達美航空 (DAL) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines September 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 a 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.

Thanks, Cindy.

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

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

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.

We have our entire executive team with us for the Q&A session.

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

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

We'll also discuss non-GAAP financial measures.

All results exclude special items unless otherwise noted.

And you can find a reconciliation of our non-GAAP measures on the Investors Relations page at delta.com.

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

Good morning, and thank you for joining us.

Today, we announced a September quarter profit of $768 million or $0.90 per share, and an operating margin of 10.2% excluding unusual items.

On a GAAP basis, our net income was $1 billion.

I'd like to thank the entire Delta team for staying customer-focused and running a good operation while producing strong financial results.

Delta is quite unique in the global industry, with strong employee relationships.

Our people are committed to make Delta the best, and we are not distracted from serving our airline and its customers.

That unique quality derisks our business and is good for our equity holders.

We look forward to rewarding our employees with well-earned profit-sharing checks in February, which totaled $309 million in profit-sharing accruals year-to-date.

Delta's strong third-quarter results, combined with industry-leading operations and customer service, reflect the benefits of steady execution of our strategies across the business, and our prudent investment in the airline.

We now have a product, network and operation that customers are willing to pay a premium for.

During the quarter, we produced an 8.3% revenue premium to the industry, our best performance on record.

We have generated a revenue premium to the industry 18 months in a row, and we intend on continuing to do so.

Our operational performance this year has been quite good.

For the last 12 months, our on-time performance is running at about 87% domestically, and our completion factor is 99.7%, which may be a record for a major airline.

Our DOT mishandled bag rate was down 18% from the prior year, and we had a 35% decline in DOT customer complaints.

Since 2007, our system bag claims have declined 66%.

Looking forward, we continue to have a positive outlook on RASM yields and loads in the December quarter.

This is based on corporate revenue gains -- and Ed will discuss that in much greater detail; a strong global network; superior product and facilities.

Our October unit revenues will be up 4% to 5%; our capacity down 1% to 3%; and we expect the December quarter to produce good profitability with an operating margin of 4% to 6%.

With our consistent investment in the business and significant capacity reductions, our non-fuel costs have grown faster than we would prefer in the past few quarters, and this trend will continue into the first half of next year.

The actions we are taking now, which include a $1 billion structural cost reduction over the next two years, will allow us to remain -- to maintain strong financial performance and free cash flow yield, while laying the foundation for future revenue growth, cost efficiency, margin expansion, and consistently hitting our return on invested capital targets.

We are managing fuel, our top cost item, by taking the unique step of operating a refinery to address high jet crack spreads.

Our refinery turnaround is progressing well under the leadership of Jeff Warmann and our Trainer team.

We expect to be at full production by first quarter of 2013, and we expect a positive Trainer contribution in 4Q.

Paul will go into greater detail about our fuel positioning.

We are working to change the cost dynamic in this industry around fuel, and our results from Trainer and the events in the industry have validated our strategy.

Delta will continue to take industry-leading action to control fuel expense by managing capacity, fully pricing our product to cover fuel costs, operating our refinery, and deploying effective purchasing and conservation strategies.

We will continue to prudently manage our capital spending in order to ensure that we generate strong pre-cash flow yields for our shareowners.

And we will continue our march to pay down debt.

With $5 billion of debt reduction already complete, interest savings already generated are substantial, and there is more to come as we approach our $10 billion target over the next year.

In this quarter, we paid down $270 million in debt, bringing our adjusted net debt down to $11.9 billion.

Debt paydown is important for our equity holders, as it is the most accretive way for Delta to improve its EPS and derisk the business.

Finally, our $1 billion program of structural cost initiatives is important to maintain our unit cost advantage.

The biggest part of this initiative is our domestic fleet restructuring, which will fundamentally change our cost dynamic as part of our three-year financial plan, while simultaneously providing a superior product to our customers.

We will begin to see those fleet restructuring benefits in the back half of 2013.

The recent agreement with our pilots was critical to this initiative.

And our unique employee relations are instrumental in that effort to transform our fleet by up-gauging across our domestic network.

The other initiatives in our cost-reduction efforts will focus on maintenance savings, technology, and process-driven efficiencies.

The path we are taking has demonstrated that it is right for our shareholders, employees and customers.

2013 will be our fourth consecutive year of good profitability and free cash flow yield.

While investments are producing results, we must and will expand our margins and hit our ROIC target of 10% to 12% on a consistent basis over the next several years.

The strong financial foundation we have built is what allows us to move the focus away from a short-term focus to positioning ourselves for long-term expansion, sustained profitability, and shareholder returns.

Thank you for joining us.

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

Thanks, Richard.

Good morning, everyone.

As Richard mentioned, excluding special items, Delta reported a $768 million net income for the September quarter, or $0.90 per share.

This is in line with first call consensus.

We had $279 million in net gains from special items, which produced a $1 billion GAAP net income for the quarter.

Special items included a $440 million gain from mark-to-market adjustments on fuel hedges; a $39 million gain from the slot exchange with US Airways; $78 million in charges related to debt extinguishment, severance, and related expense; and $122 million in facilities, fleet and other charges, which include the charges resulting from the closure of Comair.

I'd like to take this opportunity to thank the Delta team for their work in producing another strong quarter for both financial and operational performance.

