達美航空 (DAL) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines June 2012 quarter financial results conference call.

My name is Vicki, 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 call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Please go ahead.

Thanks, Vicki.

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

Speaking on the call today are Richard Anderson, Delta's Chief Executive Officer; our President, Ed Bastian; and our Chief Financial Officer, Paul Jacobson.

We have the remainder of the management team here in the room with us for the Q&A.

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.

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

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

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

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

We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted.

You can find a 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.

Thanks, Jill.

Good morning and thank you for joining us.

This morning we announced a $586 million profit for the June quarter, excluding special items, which is a $220 million improvement over last year.

This represents EPS of $0.69 compared to consensus estimates of $0.68.

Top-line revenue grew 6%.

Passenger unit revenues improved 8.5%.

Delta has now produced a unit revenue premium to the industry for 15 consecutive months, and we intend to continue doing so.

Our 9.1% operating margin improved more than 200 basis points over last year, and we have now achieved $5 billion of our $7 billion net debt reduction target.

We will continue to reduce our debt and expect to get below $10 billion in net debt by the end of 2013.

Delta's operational performance for the quarter was exceptional.

For the quarter our completion factor was 99.7%, and 87.5% of our flights arrived on time, an eight point improvement over last year and our best-ever June quarter operational performance.

On top of that, our DOT mishandled baggage rate decreased 30%, and our DOT customer complaints fell 20%.

These results, combined with our international operational performance, put Delta at the very top of the industry for operating performance and customer service.

By all measures these are some of the best financial and operational results in Delta's history, and I am thankful to the Delta team that has produced them.

It is their commitment and dedication to this airline and our customers that differentiates Delta.

Looking forward, we are expecting to achieve a 10% to 12% operating margin in the September quarter, with system capacity forecast to be down 1% to 3% year on year.

The revenue environment remains solid for Delta, as July unit revenues are expected to increase 4% to 5% in each of our entities -- Domestic, Latin, Pacific, and Atlantic have good bookings in the third quarter.

Capacity discipline is our key lever.

We will continue to actively manage our capacity, including a 5% trans-Atlantic capacity reduction for this Fall.

We will remain diligent in our efforts to have our fares fully reflect our costs.

We will further reduce capacity, if necessary, to be certain we properly match our capacity with demand.

We're pleased with this quarter results and our outlook for 2012.

We now have a unique opportunity to lay the foundation for Delta's future with continuing a number of strategic investments.

These investments in our fleet, network, and facilities will pressure our costs in the near term but they are the right path to future margin gains, as we have shown 2010, 2011, and 2012 with our financial performance.

The first investment we are making is to restructure our domestic fleet by eliminating a substantial portion of our 50-seat regional jet fleet.

We've already completely retired our propeller fleet.

We will ultimately replace 75% of our 50-seat flying with more cost-effective mainline aircraft and two-class regional jets.

Our 50-seaters peaked at more than 500 in 2008, and we intend to reduce it to less than 125 aircraft over the next two years.

With the benefits achieved with our new pilot agreement, we have the flexibility we need to both accelerate our fleet restructuring and improve pilot productivity as we vary our capacity by season.

The agreement enables us to upgage our domestic fleet by acquiring 717s and two-class regional jets, which will replace more than 200 50-seat aircraft over the next few years.

On the network side, we're investing in New York, where earlier this month we completed the largest expansion in the last 40 years at LaGuardia, creating that airport's first true connecting hub, with more than 260 departures a day to 60 cities.

We have experienced a 2% margin increase, with an 18% increase in capacity at LaGuardia.

Our expanded terminal port at JFK joins the Atlanta International Terminal which opened this past May, and our renovated LaGuardia complex in Terminals C and D will open at the end of the year.

We closed on the Monroe refinery transaction in this quarter.

We have set up a separate Board of Directors and recruited a fine team of refining professionals under the leadership of our CEO, Jeff Warmann.

We are in the turnaround process and expect to be operational in the September to October timeframe.

As we stated, we expect the refinery to improve our operating results by approximately $300 million a year.

Our intention is to improve our profitability with these gains.

We will not use our refinery results to seek out market share.

This is a unique opportunity for Delta that will bring significant advantage to Delta shareowners.

With all of these investments we are making significant progress in becoming the airline of choice for our customers, particularly our business customers.

This progress was reflected not only in our strong revenue performance and operational performance over the last year, but also in the recent JD Power survey, in which Delta was the only carrier to significantly improve its overall score.

So to summarize, we're pleased with our progress, but there is still much more opportunity to build a much stronger Delta for our shareholders, employees, and customers.

Here is what you can expect to continue to see from us.

We will continue to drive a significant RASM premium to the industry.

We will provide a superior product and experience to our customers.

We will be responsible in managing our capacity to be certain we fully cover the cost of goods sold over the long term.

We will aggressively manage our costs with a target of $1 billion in structural cost reduction over the next several years.

