've heard us consistently state that we must be disciplined with capacity.

To that end, our March quarter capacity was down by 3%, and for the full year, our system capacity will be down 2% to 3%.

We continue to closely monitor all of our markets and for that matter, all of our city pairs to be certain we match supply to demand so that we may fully cover fuel costs and meet our profit goals.

The business is generating solid cash flows, which we are using to reduce debt as we make investments in our product, facilities and network.

For every $2 of cash we generate, one goes to paying down debt and the other is prudently invested in the business to meet our return on invested capital target of 10% to 12%.

Last month, we began the largest expansion at LaGuardia by any carrier in four decades and we are building the first true connecting hub at LaGuardia.

By this summer we will have more than 250 flights per day, offering more service to more cities than any other airline from New York's preferred, close-in business airport.

We've seen excellent results so far and Ed will provide additional color on our performance.

We ended the quarter with adjusted net debt of $12.2 billion, a nearly $5 billion reduction in two years, and we fully expect to hit our $10 billion net debt target next year.

Finally, our return on invested capital for the last 12 months was 10.6%, in line with our stated 10% to 12% ROIC goals.

You've heard us detail our plan to build a durable business model that generates strong profit margins cash flow and allows for investments in our future.

This plan is the same strategy we have discussed with our investors consistently for the last three years.

So please expect more of the same ahead.

We're not, obviously, pleased with a loss for the quarter, but a $355 million pretax improvement shows that our plan is working.

Most importantly, and I stress this, we had margin expansion in all regions and all hubs, and we expect our 2012 full-year profit and margin will increase over 2011, even with higher fuel costs.

So in summary, we like the trajectory we are on, and so we will stay the course and remain focused on strong revenue growth, very disciplined capacity management, tight management of costs and CapEx, debt paydown, great operations, and customer service with the best employees in the industry.

Thank you for calling in this morning and, with that, I'll turn the call over to Ed.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us.

Thanks for your time.

Excluding special items, Delta reported a net loss of $39 million, or $0.05 per share, in line with First Call consensus.

As Richard said, while any loss is disappointing, our pretax results reflect a $355 million improvement from the prior year, and to give some perspective, this is the best March quarter Delta has generated since 2000.

So clearly, our plan is working.

Our operating margin in the quarter was 2.6% which was 4.1 points better than the prior first quarter.

Special items for the March quarter included a $163 million net gain and included a $151 million mark-to-market gain on fuel hedges, a $39 million gain from the slot exchange with US Airways, and a $27 million charge for fleet, facilities, and other items.

Turning to revenue, our top line revenue for the March quarter grew $665 million or 9%, despite a 3% reduction in capacity versus the prior year.

That increase in revenue is more than twice the $250 million increase we experienced in fuel expense.

Our passenger unit revenues increased 14%, driven by a 9 point yield improvement and a 3 point increase in load factors, and in March we generated a revenue premium to the industry for the 12th consecutive month.

Our cargo revenues were down slightly due to lower yields versus the prior year and other revenues increased $21 million, driven by a 20% increase in MRO revenues.

During the quarter, we saw strong unit revenue trends across all our entities, driven by our capacity discipline, corporate bookings strength, and the benefits from the investments we have been making in products and services.

Our domestic unit revenues increased 12% against a 3% decline in capacity.

Our Detroit/Minneapolis hubs performed particularly well and we are seeing strength in our high yield, close in bookings.

New York outperformed the domestic results by 2 points which bodes well for our expanded presence in New York.

We had two days in March which were in the top 10 highest unit revenue days for the domestic entity since 2008.

Typically, our highest domestic unit revenue days are around July 4 and Thanksgiving, but seeing this revenue performance this early in the year is a good trend, and that strong environment isn't just limited to March.

We've already had two days in April which have hit the top 10 market as well.

In the trans-Atlantic, we trimmed our first-quarter capacity by 9 points, which helped to drive a 22% year-over-year RASM increase and a revenue premium to the A4A carriers.

The trans-Atlantic entity contributed a large portion of last year's March quarter loss, and we are encouraged that the capacity actions we have taken in concert with our JV partners have delivered significantly improved results.

