達美航空 (DAL) 2012 Q4 法說會逐字稿

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

My name is Kyle, 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.

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

Go ahead, ma'am.

Thanks, Kyle.

Good morning everyone and thanks for joining us for the December quarter call.

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

We also have the entire leadership team here in the room for the Q&A session.

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 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 will discuss non-GAAP financial measures.

All results exclude special items unless otherwise noted.

And you can find the reconciliation of our non-GAAP measures on the investor relations page at Delta.com.

And with that I will turn it over to Richard.

Thank you, Jill.

Good morning everyone and thank you for joining us on this call.

This morning we cap off a successful 2012 by announcing a $238 million profit for the December quarter or $0.28 per share, in line with First Call consensus.

Delta generated a 5.5% operating margin and unit revenues grew by 4%.

For the full year 2012 we grew our net income by 30% year-on-year to $1.6 billion, expanded our pretax margins by 100 basis points, reduced our net debt by over $1 billion and produced an 11% return on invested capital.

Our unit revenues for the year grew 7% and we have now generated a unit revenue premium to the industry for the last two years.

These results would not have been possible without the hard work and dedication of the entire Delta team, and I would like to thank them for all of their efforts on behalf of our customers and our Company and our shareowners in the past year.

I look forward to being with them and recognizing them on Valentine's Day this year with a $372 million profit-sharing payout, which will equal 6.67% of base pay for our frontline employees.

We entered 2013 as a stronger airline, entering our fourth consecutive year of good profitability and free cash flow.

Through a variety of initiatives we discussed with you at our Investor Day in December, we will build on the success we enjoyed in 2012 by posting even better operating and financial results in 2013 as we execute on our commitment to sustainable and growing profitability for our investors.

For our customers we will again make targeted investments in our operations, products and facilities, and couple that with consistent execution to make Delta the preferred airline in the world.

Last year we made significant operational and customer advancements that placed Delta at the top of operational performance and customer service.

The initiatives produced a 99.5% completion factor and 86.5% on-time arrival rate, a 25% improvement in DOT luggage performance, and a 40% reduction in DOT customer complaints.

We are continuing to prudently invest in high quality products, infrastructure and our network.

We have successfully launched Economy Comfort; enhanced our personal on-demand entertainment systems; revamped our LaGuardia terminals C and D, building a connector between the two; opened a new international terminal in Atlanta; launched a new Delta website; and purchased a 49% stake in Virgin Atlantic.

In addition, behind the scenes and we have and will continue to make significant capital investments in pricing, yield management, distribution and business intelligence tools.

The investments in our people, tools and capabilities, and revenue management, pricing and distribution are critical to maintaining our long-term RASM premium.

All of these accomplishments have driven our revenue premium as we were recently recognized by the Business Travel News, which awarded Delta the top airline in all categories, and the Wall Street Journal, which gave Delta the number one ranking in its annual airline scorecard.

We cannot run a great airline and generate the operating results we have achieved without good employee relations and morale, and we are proud of the fact that Delta has the best employee relations in the industry.

We value these relationships, so we have made investments to make Delta a great place to work.

This is important for our shareowners.

For our shareholders we're focused on making Delta a high-quality investment, with an ROIC targeted return of 10% to 12% over the long run.

For the past few years we've focused on cash flows and on wisely investing in the business while reducing risk on the balance sheet.

In addition to investments in our product, we have also made important long-term investments in our Win in New York strategy with the creation of our LaGuardia and JFK hubs, our first mover advantage in our domestic fleet strategy, our equity stakes in GOL and Aeromexico, our agreement to buy 49% of Virgin Atlantic, and our acquisition of the Trainer refinery.

In 2013 these important initiatives provide significant opportunity to continue to improve, in a creative way, our financial and operating performance.

While the investments we have made in the business have contributed to our margin expansion and two years of RASM premiums, they have not come without cost.

To this end, we will focus on disciplined spending and successfully implementing our $1 billion in structural cost initiatives.

These initiatives will maintain our revenue generation while improving our overall efficiency.