We will pay down debt and delever our balance sheet.

We will leverage our refinery acquisition to improve our results for our shareholders by at least $300 million a year.

We will maintain a unique and an industry-leading employee relations, which will derisk the business for our shareowners.

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

Thank you for your attention this morning.

Thanks, Richard.

Good morning, everyone.

Excluding special items, Delta reported net income of $586 million for the June quarter, or $0.69 per share, $0.01 ahead of First Call consensus.

Our operating margin for the quarter was 9.1%, up 2.2 points year over year.

We had $754 million of special items in the June quarter, which resulted in a $168 million GAAP loss.

Special items included $171 million for severance and related costs from our early retirement program, in which over 2000 employees elected to participate; $22 million in facilities and fleet charges; and a $561 million mark-to-market adjustment on fuel hedges, which reversed prior gains and moved our hedge book to a net $250 million loss position at the end of June.

Fuel prices have risen since the end of the quarter, and at current prices the expected value of the hedge book sits at a $100 million loss.

Looking forward, we expect to have negligible impact on a settlement basis, as you can see in our fuel guidance of $3.09 per gallon for the September quarter and $3.05 per gallon for the December quarter.

Before I go through the revenue results, I'd like to echo Richard's comments in thanking the Delta team for all their great work that went into producing this quarter's results.

For the June quarter, turning to revenue, our top-line revenues increased $580 million, or 6%, on a 1.3% decline in capacity.

Passenger unit revenues increased 8.5%, driven by strong performance across all regions.

I am pleased to say that June marks the 15th consecutive month that we've generated a unit revenue premium to the industry, with our system unit revenues coming in at 105% of the industry average.

This is the proof that we continue to see returns from the investments we've made in our products and our service.

Our domestic unit revenues increased 8% on a 1 point reduction in capacity, despite the negative impact from some competitive fare actions.

Our expanded LaGuardia flying is doing quite well, resulting in a 2-point operating margin improvement on an 18-point increase in capacity.

It's very early, but we're quite optimistic with the LaGuardia expansion.

In the transatlantic, our unit revenues improved 9% against a 7-point reduction in capacity as we trimmed underperforming markets to better match demand.

In spite of weak economic conditions in Europe, we saw good point-of-sale demand from our corporate customers in Europe, as European businesses and investors showed interest in the relatively stronger US marketplace.

Pacific unit revenues increased 9% for the quarter on a 10-point increase in capacity.

We saw particularly strong improvements in load factor and yield for our trans-Pacific flights.

In Latin America we had an 8 point year-over-year improvement in unit revenue on flight capacity.

While we saw some pressure from targeted sale fares, the region's revenue performance remained strong, particularly in Mexico, which had a 25% unit revenue improvement.

On the corporate side we continue to see momentum, with corporate revenues for the quarter coming in at 14% year-over-year improvement, driven by a 1.5-point improvement in overall corporate travel share and good growth in the automotive, financial service, and healthcare sectors.

In terms of our revenue outlook, as we head into the September quarter, the revenue trends appear solid despite the continuing weak economic backdrop we face.

For the month of July we're expecting our unit revenues to increase 4% to 5%, and we continue to see unit revenue expansion across all entities -- however, not at the rates we've seen over the last couple of years.

Comparisons continue to get more difficult as we proceed through the year, and while we welcome a reduction in fuel prices, it will likely be accompanied by some reduced yields as well.

I'll also remind you that the September quarter last year included a $70 million benefit from the FAA excise tax suspension.

Domestic bookings are trending well for July and August, and we're encouraged by the market's continued response to our enhanced LaGuardia schedule.

In the Pacific, which traditionally peaks in the September quarter, we see strong unit revenue performance for July and August, especially on our trans-Pac flights into Japan.

We are looking at good booking trends in our Latin entity, with book load factors showing improvement for every month up through the Fall.

And in the trans-Atlantic, our aggressive management of off-peak capacity is helping us maintain the solid book load factors.

In terms of the corporate revenue outlook, we recently surveyed our corporate clients to gauge their forecasted travel spend for the balance of the year, and 84% responded that they anticipated either the same or increased travel spend on Delta, despite the relatively weak economy and global pressures.

So corporate revenues continue to perform well.

Turning to guidance, we are forecasting a profitable September quarter, with an operating margin of 10% to 12%.

On capacity, we expect system capacity to be down 1% to 3%, with domestic flat to down 2% and our international capacity to be down 3% to 5%, driven by the previously-announced post-Labor Day capacity reductions in the trans-Atlantic.

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

Thanks, Ed.

Good morning, everyone, and thank you for joining us this morning.

Looking at our cost performance, our June quarter non-fuel unit costs increased 3.6% on a 1.3% decline in capacity.

And as we said, we expect our September quarter non-fuel unit costs to be up 5% to 6% versus prior year.

We are continuing to experience cost pressures from the impact of our 2% capacity reduction in the second half of 2012, as well as the enhancements we've made in our products, services, and facilities, which account for the majority of September quarter's cost growth.