The unit revenues for Delta's Latin entity increased 8 points.

While this is less than our system average, our Latin entity faced tougher year-over-year comps than any of our other entities.

The Pacific has largely recovered from last year's earthquake and tsunami in Japan.

Pacific RASM increased 15% year over year, driven by improvements in yield and load factor and we are seeing particular strength in Narita and our beach markets.

We continue to make gains with corporate accounts with total corporate revenues for the quarter up 11%, despite our 3% capacity reduction.

The corporate growth is broad-based and the industries where we saw the most significant increases were financial and business services and manufacturing.

I'd also like to thank the Delta employees worldwide for this quarter's strong revenue performance.

Their efforts to deliver a top-notch customer product are why our customers are increasingly choosing Delta and paying a premium to fly our airline.

Turning to our outlook, for the June quarter, the year-over-year comps get progressively tougher as we move beyond April because we lapped some significant fare increases from last year.

That said, the revenue environment is holding up nicely and we are forecasting April unit revenues to be up 11% from the prior year.

We also see good traction in May, with May RASM forecast to be up in the high single digits despite a very strong prior-year performance.

For the domestic entity, we're seeing improvements in both book load factor and yield in April and May and we continue to see year-over-year yield improvement in May as well.

We are beginning to see the benefits of our increased services in LaGuardia, which is contributing to an increased volume of hire-yielding close-in bookings as well as corporate share shift.

Thus far in April on a 25% increase in capacity, LaGuardia is showing the biggest margin improvement for any of our hubs as well as the highest absolute margin, which is an encouraging trend as we execute the second phase of our slot swap in July.

It is great news to have had such a strong launch of our new service.

Thanks go out to Gail Grimmett and her fantastic team in New York.

For the trans-Atlantic, our bookings are tracking in line with last year and we are seeing positive traction on yields.

The second quarter is traditionally a shoulder season for our Latin markets; but we are seeing improved load factor trends on a year-over-year basis and in the Pacific, yield improvements are driving higher booked revenues for both May and June.

Finally, we are seeing incremental revenue gains as well from new products and services.

For example, our new first class upsell product has reached the $200 million run rate of annual incremental revenue and that pretty much goes straight to the bottom line.

This and many other new merchandising and sales initiatives contribute to the $1 billion in new revenue goal we expect to achieve by 2013.

Turning to guidance, we're expecting a solidly profitable June quarter with an operating margin of 8% to 10%.

On capacity, we are forecasting system capacity to be down 1% to 3% with both domestic and international both down 1% to 3%.

Our Pacific capacity will be up 7% to 9% due to the resumption of our Detroit-Narita flying and the normalization of our Japan capacity.

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

Thanks, Ed.

Thanks, everybody for joining us and good morning.

It's an honor to be here.

Turning to cost performance for the March quarter, operating expenses for the quarter increased 4%, or $334 million, driven primarily by our fuel price, which was up 14% to $3.28 per gallon.

Total fuel expense increased $250 million as the increase in fuel was partially offset by $45 million of net hedging gains and reduced consumption on lower capacity.

Non-fuel operating expenses increased $80 million for the quarter as the benefits of lower capacity and savings from mild weather conditions partly offset higher ancillary business expenses and employee costs.

On a unit basis, non-fuel costs were up 3.6%, driven by higher employee and maintenance costs as well as the impact of our 3% capacity reduction.

Looking ahead, we expect our June quarter non-fuel unit costs to increase 3% to 4% versus prior year driven by our capacity reduction combined with higher employee costs, which are being partially offset by productivity improvements.

We are committed to reducing our non-fuel unit costs and have begun implementing the structural changes needed to get there including improving maintenance efficiency; eliminating small-gauge, inefficient aircraft; and improving employee productivity.

As part of this, we are aligning our headcount with our reduced capacity.

To that end, we are currently offering a voluntary retirement package that closes next week.

We expect those employees will exit after the summer flying season.

Turning to fuel, for the June quarter we have had 70% of our consumption between $3.05 and $3.40 per gallon.

For the September quarter, we are currently hedged 40% between $3.05 and $3.45 per gallon.