Since 2010 we have generated $4 billion of free cash flow, 10% on return -- a 10% return on invested capital, and paid down over $5 billion in net debt.

Our debt goal of $10 billion is within sight this year.

As we approach that goal, we are getting ready to take the next step and move toward a balanced deployment of capital where our operating cash flow is divided between continued investment in the business, further balance sheet debt reduction and are returning cash to shareholders.

As I mentioned at Investors Day, we expect to announce more details on our capital deployment strategy before our Annual Meeting in June.

We are in the process of working through our options and I will discuss those in further detail prior to the Annual Meeting.

So, to conclude, we are pleased with our progress and have significant opportunity for improvement in 2013.

We are currently forecasting further margin expansion of 2.5% to 4.5% in the March quarter of 2013 as we are projecting unit revenues to increase 4% to 6% in 1Q.

We have the right initiatives in place, the right people, and we will keep building a better airline for our customers, employees and shareholders by being the very best in execution, the most creative at developing business strategies and wisely deploying capital to keep Delta in the lead.

Thank you, and I will turn the call over to Ed.

Thanks, Richard.

Good morning everyone.

We appreciate you taking time to join us this morning.

This morning we announced a December quarter profit of $238 million or $0.28 per share excluding special items.

This was $0.01 ahead of where consensus had us for the quarter.

During the quarter we had $231 million in charges from special items, which included $122 million in facilities, fleet and other charges primarily related to our domestic fleet restructuring; $106 million charges related to early debt extinguishment; and a $3 million mark to market loss on fuel hedges.

The December quarter results are quite solid when you consider the over $100 million net negative impact that Superstorm Sandy had on the airline operation and the refinery, as well as $100 million in lower hedge gains on a year-over-year basis.

This is proof that our core business remains strong and we look forward to continued margin expansion into 2013.

As Richard mentioned, we accrued $372 million in profit sharing in 2012 with $63 million of that in the December quarter.

I would also like to echo Richard's comments and thank the Delta employees for all their efforts this year in taking great care of our customers, running an outstanding operation and producing top-tier financial results.

There is no better way for us to show our thanks than with a profit-sharing check that we'll be delivering on February 14.

Shifting to revenue, during the December quarter our topline revenue grew $203 million or 2% despite a 1-point decrease in capacity.

Passenger revenues increased $215 million, with unit revenues for the quarter up 4.3%.

We saw a 2-point improvement in yield combined with a 2-point increase in load factor, proof that our revenue initiatives and prudent capacity deployment are driving results.

December marked the 21st consecutive month that we have produced a unit revenue premium versus our competition, and the distance between our performance and our competitors increased in every month during 2012, and we expect to add to that advantage in 2013.

We ended the year with strong holiday performance, with five dates in the quarter in the top 10 unit revenue days on record, including a new number one system RASM and revenue day on the Sunday after Thanksgiving.

We continue to see positive results in the domestic system, with domestic unit revenues up 5% for the quarter.

Our New York franchise is performing well, and we continue to pick up market share.

This is particularly encouraging given that we are still in the early ramp up period of our New York strategy.

Despite the share strength, New York's performance was significantly impacted by Superstorm Sandy.

The storm's cancellations and the subsequent slow recovery of travel demand to and from the Northeast resulted in a full quarter negative revenue impact of $75 million and a P&L hit of $45 million.

On the international side, we have managed our transatlantic capacity tightly.

And with December being a seasonal low point in demand, we have reduced capacity in the December quarter by 7%.

That strategy has paid off, as we saw an 8-point increase in unit revenues for the region.

Unit revenues for our Pacific entity were flat year-over-year on 2 points of higher capacity.

We saw some weakness driven by economic softening in Japan, along with industry capacity growth, and a negative impact from the weaker yen.

This weakness, however, was offset by strength in non-Japan Asia routes, particularly in China.

In Latin America our unit revenues decreased 1 point, driven by a 6-point decline in yield on an 8-point increase in capacity.

Mexico and Central America had strong unit revenue growth, South America was flat year-over-year, and our Caribbean unit revenues were down with a 25% increase in capacity.

Shifting back to an overall system perspective, Delta continues to gain traction in corporate revenue due in large part to our investments in products, facilities and our network.