While pressuring costs in the near term, these service enhancements are strategic and do provide us a platform for our future success through expanded margin.

Our opportunities for cost reductions lie in the structural initiatives we are implementing.

These initiatives will take some time to begin delivering results, but they are unique opportunities to improve our cost outcomes.

First, the combination of our new pilot contract and the acquisition of the 717s allows us to accelerate our domestic fleet restructuring.

We expect the 717s and the new 737-900ERs that begin delivering next year as well as bringing in 21 additional low-capital MD90s into service will allow us to retire older mainline aircraft and at least 200 50-seat regional jets over the next two to three years.

The retirement of the 50-seat regional jets is one of the single biggest opportunity costs we have.

The updating strategy will improve our efficiency by lowering our unit costs, while simultaneously improving our product, while maintaining our capacity discipline.

Secondly, we are aligning our headcount with our reduced capacity and recently had over 2000 employees elect to participate in our voluntary early retirement program.

These employees will retire by the end of the year with limited backfill, which will continue to result in improved productivity.

In addition, technology is also a critical key to improving our costs, whether through lower distribution costs or improved employee productivity.

To that end, we've been making targeted technology investments in areas such as delta.com, crew scheduling systems, and airport technology investments that not only will reduce costs in the future, but will offer our customers better service.

So we understand there's a lot more work to be done on our cost structure, but we're putting the pieces in place now to improve our cost outcomes in the future.

Turning to fuel, on a per-gallon basis Delta paid $3.37 per gallon for fuel for the quarter, which includes $0.16 associated with hedge losses during the quarter.

We entered the June quarter with a hedge book that was structured to protect against increases in oil prices up to $150 a barrel.

We remain committed to our hedging strategy, and we view our hedge portfolio as protection from volatility in the fuel markets.

We don't expect our hedge book to be a profit center, but as a means to better manage our business by reducing the volatility of our largest expense.

Based on the July 23 market close, as Ed mentioned, we are now projecting our fuel price to be $3.09 for the September quarter, and $3.05 for the December quarter, which includes minimal hedge impact and excludes any benefits from operating the refinery.

We're also looking at other initiatives like the refinery to reduce our fuel expense.

As Richard mentioned, we closed on the purchase of the Trainer refinery in June, and we expect initial startup to occur in mid-September.

We do expect the refinery will have a modest loss in the September quarter as we ramp up operations, but the refinery should be profitable, thereby reducing Delta's fuel expense, beginning in the December quarter.

Turning now to liquidity, we ended the June quarter with $5.3 billion in unrestricted liquidity, including $1.8 billion in undrawn lines of credit.

We had $350 million of hedge collateral posted with counterparties at the end of the quarter, which was down to less than $100 million at Monday's close.

We generated $683 million in operating cash flow in the quarter, which was net of $354 million of pension funding.

We have now completed all of our defined benefit funding for 2012.

We had $650 million in capital expenditures for the quarter, which included $180 million for the Trainer refinery purchase; $65 million investment in Aeromexico; an additional $300 million in aircraft parts and modifications.

During the quarter we paid down another $374 million in debt and ended the quarter with an adjusted net debt of $12.1 billion, well on our way to hitting our goal of $10 billion next year.

In the first week of July, we took advantage of favorable market conditions and completed the 2012-1 EETC, which provides $480 million at a very attractive 5.3% average interest rate.

The proceeds of this offering will primarily be used to refinance the 2002-1 EETC, which matured in early July.

For the September quarter we expect capital spending to be $400 million to $450 million, and we have debt maturities of $200 million net of the proceeds of the EETC we just issued.

We are forecasting $5.1 billion of unrestricted liquidity at the end of September quarter.

In conclusion, Delta had a successful June quarter.

We produced an operating margin of 9.1%; generated a revenue premium to the industry for the 15th consecutive month; and had exceptional operating performance.

We've made strategic investments in the business which will generate margin increases into the future, and we are implementing the structural initiatives we need to achieve better cost outcomes.

In conclusion, as Richard and Ed mentioned earlier, these results would not have been possible without the hard work of our employees and all the momentum they've built into the business on all fronts.

Thank you, Richard, Ed, and Paul.

Vicki, we are now ready to move to the questions from the analysts.

So if you could please review the process for asking a question.

(Operator Instructions).

Glenn Engel, Bank of America.

One cost question, one revenue question.

On the cost side, the maintenance levels -- expense just seems much higher than I would have expected.

How long does it stay at these levels in the second half?

What do you expect it to level out at, and what's normal?

Glenn, we continue to experience some pressure from seat-related modifications in the second quarter.

We expect maintenance spend to be roughly flat for the rest of the year.

Flat with last year, or flat with the first half?

Flat with last year.

And second is the timing of the July 4 holiday seemed to have had an impact for some airlines.

Can you say how much that probably held back your July PRASM?