As of Friday's market close with these positions, we are forecasting a June quarter all-in fuel price per gallon of $3.28 and an all-in price of $3.27 for the September quarter.

Shifting now to liquidity, we ended the March quarter with $5.7 billion in unrestricted liquidity including $1.8 billion in our undrawn revolving credit facilities.

Operating cash flow for the quarter was strong with $947 million driven by strong advance ticket sales.

Our capital expenditures in the quarter were $350 million, primarily consisting of $300 million in aircraft parts and modifications.

On this cash -- strength of the cash flow we were able to pay down $450 million in debt, including $40 million in early debt retirements.

As Richard mentioned, we ended the March quarter with adjusted net debt of $12.2 billion.

Additionally, due to our strong liquidity position, we were able to fully fund our 2012 pension contributions in early April, well ahead of our plan.

For the June quarter, we expect capital spending to be $400 million and have net debt maturities of $450 million.

We are forecasting unrestricted liquidity balance of $5.8 billion at the end of the quarter and expect to have our adjusted net debt balance down to $11.6 billion.

We remain on track to reach our goal of $10 billion of adjusted net debt by the middle of next year.

So to conclude, the year is off to a good start and we plan to build on the momentum you see in these results.

Finally in closing, I'd also like to go Richard and Ed's comments and say thanks to our employees.

They have all worked so hard to build a tremendous momentum we have here at Delta.

I'm very appreciative for all that they do to make Delta a great airline with an even brighter future.

Thanks, Richard, Ed and Paul.

Cynthia, we are now ready for the Q&A if you could give the instructions.

(Operator Instructions).

Bill Greene, Morgan Stanley.

I wanted to ask a question just on capacity.

You guys have been very disciplined in that regard and the commentary on revenue was really quite strong.

But we've also seen some attempts to raise fares fail.

I'm not sure how to reconcile all of that.

Why would a very strong revenue environment see failure when capacity seems reasonably disciplined?

Does it suggest the industry needs to take more out or how do I reconcile these ideas?

Bill, it is Glen, how are you doing?

You know, we have had a lot of success in what I would call some smaller changes to the fare environment, which have produced these results.

Clearly some of our competitors don't like the absolute fare increases that have been in the marketplace but there has been a lot of strengthening of defenses; a lot of strengthening of the advance purchase of the state requirements that have yielded this.

So I think you have to look at fares in more than just the dollar amount we are charging but in the qualifications for how you actually get those fares.

And I think that is what is driving industry yields up across the board.

So, while we have had some resistance to those types of fare increases, we've made a lot of progress on the other side of the fare equation.

Fair enough.

Another question I had, I don't know if it is for Glen or for Richard, but obviously, you've seen some early success here with the slot swap at LaGuardia.

You do have a perimeter rule there.

Is there any reason to think that we could ever address that?

And if so, if that were either lengthened or eliminated, would that materially affect your performance at LaGuardia?

Or is that not a big opportunity?

Clearly, the perimeter rule restricts LaGuardia and it is a remnant of when Kennedy was open and the government was trying to force traffic to go to Kennedy.

There is no real structural reason for LaGuardia to be limited and similar to DCA, over time -- and I have no idea what the timeline is on this -- but those restrictions tend to be loosened over time.

This one has not, to date.

And I wouldn't want to forecast if and when it would ever change but, clearly, I think customers would benefit if they had the option to fly beyond the perimeter rule at LaGuardia.

All right.

Thanks for the time.

Jamie Baker, JPMorgan.

Good morning everybody.

A question for Paul.

You touched on some cost reduction initiatives, but can we get a specific update on the $0.084 CASM target when you think you'll be able to reach that goal?

Obviously, there's been some slippage in the targeted date in the past.

Well, I think, Jamie, we're on our way in terms of making improvements to that through the employee initiatives.

Some of that we wouldn't expect to take in until after the summer flying season, but with the maintenance savings as well as some of the fleet-related savings as we get into next year, we start trending pretty rapidly into that space.

Okay.

Jamie, this is Ed.

If you recall when we laid out that target last year we said it would probably take 18 months, two years to ramp into.