And I'm happy to announce that we've set aside $174 million in profit-sharing this quarter, bringing our year-to-date profit-sharing accrual up to $309 million.

During the quarter, our topline revenue increased $107 million or 1% on a 1.5 point decrease in capacity.

Passenger revenue grew $124 million, driven by a 3 point improvement in yields.

Our passenger unit revenues increased 3 points against a difficult base comparison period, driven in part by corporate revenue gains.

Cargo revenue decreased $14 million due to economic softening that we experienced in the Pacific region, which resulted in a 10 point decline in cargo yields.

Our other revenues were flat year-over-year, as the decline in MRO volumes were offset by higher code share and SkyMiles revenues.

We had solid unit revenue performance across all entities during the September quarter.

Our domestic unit revenues increased 3% on a 1 point decline in capacity.

We continue to see strength in corporate revenues, and we are pleased that our LaGuardia unit revenue was flat year-over-year, despite the 42% increase in capacity from our new slot portfolio.

This bodes well for our long-term LaGuardia strategy.

In the transatlantic, we saw the benefit from our proactive 5% capacity decrease, as unit revenues increased 3 points despite an adverse macroeconomic outlook and a weak euro.

Our Pacific performance was the best in the network, as we saw a 6 point unit revenue improvement for the quarter, due to strong yields and load factors on both the transpacific and interport flying.

Our Latin franchise was solidly profitable during the quarter, with year-over-year unit revenue growth roughly flat on a 3 point increase in capacity.

We continue to gain traction in corporate revenues, with our corporate revenue bookings up 8% over the last four weeks.

We continue to see strong double-digit year-over-year performance in financial services and banking, and our manufacture and technology sectors each grew at 9%.

We're making good progress on our revenue initiatives.

Year-to-date 2012, our First Class Upsell Program has generated a paid first class load factor of 32%, which is up 7 full points from the prior year.

And we continue to see strong revenues from our popular Economy Comfort product.

For the September quarter, we generated a 106.7% system index as measured by the A4A RASM benchmarking.

This represented 2.3 point year-over-year improvement in revenue market share.

I'd like to thank the entire Delta team for the outstanding revenue performance we've seen this year.

In terms of our outlook, our December quarter bookings are shaping up well for both the yield and load factor size.

For the month of October, we anticipate that our unit revenues will increase 4% to 5%, driven by corporate revenue strength and continued capacity discipline.

We're seeing positive trends in November despite difficult comps and slow demand during the election week.

The month of November will be our second most difficult year-over-year comp this year, second to September, so we expect November to post smaller year-over-year gains than we are experiencing in October.

Domestic demand for the quarter looks strong.

We experienced good leisure demand around the Columbus Day holiday.

And we are optimistic that leisure traffic will also be robust for the Thanksgiving and Christmas holidays.

In New York, we're seeing positive trends in our enhanced LaGuardia network, as well as on our Transcons out of JFK, which are benefiting from the upgrades we've made in our Business Elite product.

Our transatlantic outlook for the December quarter is solid, despite the economic backdrop, as the entity is benefiting from both Delta and our JV partners' capacity discipline, product improvements, and continued corporate revenue share gains.

Pacific demand has held up well for October, although we anticipate some pressure for November and December, due to tougher comps and higher industry capacity levels in Tokyo.

And on the corporate side, we continue to see strength out into the quarter.

In our quarterly survey of corporate travel managers, 82% anticipate that travel spend will remain either the same or increase, versus prior-year, for the December quarter.

And the level of optimism for travel spend growth improves as we move forward into 2013.

For the Company's guidance, we're forecasting a solidly profitable December quarter, with an operating margin, as Richard said, of 4% to 6%.

We are forecasting our December capacity to be down 1% to 3%, with domestic capacity down 1 to 3, and international capacity down 2% to 4%.

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

Thank you, Ed, and good morning, everyone.

During the quarter, our nonfuel unit cost increased by 5.6%, and we expect to see a similar level of growth in the December quarter.

While due in part to our capacity reductions, we've continued to experience cost pressures from the investments that we made in the business.

The 5.6% increase was driven primarily by wage and benefit changes, which accounted for roughly half of the increase, and maintenance costs, which were up $65 million for the quarter.

This maintenance increase was largely due to a one-time acceleration of engine inductions to take advantage of favorable vendor pricing, as well as initiatives aimed at improving our operational reliability, and positioning us for future efficiencies.

As we look forward, we expect maintenance expense to be roughly flat in the fourth quarter to the prior year.

Up to this point, our margins have expanded through a period of product investment and cost increases.

While this trend will continue into the first half of next year, now is the time to lay the foundation for future margin expansion through our $1 billion program of structural initiatives.

We anticipate these initiatives will generate significant savings beginning in the second half of next year, while maintaining a high-quality product, network, and operation that we have built.

These initiatives will produce comprehensive structural changes to the way we do business at Delta.

They are not easy, and they will take some time and some upfront costs to implement.

But when we are complete, we expect them to take our earnings power to the next level.

The initiatives are focused in three broad categories.

The first category is our domestic fleet restructuring.

As part of this effort, we will be upgauging our fleet by replacing 50-seaters with mainline aircraft and larger regional jets.

The mainline aircraft begin arriving next summer with the arrival of both the 717s and the 737-900s.