This is Glen, Glenn; how are you?

July 4 falling on a Wednesday is clearly not good for airline revenues.

Business travel really took the whole week off.

And because it was on a Wednesday, the discretionary traveler demand was not as high as it would have been had it been at the beginning or end of the week.

So it was -- it's generally a bad week for us.

This year it was particularly bad, and probably had about 0.3 to 0.4 of a point impact on the month.

Thank you very much.

Thank you, Glenn.

Savi Syth, Raymond James.

Just wondering, on the $300 million savings you're expecting for the refinery, could you provide a little bit more about how you get that?

Or if the details are a little complicated, what drives that?

What are the key inputs that drive it?

And given where the fuel prices have been volatile and pulling down, does the benefits reduce if fuel prices pull back?

Or what are the key inputs in getting that $300 million in savings a year?

Savi, the $300 million in savings comes from the sale of the products in excess of the cost of manufacturing and cracking the crude oil against the index prices that we've seen.

And while there's been volatility in the crude oil markets, crack spreads have actually expanded slightly during that time period, and we don't anticipate any change from our original guidance.

Savi, This is Ed.

One other point, and we talked about this when we announced the acquisition.

We went also -- we back-tested this over the last six years, and the average return Trainer would have had on our results is anywhere between $300 million and $500 million a year over the last six years.

So we feel reasonably confident in our estimates on a going-forward basis.

Great.

Just on my follow-up question, have you calculated what the contribution will be with the replacement of 717s with the 50-seaters and the older aircraft, and what the timing of that would be?

We haven't publicly disclosed the impact.

Obviously, we believe it to be substantial.

If you look at the -- not just the cost of continuing to keep the 50-seat RJs in the fleet, but even more importantly, the upcoming fairly significant maintenance costs that we're going to be experiencing, which will run into the hundreds of millions of dollars on that fleet if we had decided to retain that aircraft.

So not just a savings on the current cost structure, but a substantial benefit to offset future cost rises.

Great, thank you.

Jamie Baker, JPMorgan.

Ed, the 16% of corporate accounts that responded they would be flying less, any color on what type of business they fall into?

And is that 16% of respondents, or 16% of your corporate revenue base?

It was 16% of our respondents.

We took a very wide span of respondents, and it lined up largely with the spend.

And in any portfolio, you are going to have some guys that are increasing, some guys that are decreasing.

Some of the sectors you can get yourself, which are having more difficulty in this marketplace, particularly in the defense space.

But on average, the trend lines are they are going to continue to stay with the spend patterns and the trends we've seen, or actually look to expand it a bit going forward.

So no unique comment in that 16%.

I didn't see JPMorgan's results -- I don't know what they are telling you, Jamie.

(laughter)

Yes, to be decided.

For Paul, the new pilot agreement includes a decrease in the profit-sharing calculation.

Is it reasonable to assume similar changes for non-union employees?

And if so, have those changes been made, or should we leave the equation alone in our models for now?

Well, we will be -- we have said to the non-union employees that the same adjustment in profit-sharing will be made for them, and that will be effective January 1 for next year.

January 1. Okay, helpful.

And lastly, if I can squeeze one in for Richard, once you get below the $10 billion net debt target, what's next?

What do you think should be next?

Well, I think the concern out there is that you're tempted to fall off the wagon, and you go on some sort of a growth bender.

That's not particularly my concern, but I hear it from investors all the time.

On the other hand, there are pension issues that still need to be addressed; there is possible restoration of dividends; share buyback potential.

I mean, take your pick, and don't limit it to those.

Well, first of all, we're not going to go -- I mean, I think we have demonstrated now for a number of years in a row a unique discipline around how we deploy our capital.

And I think the 717 is a prime example of that.

And the MD90 is a prime example of that.

So we're not going to change that focus, because we think the most important thing we can do for our shareowners is derisk and delever the business.

So we have some time to make that decision, because we're scheduled to hit our net debt at $10 billion at the end of 2013.

I think you can reasonably expect that no matter what we do, we're going to continue to grind down that net debt number, because that both improves our EPS quickly, because the comes right out of non-op, which benefits our shareholders significantly.

So I think no matter what, there are two principles, and we have some time to discuss this with our investor base.

But the first principle is, we're not going to go -- to use your term, we're not going on any benders around here, period.

Because we're incredibly focus on payback of our capital investments and getting our ROIC target.

And number two, you can count on us continuing to pay down debt in some form or fashion, even after we hit the $10 billion mark.

Our ultimate goal -- it's going to take us a while -- is to get back to investment grade.

Excellent.

And you say, take a while -- care to throw a year out there?

No.

I don't care to throw a year out there.

(laughter)

Okay.

All right.

Thanks for the clarity on that.

That's an excellent response.

I appreciate you letting me slide a third question in.

Do you have a fourth?

(laughter)

No, that's okay.

I'll turn it over to somebody else.

Sorry.

I have another one for you.