We've got a number of structural initiatives we're working on, and more to come in that area, but we're confident we've got some reductions in the not-too-distant future.

Okay, and a follow-up for Richard.

The topic is pilots.

Obviously, well, maybe not obviously, in my opinion, you enjoy a better relationship with your pilots than some of your peers.

I'm not going to ask you when you'll have a new contract and even if you told me, I wouldn't hold you to it, but is it fair to extrapolate that you are more likely to get a deal sooner rather than later?

And is that indeed, a priority for you?

It is a priority for Delta to get a new agreement with our pilots well in advance of the amendable date which, I believe, Mike Campbell, is it the end of the year?

Yes.

And so if you look at our track record and you look back to 2007, in 2007 we reached an agreement with our pilots three times within six months on new contracts that were well accepted.

So we really value that relationship and we want -- it is a high priority here to get a new agreement and include it as quickly as we can.

Is the timing potentially impacted at all by some of the labor headlines going on these days related to --?

No, I think if you did it based upon how the rest of the industry does it, we'd be about five years.

Okay.

I appreciate the update.

Thank you, gentlemen.

Savanthi Syth, Raymond James.

Thanks for taking my question.

On the maintenance expense, are there big maintenance events coming up in 2012 and 2013 versus what we've seen in the last couple of years?

Hi Savi, this is Paul.

We have talked about lowering those expenses through the retirement of older airplanes and we're continuing to work in that direction.

We have said that that opportunity over the next 18 months to 24 months is in the $200 million range.

Okay.

That is offsetting those expenses coming on.

Then, just a follow-up question, and the ancillary businesses related expenses, it seems that that has been increasing over the last few quarters pretty rapidly.

Just wondering what that is related to and if we start to see that gap or how we should think about that?

Savi, this is Ed.

That's the increase we have had in our MRO revenues.

Okay, so it seems even if you look at it as a percentage of other revenues or cargo and other revenues, it is increasing even as a percent.

Well, we can go off-line with the details, but we've had 20% growth in MRO revenues over the last year, so those costs are up considerably, as well.

Okay, great.

Thanks for taking my questions.

Sure.

Michael Linenberg, Deutsche Bank.

Two questions.

First, just looking at your regional breakout on revenue, you look at the unit revenue performance by region, I can understand why the Pacific is up 15%.

You had maybe a few weeks of an easy comp there, but the one that really stands out is the Atlantic, the 22% PRASM gain.

And I know that's obviously being helped by the 9% capacity cut, but you know, we read in the headlines this morning that the UK is now officially in a recession; Germany contracted in the fourth quarter and there's some talk that it contracted in the March quarter; Spain and Italy may be in a recession.

Is this just -- you've talked about in the past which you've learned with your JV partners.

Is that as a result of that, is that what we're seeing here?

Because this type of performance given the macro backdrop, they don't reconcile and yet the numbers are quite good.

What can you tell us about that?

And it's probably to Richard and Glen.

Mike, this is Glen.

I think you have two things going on here that produced that -- I think it's a pretty amazing number for us in the trans-Atlantic.

One is clearly the reduced capacity and the secondary impact that has on recapture on the remaining flights.

But more impressive is the fact that business travel in aggregate is increasing despite the fact that Europe is in a recession.

That is really contrary to what we might expect, given all the headlines that we read.

We've tried to go back and figure this out and what we see is that the US is seeing opportunities in Europe to work.

So, we've seen actual cabin load factors and same store sales where we haven't changed capacity in the business cabin go up, as well as revenues.

So we're monitoring that very, very closely, because I think if we were to see signs of weakness there we would take some actions in terms of the fall and winter capacity again next year.

But to date, we have seen a little bit of a concurring view in terms of what the headlines read versus what we've seen on our flights.

I would add two other points to that.

The first is the investment in our product -- the lie flat product, the 76-400 is all lie flat now and we've just made substantial investments they are that we are seeing pay off, not just in the RASM but also in our customer preference scores.

A sub part of that is that we have an intense focus on reliability and on-time performance across the trans-Atlantic so that we're providing a premium product with the best schedules and an intense focus by the employees to be certain we're doing the very best job.

Then the last point I'd make is leveraging the integration and the alliances.