These new aircraft are expected to generate significant operating and maintenance savings.

This up-gauge in our fleet is a good fit for our system, and enables us to leverage the benefits of consolidation and our scale.

In addition, the associated 50-seat retirements will allow us to avoid significant maintenance expense in the future.

The second major category is maintenance savings.

In addition to the savings associated with the 50-seat retirements, we have a comprehensive focus on reducing material expense by capitalizing on used aircraft purchases and part-outs.

The final category is technology and process-driven savings.

We will leverage the investments, and continue to leverage them, that we've made in our systems and our delta.com platform, to improve distribution expenses by continuing to shift more share to our delta.com.

In addition, we have initiatives underway targeted at improving logistics, lowering vendor expense, and maximizing the benefits from our investments in our scheduling systems and facilities.

We will discuss these in more detail at our Investor Day in New York in December.

Turning to fuel, Delta paid $3.14 per gallon during the September quarter, $0.05 higher than prior-year.

We had $26 million of settled hedge losses during the quarter.

Based on Friday's market close, we are projecting a fuel price of between $3.15 and $3.20 for the December quarter.

Production levels at Trainer are continuing to ramp up, and we are pleased with the initial results we're receiving from the facility.

Jet fuel production began in September, and we anticipate the refinery to be at full production run rate in November.

Based on recent curves, which have been highly volatile, we expect Trainer's production to generate a contribution of breakeven to $25 million for the December quarter.

Shifting now to liquidity, we ended the September quarter with $5.1 billion in unrestricted liquidity, which included $1.9 billion in undrawn revolving credit facilities.

Our operating cash flow for the quarter was $545 million, and we generated $120 million in free cash flow.

Capital expenditures for the quarter were $425 million, of which $275 million were for fleet investments, which included deposits for new aircraft, induction costs for used aircraft, and continuing our fleet modifications, including the flatbed installations.

During the quarter, we paid down $270 million in net debt, ending the quarter with an adjusted net debt of $11.9 billion, another step forward in our delevering strategy.

This is the first time since 2007 that our net adjusted debt has been below $12 billion.

Our debt reduction has already produced $60 million in interest expense savings for year-to-date 2012, as compared to prior year, including $34 million in the September quarter alone.

While we are focused on reducing our debt, we are also working to lower rates across our overall debt portfolio.

To that end, this month, we refinanced $1.7 billion in debt and undrawn lines of credit secured by our Pacific routes and slots.

Strong investor demand for this transaction allowed us to upsize and provide very cheap liquidity, maintain our revolver, and still achieve in all an interest rate of 4.5%.

We anticipate achieving more than $30 million in annual interest savings from this refinancing of loans.

To wrap up, we had a good September quarter, with good profitability and further debt reduction.

I'm proud of the work the Delta team has continued to do this quarter.

And I'd like to thank the Delta employees worldwide for their dedication and determination, as we continue the hard work of building a better airline for the long-term.

I'm excited about the steps we're taking for the future, and look forward to sharing more with each of you on Investor Day.

Thank you, Richard, Ed and Paul.

Cindy, before we move to questions, I did just want to take a minute and remind everybody, as Paul mentioned, about our annual Investor Day, which will be held on December 12 in New York.

So please mark your calendars.

We'll send out more information shortly, and we hope to see you all there.

So, with that, Cindy, could you give everybody the instructions for the Q&A process?

Thank you, Ms. Greer.

(Operator Instructions) John Godyn, Morgan Stanley.

Great job with gaining corporate travel share, but I think there's a bit of a concern that you've over-earned on corporate travel in recent years, just given the challenges that some of your competitors have had.

As we think about a world where American is getting closer to emerging from bankruptcy alone or not, to what extent do you think your corporate travel share is going to be put at risk?

John, this is Ed.

Thanks for your compliments.

We'll fight hard to make certain that we maintain all the share that we've acquired to date.

A fair bit of the share that we've acquired is truly new share, as we brought the benefits of our investments in product and technology of facilities in New York, facilities in Atlanta.

So I don't anticipate there is going to be a dilution of that as we look forward.

I think any future change in the industry will be positive for everyone.

I know we've had in the most recent weeks certainly some share gains from some of the problems that American has had, but they -- they're relatively modest, and candidly, are not big numbers of that share gain that we've seen.

I guess the concern is more on the economics of the business too, not just the share.

I mean, when we think about potential consolidation, just for the economics of corporate travel going forward, is that specifically sort of like a negative or a positive on corporate travel isolated?

This is Richard, John.

We think that further industry consolidation will be overall quite good for Delta and quite good for the industry, and believe that if you look at the current organizational construct of the industry, we need the next transaction to be completed.

And when it's completed, then we have a pretty rational organizational construct in the industry that will benefit Delta.

That's really helpful.

Thanks, guys.

David Fintzen, Barclays Capital.

A question for maybe Paul, just picking up on some of the cost commentary for next year.

As we look at this 5% to 7% nonfuel CASM pressure in fourth quarter, is that the right run rate to think of generic, roughly?

I know it's early to ask specifics, but is that the right run rate to think in the first half of next year?

And then how fast do we sort of pivot as those investments are -- really investments benefit you and then we obviously overlap the raises from this year?