What is JPM's travel going to be?

Are you going to try to get them to pick it up?

I think she cut him off.

David Fintzen, Barclays.

Just a question for Glen.

You sort of mentioned the 5% premium on RASM that you're hitting today.

As you look out over the next couple of years with the puts and takes of the re-fleeting versus ongoing merger synergies on the revenue side, how do you see that evolving?

Is 105% your long-term target and where you think you'd go?

Or do you think there's upside from here on a relative basis?

We really believe that there is continued upside.

The 105% is actually an amalgamation of all the different entities, not all of which we produce premiums today, but all of which we aspire to produce premiums over time, and we think that will drive the system-wide number higher over the longer term.

And so we should think of -- is 105% sort of your target in every entity, or in all -- or does every entity has its own expectation?

Every entity has its own expectations based on our gauge, our stage length, the market selections we fly.

But I think it's safe to say that we think there is a couple of points of headroom, 2 to 3 points of headroom in the next couple of years that we could achieve.

Okay, that's helpful.

And maybe a question for Richard.

On your ROIC targets, as you take a step back and think about the derisking and the deleveraging, how should we think about ROIC over the cycle?

Is that -- is the range shrinking?

Do you think 10% to 12% is achievable in most environments, or do you think there is still a pretty wide range on returns through the cycle?

Well, what we been able to show, I think, if you look at 2010, 2011, now 2012, we have been able to manage and be -- and have good performance and make good money through three years of pretty volatile fuel and economic environments.

So that 10% to 12% return on invested capital we think is a solid number for us going forward.

And this is a management team that is incredibly serious and intent on hitting that number for our shareowners.

Okay.

Appreciate that color.

Michael Linenberg, Deutsche Bank.

Just a couple here, and I guess maybe a clarification.

Richard, in your opening comments, did you -- when you talked about the third quarter and you mentioned bookings being good, I thought I heard 4% to 5% top-line growth.

Is that in reference to the third quarter?

No.

Mike, that was month of July RASM.

Yes.

Okay.

All right, so that's helpful, then.

I guess next one for Paul Jacobson -- you talked about the change in -- or the RJ fleet, the shrinkage of that by 250 airplanes as being the single largest opportunity cost.

And again, I realize that there's been some questions on this, maybe variations on this, but how do we think about this?

You talked about hundreds of millions of foregone maintenance expense on some of the older aircraft.

What about the potential revenue opportunity?

There are a lot of different moving parts on this.

Any additional color that you could give us would be great.

Mike, I'll jump in.

This is Ed.

The revenue opportunity is substantial.

We've said any number of times the 50-seaters have been the perfect storm for us, because not only is it a cost opportunity, it's also an airplane our customers don't particularly prefer.

So as we upgage, and that was sitting behind the 717 strategy, and that's why they are linked at some level -- as well as getting some incremental two-class 76-seat RJs, we are going to have a fairly substantial upgage in margin improvement, cost reduction, some revenue enhancements.

And from a capital efficiency standpoint, with where we're able to acquire the 717s, it is just going to improve those returns all the more.

So it was a win all the ways around.

All right, thank you.

Very good.

John Godyn, Morgan Stanley.

Thanks for taking my question.

Richard, when investors think of Delta, I think increasingly they look at you as aggressive and creative at trying to better manage or control some of the forces that other airlines leave to chance, and maybe best symbolized by the recent refinery deal.

And that's something you touched on in your prepared remarks.

But as we think about scenarios surrounding American's emergence and the possibility of M&A, is this a situation where you think the outcomes are out of your control?

Or does Delta have the ability to drive this situation toward outcomes it favors?

As a matter of policy, we do not comment or speculate on transactions of that nature.

I would just say that overall, one, at Delta we will continue to always control our destiny.

And -- by pushing a lot of different opportunities and leverage across the business.

And number two, global consolidation is good for the business model.

Okay, that's helpful.

And just broadly, we've heard from a lot of different airlines about solid revenue trends and how we're not seeing really any signs of economic weakness yet.

But this quarter, cargo revenue for you guys fell year over year for the second quarter in a row, and we've seen a lot of weakness in cargo.

Normally that's a canary in the coal mine.

Can you help us understand why it makes sense to look through cargo weakness this time around when thinking about the trajectory of passenger revenue?

John, this is Ed.

The cargo revenues for us in the second quarter were fairly flat on a year-over-year basis, and we had some weakness in yields, but the volumes improved on a year-over-year basis.

We're not a big enough cargo carrier to really be able to call that as a trend.

Obviously, we see what's going on with the bigger freight operators around the world.

So I'd say, one, don't necessarily look at our cargo performance as an indicator; but looking to our business model, we think when you are -- because we've asked ourselves that question a lot with some of the continued concerns and headline risk coming out of Europe and other parts of the geography -- how do we look at our July unit revenue performance?

And if you were to contrast June to July, there's about a 2-point sequential downtick, which compared to what we would historically have expected to see.