Our system corporate revenues increased 9% in the quarter with double-digit growth rates for our transatlantic and Latin entities.

We saw strong growth across most industry sectors, topped by a 31% increase in revenue from the banking sector, the result of new contracts that were effective in the December quarter in our buildup in New York.

In terms of our revenue outlook, as we head into 2013 we expect to expand our competitive advantage and continue to outperform the industry as we reap the benefits from our investment in the business.

Our new JFK Terminal 4, which will open in May, will give Delta a world-class facility and will address one of the largest drivers of our traditional revenue underperformance in New York.

We will reach 85% completion on flatbed seat installation on international aircraft by the end of this year.

This summer, 100% of our transpacific flights and over 40% of our transatlantic flights will offer the flatbed product.

We anticipate improved merchandising revenue, including first-class upsell from the relaunch of Delta.com and improved mobile apps, and we will benefit from our international equity investments.

We anticipate strong traction from Virgin Atlantic, which will further enhance our position in New York.

The initial customer reaction from the announced JV has been very enthusiastic.

In short, we have a lot to look forward to, and we are excited about our future revenue opportunities.

Our guidance for the March quarter -- demand trends remain positive and we are forecasting full quarter unit revenues increased 4% to 6%.

We are off to a good start in January, with our unit revenues expected to be up 5% to 6% in the month.

This is particularly encouraging, given calendar day of week shifts in the month are costing us about 2 points in comparative RASM.

February and March are also building well, albeit at slightly lower growth rates.

The domestic entity is showing strong yield trends, largely attributable to continued corporate strength.

Transatlantic yield and advance bookings are holding up well as we actively managed our off-peak capacity, which will be down 8% to 10% from the prior year.

Our outlook for the Pacific is mixed.

We are seeing positive trends for non-Japan Asia, which are offset by weaker Japan demand due to economic weakness, a softer yen, and industry capacity growth.

However, the challenges in Japan are mitigated by our 2013 yen hedges, which will have -- which currently have a mark-to-market value of $75 million.

In fact, our full-year 2013 net yen position is 90% hedged at JPY80 to the $1, so financially we will be protected this year from the recent yen selloff.

And as a side note, 2013 will be the first year that the majority of our transpacific capacity will be outside of Japan, as we continue to diversify our Pacific portfolio to the more rapidly expanding economies in the Pacific Rim.

And in Latin America, demand remains solid moving into the March quarter, with Mexico and Central America showing strong year-over-year improvement.

Finally, with regard to guidance, we are forecasting an improvement over last year's March quarter, with an operating margin expectation of 2.5% to 4.5%.

On capacity, we expect system capacity to be down 2% to 4% with domestic capacity down 1% to 3%, and international capacity down 3% to 5%, driven in large part by our off-peak reductions in the transatlantic.

And now I will turn the call over to our CFO Paul Jacobson.

Paul.

Thanks, Ed.

Good morning everybody.

I will start with our cost performance.

For the quarter, total operating expense increased by $376 million as a result of higher fuels and salaries.

Nonoperating expense decreased by $43 million, showing the continuing benefits of our debt reduction strategy.

Our non-fuel unit costs were up 5.7% for the December quarter, driven by our capacity reduction, continued investment in wage increases and investments in our products, services, operations.

We expect our non-fuel unit costs will be up 4% to 6% for the full year 2013, with the March quarter up 6% to 8%.

March quarter costs, which are pressured by the year's largest quarterly capacity decline, will represent the peak of our cost growth for 2013.

That growth should then moderate over the remainder of the year as capacity levels flatten out and the benefits of our $1 billion structural cost initiatives begin to kick in.

These initiatives are designed to stem the rate of growth in our costs without jeopardizing the revenue production enabled by our network product and our service.

We are restructuring our domestic fleet, and one of the key tenets of our structural initiatives is maximizing the benefit across our organization.

To do this, we are actively replacing 50-seat regional flying with more efficient and customer preferred 717s, MD-90s, 737-900s and CRJ-900s.