I'm just curious how should we think about first half versus second half and first half run rate?

Well, I think, David, I think it's a little premature to go into more specifics around first half cost guidance.

But I think as you look at the salaries and wages, you know, the increases took effect in July.

And there's another tranche to come in January.

So, the first half pressures are going to continue to be there.

I think as we get to Investor Day, we'll have more details around the timing of some of these structural initiatives, which we expect to begin to take hold in the second half of next year.

Okay.

Appreciate that.

And then just maybe a broader question.

On the move to re-fleet the domestic, how much have you guys -- how much concern or focus is there on what others are doing with regional, just in terms of how that could affect the revenue assumptions?

I mean, does it matter in terms of this project if United is re-fleeting with 70-seaters as well?

Or is this pretty much a Delta-specific project?

You know, I can't speak to what any other competitors around the world are doing with their fleets.

I can speak specifically to the economics of the 50-seat fleet.

And by our point of view, the 50-seat fleet reduction will be significantly accretive to our enterprise.

Because when you think about it in a really basic way, we're going to reduce the number of airplanes we have on the enterprise, because the 50-seaters, at the kind of long-range fuel prices that we have today, are no longer economic, particularly in state's lengths over about 450 miles.

So, by up-gauging the domestic with MD-90's and 717's, which are really capital-efficient, and then the 737-900's, we'll be able to produce the same number of seats, but we'll do it with fewer airplanes, fewer take-offs and landings, which is where the scale leverage comes from, from the fleet changes.

So I don't know how -- I don't know about others.

I can just talk about what it does for the Delta network.

Yes, and then just in a sense of retaining that revenue on that lower cost base, you're pretty confident that it's revenue that's in the network, is solidly in the network, and you don't need to worry about someone coming in and down-gauging and stealing some of that share?

No.

Because actually, we'll be mindful of our frequency by market.

And that's a key driver.

And the 717 deal particularly gives us much better gauge.

And the second thing is, I don't think customers want to fly 800, 900 miles on a 50-seater.

Part of what we're doing here is putting a better product in the market, better fuel efficiency, fewer airplanes in the air, and our customers tell us they much prefer flying on mainline airplanes rather than 34, 44, and 50-seat airplanes.

No, that makes sense.

Appreciate that color.

Thanks, everyone.

Jamie Baker, JPMorgan.

First question for Richard.

You've had another three months or so to think about how you'll proceed after achieving Delta's $10 billion net debt target.

Any current color in regards to how you're thinking about pension prefunding, share buybacks or potential dividend policy?

You know maybe I'll start by answering it the same way I did three months ago and ask you what you think we should do?

(laughter)

Well, you know, I think, quite frankly, it's up to your actual owners, but I speak to them a lot, all the analysts do.

And I think we're kind of at an inflection point here at $10.00.

I think at a depressed share price, there's appetite for buybacks.

But if you're trading $15, $16, $17, certainly our hope, I think a dividend policy is sort of the -- in the lead right now, pension prefunding definitely bringing up the rear amongst most equity clients that I speak to.

But, you know.

Well, look, that's really good feedback and it's really important feedback for us.

What -- so to give you our plan, we're going to get through 2013 and complete our leveraging goal that we have.

I do think it's worthwhile for us to continue deleveraging on the balance sheet, because it's so accretive when we take the non-op expense out.

But at the same time, our Board and our management team understand our large shareholders want to understand what we're going to do with our free cash flow yield when we get down to the end of 2013.

So, I would extend an invitation not only to the December 2012 Annual Investor Day, but to the December 2013 Annual Investor Day, because I think we're going to have pretty good color on what our next steps will be.

And we are sympathetic to our shareholder desire to share in that free cash flow yield.

Okay.

And second question for Paul, you talk about this $1 billion mystery program of initiatives.

Unfortunately, it comes after you identified an $0.084 set ex fuel target for this year, only to consistently time and time again back away from that figure.

My first question is whether this is truly a new initiative or simply a do-over of what you failed to achieve this year?

Second question is, if it is something new, why should we trust that things are going to turn out better this time?

And is $0.084 still the right target to be using?

I think, Jamie, as we think about targets, what we're focused on doing is identifying and communicating the $1 billion in as clear and transparent a manner as possible.

And we'll plan to do that at Investor Day where there's a better, longer forum to do that.

The targets and the CASM is really a function of what our long-term plans are.

I'm not comfortable talking about that right now without discussions around how longer-term our strategic plans look, as to capacity, re-fleeting, et cetera.

So I think the better avenue to do that is at Investor Day.

Jamie, this is Ed.

The $1 billion that you're -- that we're referring to is candidly part of that same cost reduction initiative that we talked at the Investor Day last year, as we laid out that plan.

As I think we said at that plan discussion, it'd take probably about two years to implement.

And that's where we're at now, in terms of the implementation, I think we said at the time.

And we said since that, the $0.084 was a calculation at a point in time.

It's obviously influenced by a lot of other factors -- capacity levels, which we continue to take down; the opportunity to move ahead with our pilots, which obviously puts much higher pressure on it.

So, from that standpoint, we're not backing down from our cost goals; we're saying that we're going to have to have a reset, though, due to the change in the macroeconomic factors, not anything that's different about the $1 billion target.

Okay.

Thanks for the color.

I appreciate it.