So we've been at this alliance activity for almost 20 years now.

And as we get closer and closer to our partners across the trans-Atlantic, it tends to drive real distribution strength and the distribution strength is an important part of the equation.

So I think it's a combination of all of the above.

Okay, good, that's helpful.

Then just my second question, just a commentary.

about the profitability of LaGuardia and you made the point I think it was you, Richard, where you indicated that not only did it see the most margin improvement, but it had the highest absolute margin.

Now, when I think about your 10 or 11 hubs and I don't know, maybe LaGuardia is the 12th hub, I know you concluded with New York.

But my sense historically, and I realize these are my estimates, my sense is that LaGuardia was always clear to the bottom.

So what you're seeing in LaGuardia is significantly, even based on the comments, what you're seeing is pretty significant and yet you're only getting maybe half of the benefits, you don't have the additional flight for another month or two.

Is that -- I don't know what you can say or agree, but is that a fair statement that LaGuardia maybe has moved from being not just meaningful improvement but from being maybe one of the worst performing hubs in your system to the best performing hub?

What can you say on that?

Mike, it is Glen again.

LaGuardia was not ever one of our worst-performing hubs, so the model needs to probably be adjusted on that.

But it was clearly not one of our best.

And what we're seeing now is a significant improvement and I think I would agree with your statement that we're only halfway there and we're optimistic as we get the other half of this slot that it will continue to improve.

Okay, great.

Thanks, guys.

Glenn Engel, Bank of America.

A couple of questions.

One, if I stripped out the MRO business, the other revenues would be down, are ancillary revenues no longer rising?

I think that is probably capacity, Glenn.

Second, on the maintenance side, I thought it was really high at the start of last year.

It was really low at the end of last year.

I thought a normal number was an average of all four quarters and yet the first quarter was again off the charts high.

What is a normal number for maintenance in the quarter?

Well, I think, Glenn, we have in the first quarter and fourth quarter we have a lot of seasonal-related initiatives that are going on with cabin interior upgrades, et cetera.

So I think you're looking at a heavier weighting in the winter months than you are in the summer months for maintenance.

And roughly how much for the full year would you expect maintenance costs to be up?

Yes, I think we're generally flat year over year.

Yes, and finally, if I think of last year I remember that business, the comparisons were difficult in April and May but, I thought, got somewhat easier in June.

Is that not correct this year?

Well, I think it's early to forecast what June is going to be, Glenn.

We gave you our April and May snapshot and I think that's probably as much visibility as we're comfortable providing at this point.

We do know that the May comp is quite tough and the June comp is a bit easier.

So we'll probably have a little more color for you at your conference coming up in a few weeks.

Thanks for the plug.

You're welcome.

(laughter).

Glenn, this is Richard.

If I could just make one point on the maintenance costs and how they vary from quarter to quarter.

You know, we tend to try to now push all of our maintenance into the shoulder months, so 1Q and 4Q tend to be -- or the end of 3Q a good part of 4Q except for the latter half or the latter half of December.

And then January, February, and March are where you try to put it in those shoulder months so that you have maximum fleet availability to be able to fly the peak.

And I think -- and on the unit revenues, it's pretty clear that we're forecasting unit revenues in April at 11%.

So we think the revenue environment is at least for Delta, Delta is pretty strong.

Thank you.

David Fintzen, Barclays.

Just a question, I guess maybe for Glen.

Over the last couple of years, you've been able to cut capacity deeper than the industry and outperform on revenues.

Obviously, you're retaining an awful lot of the revenue in the capacity you are cutting.

As you look out over the next year or two, is that something that you see a lot more opportunity in the network to optimize?

Or is there something else going on that explains that where we just don't see from the outside?

Well, I think our revenue performance is attributable to two factors.

One is capacity discipline and the other is really providing a better and better product each and every quarter.

And our revenue performance is really divided into two -- one is the retention of the underperforming revenue or the recapture of that revenue and the other is obtaining new, higher-yielding accounts.

And I think we've been hitting it out of the park, really on both sides or in this quarter, anyway, in terms of not only retaining the revenue on the capacity we have removed, but also on bringing ourselves into a higher realm in terms of corporate share.