We think one point of the 2-point downtick is due to some of the domestic competitive fare activities that we've commented on in the past.

And the other point is a myriad of a little bit of economic weakness; a little bit of the fuel sell-off, which obviously has some revenue implications; a little bit of the Fourth of July; and again, just a little bit of softening, but nothing to -- on the guise of what some of the cargo carriers are seeing.

So for a consumer or business in the environment that we're operating in, to see a 4% to 5% year-on-year revenue improvement, which is effectively our same-store sales metric, we feel it's pretty solid.

Okay.

And can I just ask a quick clarification on an earlier question?

There was a question about uses of cash and free cash flow.

When you guys think about excess cash for paying down debt or what have you, is the right way to think about it as cash above and beyond the air-traffic liability?

Or do you define the excess cash in a different way?

We define excess cash as free cash flow operating cash less capital investments.

Okay, thanks a lot.

Dan McKenzie, Rodman & Renshaw.

Ed, over what period of time is Delta targeting the $1 billion in cost savings, and where does that leave the new non-fill cost target?

And then related to that, how are you thinking about full-year cost guidance at this point?

The $1 billion structural cost reduction is over the next two to three years.

And obviously, the 50-seat reduction is probably the single biggest contributor there, but the early retirement package that we just completed is also a contributor.

So it will take a couple of years to see the benefits come through.

I see.

And then secondly here, if I can go back to -- revenues, the 10% to 12% operating margin for the third quarter, of course, is pretty encouraging.

But the investor worry is just the daily barrage of negative economic data points, and historically, revenues at times have deteriorated quite quickly.

I wonder if you could just talk about what is different today?

Can you elaborate a little further about the source of confidence as you look ahead to demand in the back half of the year?

This is Glen.

How are you doing?

We don't have a crystal ball here.

And I think our commitment is to react as quickly as we can to changes in demand.

And as we look out into the early Fall, we really don't see anything yet, but that doesn't mean that we won't react quickly if we do see those shortfalls.

So I think our commitment to our shareholders and all of our constituents is to make sure we're doing the best we can with the information we have.

And while we read the same headlines, right now in Europe we have a little bit of a disconnect between what we're experiencing and what you read in the headlines.

So the forward bookings and forward units revenues look great into the Fall.

If that starts to deteriorate -- so we've already taken proactive reductions.

So we've reduced 5% of our capacity because of things we know.

So we know the euro is lower, and we know that winter is higher x-European demand than x-US demand, which peaks in the summer.

We've already taken actions on what we know, and we will take the actions required as more unfolds, if it does.

Okay, terrific.

Thanks so much.

Helane Becker, Dahlman Rose & Co.

Thanks very much, Operator.

Just with respect to the changes you're going to make over on the regional side, one of your major providers was basically out there saying that there is no way you can get out of their contract, and the contracts go out four or five more years.

And I'm just wondering how we should think about that, given the fact that you've got to get down to something like 125 50-seaters over the next, I think, three years?

Well, we have, without going into the particulars of any of the contracts that we have, we have a steady path to be able to get to 125.

So without going into the specifics, we have a confident path of moving to the 125.

And I'll just leave it at that.

Okay, I will accept that.

And then my other question is with respect to Latin American markets, in the past couple of months I've just seen some unit revenue growth slow.

It hasn't been quite as robust as it was six or eight months ago.

Is there anything accounting for that?

Or is it just tougher comps -- which would be one thing to account for it, I suppose -- but is there anything going on we should know about?

This is Glen again.

If you look to the Fall, I think the one thing that we are keeping a close eye on is industry capacity -- clearly not Delta capacity, but as you get into the Fall in Latin America, current schedules show that capacity is up around 10%.

You combine that with decline of the local currencies, the real -- now, a lot of the real is not priced; the tickets aren't price in reals, but about 10% of our Brazilian sales, for example, are priced in reals, and that has a 30% negative year-over-year bias.

So I think you've got some foreign exchange; I think you've got some capacity issues.

But I think the core demand is still quite strong.

Okay.

And then your investments in Aeromexico, where does that show up in the numbers, or does it?

It wouldn't show up in the numbers, per se.

It would show up through better passenger revenues as we better hook our two networks up.

You're not going to see it has a separate line item or anything.

Okay, got you.

Thank you.

Kevin Crissey, UBS.

Thanks for taking my questions.

CASM ex-fuel, I guess I just want to go back over the timeline a little bit.

I think it was back maybe October 2010, I think it was somewhere in that vicinity; you guys had targeted 2011 to be flat with 2010.

And then I think it was revised at your investor day, and then you've cut some capacity.

But what I'm trying to understand is -- I didn't see these CASM ex-fuel pressures coming.

And I think I didn't see them in partly because I think you guys had guided that they weren't really there, or at least one point you had guided it that way, or maybe I'm misreading it.

But I want to understand what changed from that point to today in terms of your pressure on the CASM ex-fuel line?