Look forward to hearing more in December.

Take care.

Michael Linenberg, Deutsche Bank.

Two questions here.

When you talked -- I guess it was Paul, you had talked about the fleet restructuring; Richard, yourself as well.

You talked about bringing on the 717's and the 737-900's.

You also get the ability to add more, larger regional jets, the 70 -- the 76-seaters.

And I believe you go from, I want to say, 255 up to 325.

Are those going to be -- are those airplanes going to be sourced from your current partners?

Or will Delta be in the market?

Will you be out there, either putting those airplanes on your balance sheet or signing the master leases?

And what's the timing on that?

Well, we are in the process now of running the competition between Bombardier and Embraer.

And our expectation is, is that some time around the -- by the end of the year, we'll have a pretty good idea of what direction we're going to go.

Our goal is to use that to take out a significant number of 50-seaters.

So there's -- we will look at all alternatives in terms of where -- which balance sheet they end up on, the regional partner on Delta.

But when you think about it from a total liability perspective, what our goal is, is to take out the debt and significant costs that are part of owning all these 50-seaters.

So when you think about, say, bringing in 40 76-seaters and taking out 60 50-seaters, there's a really good balance sheet and CASM trade there.

So when you think about where -- regardless of where it ends up, in terms of the balance sheet, we want to take a significant amount of debt off, to the extent we put that on, by buying 76-seaters.

Okay.

Super helpful, Richard.

And then my second question, this is to Paul.

You know, you ended the third quarter with $5.1 billion of cash.

And it looks like at year-end, you're going to be $5.2 billion total liquidity.

I did see the blurb out that it looks like you're going to pay down $600 million of debt.

And it looks like, by way of a call option here, sometime -- I think it's in November.

Is -- are you going to see any cash come in the door from your AMEX agreement?

Can you just reconcile some of those different events?

Well, the call that you referred to is related to the Pacific routes and refinancing that we did.

So we've closed the cash to fund that.

But if you look at our fourth-quarter free cash flow from last year, there's a similar pattern this year in terms of the flows from AMEX and Miles purchases.

Okay, great.

Thanks.

Appreciate it.

Savi Syth, Raymond James.

Just a question on the Latin American revenue.

It seems like your net revenue decelerated more than in the other regions.

And I was wondering, is that a result of capacity growth in the region?

Or is there kind of a slowing down in demand?

This is Glen Hauenstein.

And what you see moving forward in Latin America is an increase in capacity offered primarily by the foreign flag carriers, with both Lan and Tam being up significantly into South America.

It's primarily focused on South America.

And so yields and traffic in South America has come a little bit under pressure.

Okay.

Understood.

And then just a quick follow-up question on the 50-seat RJ's, have you decided what you're doing on the 41 that Delta's kind of responsible for, related to the updated agreement with SkyWest?

Meaning, if you're taking those back, are there costs related to that that will be hitting in 2013 or so?

Well, I think the individual tails that we've identified through the 50-seaters, we haven't gone into that detail; but we are -- we're working through to identify specifically which aircraft are coming out.

But as Richard mentioned here, the goal is to make this as close to debt-neutral as we can.

Yes, Savi, this is Ed.

The 41 you're referring to, actually, it's 66, not 41.

And we've -- yes, we've accounted for the 66.

And they're going to be either sat down, parted out, or otherwise disposed of.

But that's all in our forward-looking guidance that we've provided.

Perfect.

And the 41 I mentioned is, I think, 25, is on the SkyWest balance sheet, correct?

And the 41 then?

Yes, exactly.

Right, but we got out of 66.

Okay, got it.

All right, thank you.

Glenn Engel, Bank of America Merrill Lynch.

Two questions, please.

One on RASM.

If I looked at the Asian RASM, it was up 6, which is good but the industry was up 9. Why would you be lagging?

We had a lot of new capacity in from the overflights and the stage length was up substantially in the quarter.

So I think that would be the primary differential.

And then there's also a lot of capacity in Japan, so as we move forward with ANA and JAL, we are the largest carrier to Japan, so there's a lot of pressure with new frequencies to New York and frequencies to Seattle; new frequencies to San Diego and San Jose, all offered by the Japanese carriers as they complete their restructuring.

And Glenn, the other -- we restarted Detroit-Haneda.

That's in the quarter that wasn't in the prior year comp.

And that was another 2 point drag on the Pacific, which we've now taken out of the system as of October 1.

The second question on the cost side.

$1 billion is about 3% or 4% -- one, I'm never sure with cost.

Is this cuts from what would have happened, so that you would have had cost increases, and you're going to take the $1 billion out of the cost increases?

Or is this actually saying we're going to lower the non-fuel costs by $1 billion?

And is $1 billion enough?

Glenn, the -- it's never enough, right, so we're always looking for ways to improve.

But the $1 billion is the total amount of the initiative, not the net.

There will be costs growth in other areas.

And the $1 billion is our primary means by which we're combating inflationary pressures, which we're seeing in many parts of the business.

So, the $1 billion would just hopefully keep you from your unit costs growing?

You really wouldn't expect it to bring you the cost actually down at any point?

We're going to go through that on Investor Day, Glenn.

Okay, thanks.

Duane Pfennigwerth, Evercore Partners.