I think that's really what is driving it.

And we will continue to look at the underperforming markets and we will continue to remove those that are a drag on earnings.

If I could just add to that, if you've just taken up all the macroeconomics and you think about an airplane as an investment, a factory investment, you've got to get the maximum production out of each unit.

And there are a myriad of actions that you take from scheduling the costs to revenue.

But we have to -- we're going to continue to shrink the fleet; upgauge the fleet; and they improve the profitability of each shell.

Because it is a significant capital investment and each of those capital investments has got to contribute to the return.

And then lastly, do you have any questions for Gary Chase?

(laughter).

Well, I thought about ceding the rest of my time if he had more questions for you, Richard.

But one question for Gary, on the slot swap, you'd mentioned last quarter there's -- the phasing was suboptimal.

Is that something that affects the month-to-month progression and RASM that we should know about or is it just too small to affect the overall April RASM outcome?

I missed the first, the phasing of --

So as many of you know, the government asked us to do the LaGuardia slot transaction in two phases.

The first phase was in the latter part of March and the second phase is 11 July.

And we swapped about half of the slots in the first swap and then we will swap the other half and the second, which leaves US Air in certain markets that they will eventually see turning the slots over to us.

And that is why we think it was a suboptimal in terms of P&L during the transition.

So not probably enough to move the meter directionally come up but clearly when you get to July, we think that will make our LaGuardia performance relatively even stronger.

All right.

Thanks, I appreciate that's great.

And congratulations, everyone, on all the moves.

Hunter Keay, Wolfe Trahan.

So I'm wondering if the use of market value and equity in the calculation of invested capital is the best way to go.

Doesn't that mean that when your stock price goes down your ROIC goes up?

That just doesn't really feel right, first of all.

I appreciate you disclosing how you calculate it for one, I should mention that, but is there maybe a better way to consider calculating your ROIC?

Well, that is why we hired Gary Chase here, Hunter.

So let me turn that over to Gary, see if he is got a view on that.

You know --

We couldn't figure it out on our own, so we just had to hire somebody from your side of the house.

What it does do, Hunter, is adjust a way for a lot of what you see in accounting impacts so if you look through time, how much book equity do you hold, the accounting that comes through bankruptcy.

It's a way to think about how we're performing versus the market value of our capital base.

So there are going to be flaws in any methodology.

I think the important thing is that what we're trying to do from an ROIC perspective is to be on a trend to drive behavior, to think about taking capital out of business and drive better returns.

And regardless of the method that you choose, that's a constructive process.

Yes, I think that's fair.

I think it becomes a bit of an issue when things like executive comp are based on it.

It's different from the rest of the industry, particularly different from how I think of lot of people on the street are calculating it.

But again, you are there -- would you say maybe it is reviewable at this point?

As sort of a methodology?

Because I calculate it my own way, obviously but is the way you calculate it reviewable?

I appreciate the concept, Gary, but how you actually think about going about it.

I think Hunter, the important thing is that we're -- we want to provide the transparency of how we think about it.

And Gary said the right thing.

The key is not necessarily the calculation as much as the results that the calculation drives and the continued improvement over time using a consistent methodology.

And we're pretty -- we're transparent about how we calculate it.

So --

I know, and I appreciate that.

We want you to see how to calculate it, but let me take this down to a more practical answer, which is, you've got to drive margin in the business, number one.

And number two, the cash that you do generate has got to be put to the very best use of the capital holders.

And by limiting our CapEx and being really disciplined about airplane purchases and the like, to be certain that we are going to get a return and make a commitment to our capital holders, that half of what we generate is going back on the balance sheet to de-risk the business, and -- which are all very accretive moves.

I think if you look below that calculation and you look at all the things that we've been steadily doing, they are all the right things for the shareholders.

Thanks, Richard.

I can appreciate that.

And real quick, Paul, in terms of -- I think you guys mentioned in the press release some opportunities for some accelerated debt paydown and also you guys prepaid a little bit of debt.

How should we think about full-year net interest expense?

If you want to talk about it in the context of total non-off, that's fine, too, but I'm specifically referring to the one that was $901 million in 2011.