This is Richard.

First, if you look out over the past two years, we have pushed capacity down pretty hard.

We have viewed capacity as the real lever to push our business.

And it has put real pressure on our non-fuel CASM.

If you look where we'll be by the end of this year, in Q4 compared to two years ago when we were giving that guidance, we are going to probably be downed 5% to 6% in overall system capacity, and the industry has probably on the main grown a bit.

So if you think about being down 5% instead of being up 1% to 2% each of those two years, the equation is very much different on the non-fuel line.

The second piece is that we have along the way made investments that are the right investments in our product, in our employees.

And you can see it in our revenue performance versus the industry.

Hence, our drive to drive another $1 billion of structural costs out and our push in the refinery to make up on a total basis, total unit cost basis, those inflationary pressures that we see.

And I'd say the other thing, Kevin, there that we did not necessarily forecast or see coming is clearly the opportunity that we had with our pilots to do the contract early.

It is going to pay significant dividends over time, as it will have a big cost return to it, not just turns in terms of improved productivity, but the ability to fairly substantially restructure the domestic fleet.

But those costs came in right away, so that's in our September guidance as well.

That was another big piece.

Okay, thank you.

And Richard, if I think about -- you talk about derisking the business, and we all want that.

One of the big things as we look across transportation companies, fuel is only a discussion in the airlines, pretty much, if you look at trucking or rails or stuff.

What more can be done to allow all fuel surcharges to truly be passed through?

It should be; to me, it should be the effort that is expended by every Company, be it -- before they buy more planes, it's like, let's see how we can get a fuel surcharge in here that actually truly does what it does in every other industry?

Two points there that are different in this industry from those industries, which is, we sell our tickets 330 days in advance.

So at the point in time that we sell the ticket for travel six months from now, we don't have -- we have current fuel or the current forecast that we have for fuel, which we use in our pricing department.

Because if you look at businesses in a totally deregulated environment that are commodity-intensive, the management team is always working to match the cost of production to the pricing in the marketplace.

We're a bit more challenged that we sell tickets 330 days in advance, and the DOT does not allow us to collect fuel surcharges in the US.

We can in foreign point-of-sale, but we cannot in the US.

So there are some differences there.

So what we do is we manage capacity very tightly and are prepared to suffer some of the risks of a little higher unit cost creep as a result.

Because the independent variable needs to be, then, how we manage our capacity and how we manage our internal pricing mechanisms to be certain that our prices are capturing the actual costs of goods sold at the time that we price.

And that leads me to my second point, which is why we hedge fuel.

Because if you're selling 330 days in advance and you cannot legally use fuel surcharges, we need the ability to take some of the volatility out and allow us in a more near-term basis to lock in our margins.

And candidly, that's what we just did in the second quarter.

When we were moving through the second quarter, we saw some of the best revenue performance that we've ever seen for the month of May.

But the biggest risk was where fuel was going in the January through April timeframe.

And we wanted to be certain that we had 200 basis points of margin expansion.

It's going to be a combination of, one, managing your capacity, that because that's our biggest lever.

And we're going to continue to manage the capacity to be able to drive our revenue up by putting more revenue on each airplane.

And you do that by reducing capacity.

The second thing is in our pricing environment, we're very focused on having our pricing and yield management professionals have the cost of data at the time they make decisions around capacity and pricing.

Third, we made an investment in the refinery to be able to take the crack spread risk out of our business, which is our single highest fuel expense.

And number four, to use our hedging program in the shorter term to be able to lock in our margins so that we know that our cost of goods sold is going to match the pricing we have in the market.

Thank you.

Just one last, real fast one, because Jamie had three, I'll take three.

Capacity change by month, if you could, to help us frame the RASM expectations by month?

There's nothing -- we don't typically give the monthly forward capacity outlooks, Kevin.

But there's nothing unique in the months.

Okay.

Thank you.

Vicky, we're going to have time for one more question from the analysts.

Hunter Keay, Wolfe Trahan.

Thanks for getting me in.

Appreciate it.

Maybe a subtlety, Richard, but you've referred to a net debt target of $10 billion by the end of 2013.

I think recently you guys were saying mid-2013.

Is there any particular reason why that's changed, given I think the pull back in fuel prices?

I would have thought maybe that could have been possibly even accelerated a little bit.

Any kind of color on that would be great.

No, there is no change.

Our goal is to make certain that we get it done as soon as possible.

Sure, okay, thanks.

And a little bit more on the hedge book.

Can you tell us how you manage the risk or oversee the tail risk in the hedge book?

Because we obviously saw some pretty big mark-to-market adjustments with the big pullback in oil prices in May.

And I'm wondering how you guys think about managing risk within the derivative exposure in the hedge book -- who oversees it?

What is your tolerance threshold for risk?

Any kind of color you can share with us would be great.

Hunter, this is Paul.

We have a robust and independent risk management function that oversees the financial risk in the Company, including the hedging book.