On the fleet savings you expect, can you comment on the negotiated conditions on the 717's?

And specifically, how much life will be left on those engines?

And how should we be thinking about a maintenance honeymoon, if any, on -- as you transition to that fleet?

The airplanes come fresh out of their next check and fresh out of overhaul.

Steve Gorman, do you want to give some particulars?

The only thing I would say, to add to what Richard said, would be that, from an engine standpoint, we would basically be taking on the long-term power by the hour deal on the engines.

And so, that probably would not be in a maintenance honeymoon period.

And what Richard said on the airframe checks is exactly right.

They're fresh out of check as we receive them, and what was ever their -- whatever their next check due was.

And the costs related to putting them in the Delta configuration with Delta seats, Delta livery, Delta interior product, fresh overhaul, paint job, and all the reliability mods is -- the airplane is delivered to us in that condition, so that cost is not ours.

That's helpful, thanks.

And then just if I could follow-up on the refinery, I think you talked about a longer-term target of $300 million.

And I think the underlying assumption on that was a $16 jet fuel crack spread.

Obviously, there's a lot of volatility around that assumption, but if we look now and call it $35, $40 range, what would the updated savings estimate be?

Well, I think, Duane, I think when you're looking at a $35 to $40 crack, you're looking at it off of WTI versus a Brent crack.

We still feel confident in our $300 million annual target.

It has to do more with the relationship between all of the products that are produced at the refinery.

But in spite of the volatility that we've seen, we remain confident in achieving that over the long-term.

It seems like there'd be upside to that number.

And just wondering why -- I guess we'll wait for Investor Day.

Well, there is ups -- there's no question there's upside to the number, depending upon what crack spreads are.

And we built our case on a conservative basis.

And we think the refinery is going to be a very quick payback.

Thanks.

Hunter Keay, Wolfe Trahan.

Glen, a question for you.

So we've noticed that Air France along with you guys, obviously, are adjusting some of the winter schedule, pulling down -- or terminating, I should say, some service to both Miami and DFW.

I'm wondering if this is because the oneworld JV is turning out to be maybe a little more competitive than you guys initially assumed?

Or have they just been pricing sort of aggressively and irrationally there, just to kind of drive you out?

Maybe some color on that market dynamic would be helpful.

Hunter, I think that what we did when we planned the fall and winter was to look at the macroeconomics, the forward fuel curves, the forward demand set, the economic forecast for Europe.

And it really had less to do with the competitive set.

Because when you net it all out, the competition is actually offering -- in aggregate, is offering less capacity this winter than they are -- than they did last winter.

And you pointed out oneworld expanding; oneworld is expanding, and that remains to be seen how successful that expansion is in the winter season.

But it was not in response to that.

It was really in response to what we saw of the macroeconomic forecast.

Okay.

Thank you, Glen.

And this is a little more of a sort of offbeat question.

I'm not sure who would answer this, maybe Paul.

As you think about the implementation of the Volcker Rule in the fourth quarter here and beyond, there's going to be an impact not only to how banks run their commodities trading desks.

And I know you guys have ramped up your own commodities trading operation.

So it's a two-part question.

One, what do you expect the commodity trading landscape to look like after the Volcker Rule has been implemented?

And two, is it going to impact how you decide to hedge your fuel?

Thanks a lot.

(laughter) That is an obscure question.

I know, it's obscure.

But it could have an impact.

I mean, Goldman is talking about potentially getting rid of its commodities trading operation.

It's a very less profitable operation than it was for the banks.

I mean, obviously, your answer is what it is; you haven't really thought about it too much at this point it seems, right?

Well, I mean, first of all, I think the characterization about a trading operation versus -- compared to a corporate hedging program, I don't think is necessarily a good one.

You know, we're very confident in our execution and don't see any significant changes coming through our counterparties.

We have close relationships with them.

We're comfortable with where we sit.

Hunter, this is Richard.

First, we would get an end-user exemption under the CFTC Rule.

So, in terms of what it would require, in terms of counterparty postings and the like, you know I think we're going to continue business as usual in that regard.

The second thing is, is the over-the-counter feature will give us a lot more transparency into what the profitability of our counterparties may be in some of these trades.

The third thing I'd point out is, you know, it might be a good thing for a lot of people to take their passive money out of the forward market.

Because we still think there will be enough liquidity in the futures market.

And one of the things that I still think the industry has suffered from is, the forward fuel market has become the next stock market.

And so, you have so much passive money in the last 10 years that it flowed into the futures market, that it might not be all bad to have a lot of that money flow back out of the market.

So that the supply and demand signals that we see in the underlying market tell you that jet fuel ought to be -- Brent ought to be about $20 less than what it is today.

So, maybe we get to more rational markets.

Okay, great.

Thanks for that, Richard.

Appreciate it.

Yes, you bet, Hunter.

Thank you.

Dan McKenzie, Buckingham Research.

A couple of questions here.

Paul, if I could circle back to your commentary -- margin expansion resulting from investment, which would help take Delta's earnings power to the next level once done.

So, I believe Delta today is targeting 10% to 12% margins on a calendar basis.

Does that mean you'll start to target 15% margins longer-term?

Something higher?

What can you say to elaborate on that?

Thanks.

Well, I think, Dan, that's taking it from where we are today to getting to that 10% to 12% level.