How should we think -- the one that upticked a little bit in Q1 -- should we think about that decelerating through the year sequentially?

No, I would say that net interest savings is going to accelerate through the year on a quarterly basis.

We had some overlap in the first quarter, but as we continue to pay down debt, we would expect that interest expense for the year is going to be about $1 billion.

Great, thanks a lot.

Dan McKenzie, Rodman & Renshaw.

I know you've got initiatives underway to lower costs and I'm wondering if you hit your goals, how does the cost outlook for the year change, if at all?

And I guess what I'm wondering is, is if there is some unexpected cost inflation that you're trying to offset or whether there are potentially -- so you're just trying to keep level, or is there some potential for the cost outlook for the year to potentially improve share?

Dan, we gave our guidance at the start of the year for costs and I think we're probably still in that general range.

We've had some favorability in the first quarter of the year with weather, which has actually been helpful, not just in raw savings but also in a little higher capacity that it produced.

But I'd say our outlook for the year is consistent with what we gave you at the start.

Okay, understood.

And my second question here just ties to Japan.

That commentary, of course, was really helpful.

I get restatement of flying revenues up, but the industry capacity from Japan in the second quarter is a much different dynamic than the first quarter -- second quarter, up 14%, versus first quarter roughly up 2%.

So does look like there is a chunk of new flying that kicks in in the second quarter that didn't exist in the first quarter.

So first off, is demand sufficient enough to maintain pricing and keep pace with increased capacity?

And if so, I'm wondering what's driving that.

Anything you can share would be helpful there.

Hi Dan, it is Glen.

Maybe we need to reconcile our numbers, because clearly the second quarter is up.

By the time you get to peak July, the numbers that we are showing for the industry's capacity relatively flat, because you have a lot of ins and outs there.

You have American dropping out of JFK, Narita.

You have the year over year inclusion of LA-Haneda and Detroit-Haneda.

So I think it's really over a month by month and I think in the second quarter we might have a little bit of rockiness in terms of capacity being ahead of demand.

But by the time you get to the third, it's really solid.

And we also, we've brought back Detroit-Haneda this month as well, which is also part of the --

-- the base last July, so.

Right, not the second one.

Okay, no, I appreciate it.

That is helpful, thanks.

Helane Becker, Dahlman Rose.

Thanks very much, Operator.

Hi, everybody.

Just two questions.

I think you said corporate bookings were up about 11%.

I didn't catch whether that was in March or the March quarter.

That was the actual March quarter revenues, Helane.

Our corporate revenues were up 11%.

Okay, can you say how it's trending now?

April continues to look strong.

In fact, it has ticked up from there a little bit.

Okay, and then just unrelated follow-up question, I think you mentioned the voluntary retirement program.

Are there charges that are going to be taken as a result?

Were they taken in the first quarter?

If so, were they taken in the first quarter or will they be in the current ones or going forward ones, which is sub letter a.

And sub-letter b, is it included in your cost guidance?

Thank you.

Helane, this is Paul.

In response to your sub-letter a question, we would expect any charges to accrue in the second quarter.

And in response to sub-letter b, those would not be included.

Those would be special items.

Okay, thank you.

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

Okay, our last analyst question comes from Duane Pfennigwerth with Evercore Partners.

It looks like AirTran capacity is down pretty significantly over the June and September quarters.

I realize a lot of this is small markets that they're exiting.

Probably the only reason you flew to some of these markets, Glen, is because AirTran was flying there, but wonder if you have stats handy about your domestic competing capacity out of Atlanta in June and how that compares with the March quarter.

I don't have it at the tip of my fingers.

But generally it is better as we move through the year.

Okay, and then I'll just take a stab at this one, I doubt you'll answer it.

But can you disclose revenue in the March quarter from the sale of SkyMiles and what the change was year-to-year?

And does that flow through passenger revenue?

It is in other revenue -- it's a complicated accounting because some of it is in passenger and some of it is in other revenue, --.

And again, we can take your question off-line and will help you understand our disclosures.

But we are not going to provide any new information.

Fair enough.

Thank you.

You're welcome.

That is going to conclude the analyst portion of the call.