When we hedge fuel and we see rapid declines in fuel prices, you're going to expect hedge losses, because the hedge book is net long, and it's offsetting position.

But we monitor that very independently, and we're very comfortable with our position and our book.

Okay, thank you.

Vicki, that is going to conclude the analyst portion of the call.

And so I'm going to turn it over to Ned Walker, our Chief Communications Officer, for the media portion.

Thanks very much, Jill, and welcome, everybody.

Vicki, we're ready to begin the Q&A with the media.

We'll ask the media to limit themselves to one question with a quick follow-up.

We should be able to accommodate most Q&As, but often we are not able to get everybody on.

So with that, we'll go ahead and turn it over to the first question.

(Operator Instructions).

Mary Schlangenstein, Bloomberg News.

A quick question.

Earlier in the call, you said that you are looking at other initiatives like the refinery to decrease your fuel exposure.

And I wanted to see if you could be any more specific in terms of what you might be looking at.

I thought we were fairly clear in saying that the way we manage our fuel exposure is, one, capacity.

Number two, having the right pricing, processes, and mechanisms in the Company to be certain that we are fully covering the cost of fuel in our pricing.

Number three, we have a lot of fuel-efficiency efforts underway, including our re-fleeting, adding winglets, and more efficient aircraft routings.

And then number four is our hedge program.

I'm sorry; I thought the reference was perhaps to another asset purchase of some type.

No, that was not what the reference was at all.

Okay, thank you.

Thanks, Mary.

Andy Compart, Aviation Week.

Richard, I want to get back to the steady path to 125 50-seaters.

SkyWest CFO, which was an indirect reference made to earlier, had said to me that they operate about 150 50-seaters, and he said they are not inclined to trade them for 76-seaters, two-class 76-seaters if there's nowhere to put the 50-seater.

So that's above 125 right there.

So how do you get to that if SkyWest or others -- are resistant to making this trade-off?

I'm going to stand on what I said before, which is we have a clear path through it.

We have a number of operators and a number of contract expirations, and I think we've shown a pretty steady process here.

Our high watermark was a little over 500, and I think today we're at -- 300?

320?

So we have been able to do 180.

So I think you just have to stay tuned.

But it's going to happen.

Can you do it without voluntary participation by some of the partners?

As I said, without going into the specifics of any of these, it is going to happen.

Thanks, Andy.

Vicki, next question.

Josh Freed, Associated Press.

Well, I suppose this is related.

What can you tell us today about your plans for Comair?

In view of the significant changes in the economic and competitive conditions in the regional airline industry in recent years, Delta continues to explore strategic alternatives for Comair, as previously announced.

Until a final decision has been made, we cannot comment further.

Thanks, Richard.

That was really good.

It almost felt like you were reading from something there.

(laughter)

That's really basically been left we been telling you and the rest of the media over the last few weeks.

And so our position hasn't really changed publicly on that.

Okay, thank you.

Kelly Yamanouchi, Atlanta Journal-Constitution.

I'm just wondering, since you have a target of $1 billion in structural cost reduction over the next few years, do you plan for further job cuts over that period to accomplish that?

No.

All right.

Thank you.

Edward Russell, Flight Global.

I was wondering if you could detail a bit more the swap from 50-seaters to the 76-seaters at your regional carriers -- about who might be receiving those and where they might be going.

No, we wouldn't comment on that.

We've got a lot of work to do there, and there will be RFP processes and the like.

So we can't comment on that.

But I will let you know as soon as it's all worked out.

Thank you.

Okay, Vicki, we have time for one more question.

Linda Lloyd, Philadelphia Inquirer.

Thank you for taking my call.

I have two questions about the Trainer refinery.

How is the turnaround at Trainer going at this point, and do you anticipate you will have to spend more than the estimated $100 million to get the refinery up and running?

This is Paul Jacobson.

The turnaround is actually progressing very, very well.

We are on budget and on target to begin restarting that facility in mid-September, and we expect the actual costs to come in line with all of our expectations.

There have been no surprises.

Well, thank you.

And I have one follow-up question.

How many years are the swaps with BP and Phillips 66?

That's the first part of that.

And what are Delta's plans after those swaps expire?

All of the commercial agreements that we entered into are three-year agreements.

And we'll continue to monitor that as we get underway and down the road, and explore our options.

Because -- is it not true that the benefits of buying the refinery hinges on the swaps for the gasoline and diesel produced at Trainer for jet fuel that is made somewhere else?

No.

The swaps are a means to exchange product for jet fuel.

The economics of the transaction don't hinge on those commercial agreements, but they are sources for those products.

And there's a broad market for those products in that area.

Okay.

Thanks very much.

Okay.

Thank you very much, Richard, Ed, and Paul.

That concludes our June quarter call.

We'll be back in three months with the September quarter.

Thanks very much.

Again, that does conclude today's teleconference.

Thank you all for joining.