We've put a lot of investment into the product and it's paid tremendous dividends with our revenue performance.

There comes a point where you can't always count on further revenue performance going forward.

And we want to make sure that we're restructuring to address the cost side of the equation too, in order to contribute to that future margin expansion off of today's current levels.

And to clarify, Dan, not to speak for Richard, but the 10% to 12% that he referred to was return on invested capital, not operating margins.

Right.

Which was exactly where we are this quarter.

Oh, got it.

I appreciate that clarification.

Thanks.

And then, secondly, Glen, I see the capacity cuts to Europe, of course, which are pretty steep on Delta's part.

But I'm wondering if you can provide a little bit more perspective about the demand set.

This just follows up on Hunter's question.

And I guess as you look ahead with respect to the inputs, does it factor in price elasticity from higher ticket prices?

And I'm guessing it does, but I'm just -- I guess I'm not sure how you go about measuring that elasticity, given the macro here, is that -- or maybe asked a little differently, is the demand set really driven by corporate travel feedback, something different?

Any additional color you can provide would be helpful, just given how the wheels look like they could potentially fall off the wagon.

I think our premise, our basic premise, is airline seats are more inelastic than people give them credit for.

And as the industry has passed along fare increases, that we've seen very little drop-off in demand.

As a matter of fact, in this month of October, we're running at a month-to-date load factor that's around 84%.

So we're remaining at historic highs despite improving yields.

Is that your question or is it more specific to Europe?

Yes, it was -- yes, I guess really specific to Europe, just given the volatility and the macro backdrop there, which could really disrupt demand trends.

Absolutely.

And I think -- again, this is similar to a comment I made in the last quarter, is the headlines don't match our results.

And what we see through the winter months is actually some very positive signs in terms of European demand, as the market responds to the capacity discipline.

So we're very optimistic, as we run through what's historically the winter iota season or the weak five months of the year, that we're going to post very favorable improvements in unit revenues, despite not only the economic headwinds, but the headwinds of the currency on a year-over-year basis.

So we've mitigated -- it looks like we're going to mitigate both of those.

And the demand is actually moving both ways.

So European multinationals who are having trouble doing business in Europe are actually coming to the US to do business.

And so, there's a lot of dynamics that are fueling that, I think.

Terrific.

Thanks so much.

Appreciate it.

Bob McAdoo, Imperial Capital.

My questions have all been answered, thanks.

Good job, guys.

Thanks, Bob.

Thanks, Bob.

And, Cindy, I think this is going to be our last question coming up.

Okay.

Our last analyst question will come from Helane Becker with Dahlman Rose.

Thanks, Jill, for squeezing it in.

I appreciate it.

Just a question about Atlanta.

You guys talked a lot about picking up corporate share in New York, but I think when Southwest bought AirTran and they start to take over and reconfigure their aircraft, they're getting rid of a lot of the front seats.

So, can you just talk about what you're seeing in Atlanta, in terms of both pricing on the walk-up side and in terms of share gains?

This is Glen.

How are you?

We see a very favorable dynamic going on in Atlanta in the short, medium, and long-term.

Since AirTran has been taken over by Southwest, they're down almost 50% in capacity from what AirTran's peak was, as you look out into the forward mods.

And they are rationalizing more and more cities.

I believe last week, they announced that they were stopping service next spring to Charlotte, to Rochester, New York, and to Flint, Michigan from Atlanta, which is in addition to the many cities they've already closed.

Their departure levels are down to about 177 a day.

But the transition has been, I think, from our perspective, difficult.

Because, if you look at the T100 data that comes out in the spring, AirTran and Southwest had a lot of trouble filling their seats.

So they put some very aggressive sales figures out there.

We think those will be mitigated over time as they continue to rationalize capacity.

And we're very optimistic, as we go through the winter schedule and the spring schedule, that we'll have a lot of traction here in Atlanta.

Okay.

So you would say that you were seeing share gains from them?

Is that it?

Absolutely.

Okay, great.

Thanks.

We'll see you in December.

Thanks, Helane.

And that is going to wrap up the analyst portion of the call.

And so I'll hand it over to Ned Walker.

Okay.

Hey, thanks very much, Jill.

And Cindy, if you could go over again the process for queuing up to ask a question for the media.

And once again for the media, we'd like to have one question with a quick follow-up, and hopefully, we'll be able to accommodate everyone.

Thank you.

We will now take questions from the media.

(Operator Instructions) Josh Freed, Associated Press.

You mentioned earlier that you're seeing that customers are willing to pay a premium to fly on Delta.

I'm just wondering if you can say any more about that?

I mean, are you seeing that premium show up in fares?

Or are you thinking of that as more of a sort of general premium, because you're also collecting baggage fees or upgraded seats or that kind of thing?

Where are you seeing that premium show up?

Primarily in corporate share and in yields.

The airline is running very, very high load factors on an annual basis.

So it's very hard to take it in traffic and overseas in higher and higher share of the higher-yielding customers selecting Delta.

All right, thank you.

Andy Compart, Aviation Week.

I guess you're doing well.

Just a couple of quick questions.

On the refinery, you said that the revenue prediction is pretty much staying the same.

I'm wondering if the cost estimate you gave in the beginning, which I think was around $100 million, if that has stayed the same or if you've had some unanticipated costs or anything like that?