I will now turn it over to Ned Walker for the media.

Thanks, Jill.

And Cindy, we are ready to go ahead.

And if we could ask the media to ask one question with a quick follow-up.

Also if you could review the process for getting your questions in queue, that would be appreciated as well.

Thank you.

Again, that did conclude the analyst portion.

All questions now need to come from the media.

We will now take questions.

(Operator Instructions).

Mary Jane Credeur, Bloomberg News.

There have been a number of media reports about Delta's interest in a certain idled refinery in Pennsylvania.

I wondered if you guys could talk a little bit about how something such as that might fit into your overall fuel hedging and mitigation strategy.

I realize you probably can't talk about the plant itself.

Mary Jane, we are going to consistently not comment on industry rumor and speculation.

We are just going to keep that line.

Okay.

Would you like to ask another question?

That was the one.

Okay.

Jack Nicas, Wall Street Journal.

My quick question is the report yesterday talks to increase your stake in Gol to 20%.

Are you considering increasing your stake in Gol at all?

No.

No, that is a definitive no?

No.

Okay, thank you guys.

Josh Freed, Associated Press.

Can you say a little more about your fuel hedging as it stands today?

You had a big gain on that this quarter.

I realize it was mark-to-market, but are there -- are you taking a different approach to hedging than you used to?

Are you doing more quick trading or less maybe then you used to?

Or is it the same as it's always been?

This is Paul.

Our program is the same as it's always been and we don't comment on any specifics within the plan.

All right.

And your reduction of the 50-seat jets.

Is that still proceeding at the same pace that you had anticipated or is that going faster or slower than it used to?

It is proceeding at the same pace that we previously discussed.

All right.

Thank you very much.

Andy Compart, Aviation Week.

Just to follow up on that 50-seater question, I'm just trying to get a handle of what the pace and timing is of that, given that you have recommitted to [Pinnacle] July 22, I believe it is and they have 140 of them at the moment.

But it didn't really spell out how many of those you'd get rid of by 2022.

Can you give me some firmer idea of what you expect for how many 50-seaters you expect to retain, and what's the timetable going to decline them -- I'm not sure how many are flying right now with the partners?

We're not going to provide any specifics -- we've mentioned consistently over time that we are going to look to reduce the size of that fleet.

It is not a cost-effective solution for us, and the individual transactions or methods by which we'll get there, we're not going to share at this time.

Do you expect eventually to get rid of all of them?

We did not say that, no.

We said we will be reducing them over time.

Karen Jacobs, Reuters.

Good morning.

I was wondering if you could comment on what has been your response so far to the voluntary retirement package offers.

We do not have a set number.

And it is a process that will conclude in another week.

What typically happens in these types of programs is really up until the end that people will make the decision.

So we're not releasing numbers of the takeaway at this point.

As a follow-up to that, are these kinds of offers going to recur at Delta?

I know there was one last year.

No.

The particular one that is being offered this year is a unique one that will not be re-offered at Delta.

It is a one-time program.

And what has happened is over the last three or four years because of the resolution of representation, we haven't been able to offer one program to all of the employees of the same nature that is being offered.

And we use the opportunity when we got the resolution of all the representation issues to make this one-time opportunity, but I do not envision another type of program again.

We just issued --.

Cindy, we have time for one more question.

Cathy McKitrick, Salt Lake Tribune.

Thank you.

My question deals specifically with the Salt Lake City hub.

I was wondering what the reductions in flights will be out here and how that might affect the nonstop flights to Tokyo and Paris.

And also if you expect any layoffs in this area.

No, we do not expect any layoffs in the Salt Lake area.

The hub is performing well.

We have some seasonal adjustments that we make that are going to be driven by demand in fuel.

And the outlook for Salt Lake for us is strong.

We're working together with the city on the new airport out there and we feel good about our presence.

Thank you.

Okay, thank you very much, Richard, Ed, Paul, Glen, and Mike.

That concludes our March quarter 2012 earnings call.

We will be back here in July with the June quarter.

Thanks very much.

Appreciate it.

Again, thank you for your participation today.

That does conclude today's conference.

You are free to disconnect.