Hey, Andy; Richard.

Good question.

You know our turnaround costs are tracking quite close to plan through the end of the year.

And the turnaround will result in our being at full production probably near the end of 4Q, but for sure by 1Q.

Okay.

And just to be clear on the regional jet timing, can you expect to make a fleet decision between Bombardier and Embraer by the end of this year?

And then --?

That's -- Andy, that's our plan.

And at that point, do you think you'll have agreements in place with the -- which regionals are going to operate which jets, and where the 50-seaters are going to be dropped?

(multiple speakers)

We have (multiple speakers) --

Capacity wrapped up by then?

Yes, we still have that to be wrapped up, Andy.

Is that the same timetable or different?

We hope that it's around the same timetable.

Okay, thanks.

You bet.

Thank you for calling in.

Karen Jacobs, Reuters.

I had a follow-up on the Bombardier/Embraer contest.

How many planes are you looking to buy?

We haven't finalized the number of airplanes.

Under our agreement with our pilots, we have the ability to take up to 70 additional 76-seat airplanes, so it would be some number less than 70.

Okay.

And then I had another question, sort of a question about the cost-cutting plans.

Have you ruled out layoffs as you look to drive down costs over the next year?

Right.

We have ruled out layoffs.

You know, we have a strong tradition at Delta of managing our unit costs for personnel by using voluntary programs and pushing productivity throughout our business.

So, we would -- it's a really important part of the strong relationships we have with our employees.

We want them to be secure in their jobs so they can provide really good customer service to our customers.

Okay, thank you.

Mary Jane Credeur, Bloomberg News.

Can you talk a little bit about how you're going to afford that new pilot contract?

Well, when you look at -- hi, Mary Jane.

This is Richard.

Sorry for not saying hello.

When you look at the overall value that we're going to create as a result of unlocking the ability to re-fleet, plus the productivity that has been built into that agreement, we're confident that it will be an important part of our ability to get to unit costs over the next couple of years, to improve our margins and our return on invested capital.

And Mary Jane, this is Ed.

One additional thing -- we also reduced the profit-sharing going forward too, and that's an important part of helping to fund that cost growth.

Sure.

Okay.

Thank you.

Ted Reed, The Street.

Richard, you said that you would applaud the industry consolidation and it would be quite good for Delta; but the contemplated transaction would make a much stronger competitor to Delta in the Southeast, and across the Transatlantic, and probably elsewhere.

So, what's the rationalization for saying that?

Ted, good question.

When you just think around the world, and it's not just in the US but around the world, the industry consolidation has really helped regions around the world.

And the region I think about is Latin America, which has probably led the worldwide region -- the regions around the world in consolidation.

And so you end up with just a much more rational industrial organization.

And when you have a much more rational industrial organization, the participants in the organization tend to do better.

So, we think we have competitive advantages that will allow us to continue to sustain the distance that we put between ourselves and the rest of the industry.

And, of course, we don't intend on giving up any market share.

All right, thank you.

Okay, Cindy, we have time for two more quick questions.

Kelly Yamanouchi, Atlanta Journal-Constitution.

I was wondering, as Southwest and AirTran are rejiggering their networks, are you starting to see noticeable frequent-flier loyalty gains or new AMEX cardholders from them?

Kelly, this is Richard.

I'm going to ask Glen to answer that.

Hi, Kelly.

It's Glen.

How are you?

(multiple speakers) We have had record acquisitions for the last several months that have come primarily through acquisitions in both New York and Atlanta as well as other markets.

So we're very excited about the card and the dynamics of the card.

It looks like October will be another record month, and I think we'll see share gains not only in our hubs but across the entire network.

Great.

And I was also wondering if you -- if there's an idea for a timeframe for deployment of the additional 76-seaters, once you reach a deal?

Kelly, this is Richard.

Typically, when you place an order for an airplane, the earliest you get it is 16 to 18 months after you've placed the order.

So, you would expect, just like on our 737-900 ER order, we placed that -- it will be two years ago this August, or August 13.

And we'll end up taking the airplanes somewhere around -- the first airplane about 26 months after the order.

So -- and then you end up taking about a dozen a year or something like that.

So I hope that helps give you some timeline.

Okay.

One more final question, Cindy.

We'll take our last question from Linda Loyd with Philadelphia Inquirer.

I have a question about the Trainer refinery.

The refinery before it was reconfigured was 180,000 -- 185,000 barrels a day.

With the reconfiguration, is it still that much oil?

And how many barrels of jet fuel are you -- will you be producing when you're at full run rate?

Good morning, Linda.

This is Paul.

Thanks for your question.

None of our modifications are intended to expand production at the plant.

So we remain at 185,000 barrels a day.

We've said that we intend to get about 50,000 barrels a day of jet fuel when we complete the modifications sometime during 2013.

But we will be producing significantly more jet fuel than Conoco Phillips produced when they ran the plant, beginning in the first quarter.

Thank you very much.

Okay, hey.

Thank you, Richard, Ed, and Paul.

And that does conclude our September quarter call.

We'll see many of you at Investor Day in New York City on December 12, and back on the telephone with everyone here for the January quarter results.

Thanks again, everyone.

Thank you all.

That does conclude today's conference.

Again, thank you for your participation today.