Recent agreements with SkyWest, Pinnacle and Bombardier have produced a clear path for us to eliminate more than 200 50-seaters, and we will begin taking deliveries of the mainline aircraft and the CRJ-900s in the September quarter.

We are also redesigning our maintenance program to improve processes and resource management, as well as lowering materials expense by seeking out market and part-out opportunities.

We have purchase agreements in place for 23 MD-80 aircraft at very low prices which will be used for parts on our MD-88 and MD-90 fleets, and have already taken delivery of four of these aircraft.

We are also capturing the benefit of our increased operational reliability, which is facilitating cost-saving scheduling adjustments.

And we are improving our distribution platforms to continue to move towards more cost-effective and value-added channel such as Delta.com.

Overall we have seen in over 5-point share shift to Delta.com since 2010 and expect further market penetration due to our enhanced platform.

We anticipate beginning to see the benefits of these -- of this $1 billion cost improvement initiative in the second half of the year, with continued program ramp-up through 2015.

Overall we expect to achieve $600 million of benefit from these initiatives in the back half of 2013, and reach the $1 billion level in 2014.

Turning to fuel, our all-in fuel price per gallon was $3.24, which included $0.05 per gallon settled hedge gain, as well as a $0.07 per gallon loss from our Trainer refinery.

In November and December, operations at Trainer were negatively impacted due to Superstorm Sandy damage to regional pipelines and terminals in the area, which created a reduction in available distribution points for products.

This, in turn, forced Trainer to slow production and lower efficiency until the infrastructure recovered.

These events were the largest drivers of the $63 million refinery loss during the quarter.

However, refinery operations are recovering and we expect Trainer to be able to realize a modest profit in the March quarter.

We have also entered into discussions to bring Bakken crude to Trainer, which will lower the overall total input costs at the refinery.

Trainer will be receiving a shipment of Bakken crude this quarter and we'll be better able to evaluate crude sourcing options after this test run.

In sum, based on Friday's market close, we are projecting a fuel price of $3.15 to $3.20 for the March quarter, which includes the impact from the Trainer refinery.

Turning to liquidity, we ended the year with $5.2 billion in unrestricted liquidity, which included $1.8 billion in undrawn revolving credit facilities.

Capital expenditures were $600 million, which included $310 million in fleet investments and $70 million in improvements in turnaround to the Trainer refinery.

Our year-end adjusted net debt was down to $11.7 billion, which represented a $1.2 billion reduction from 2011.

Additionally, in October we refinanced $1.7 billion in debt in undrawn revolving credit facilities which are secured by our Pacific routes and slots.

This route refinancing will generate more than $30 million in annual interest expense savings.

For the March quarter, we expect to generate $400 million of free cash flow.

To conclude, we are proud of all that we have accomplished in 2012.

Our operational performance was stellar.

We generated $1.6 billion in net income.

We paid down $1.2 billion of net debt, and we generated a unit revenue premium to the industry every month of the year.

This can't happen without the hard work and efforts and dedication of the Delta team in 2012, and I look forward to an even better 2013.

Jill.

Thanks Richard, Ed and Paul.

Kyle, we are now ready for questions from the analysts, so if you could review the process for asking questions.

And again, we ask everyone to limit themselves to one question with a brief follow-up.

(Operator Instructions).

David Fintzen, Barclays Capital.

Just a quick question, Ed, and your comments that you mentioned 2013 could be a year where you further extend your revenue premium.

I am just -- I'm curious how to think about -- obviously, that is happening to start -- seems to be happening to start the year.

But I am curious how the up-gauging, as it phases in in the back of the year, starts to impact that.

Is that a case where we should expect it to sort of (technical difficulty) midyear and start to come in?

Or do you think you can continue to expand out your RASM relative to the industry even as you're getting into the bigger aircraft?

Well, Dave, certainly the up-gauging strategy on our domestic network will put some pressure on our unit revenues, and thus our competitive RASM performance.

It is certainly going to be a huge positive for our margins.

Right.

-- Which is the most important measure that we look at.

And as I think you know, we have already been seeing a fair bit of the up-gauging over the course of the last couple of years, so driving both margin and RASM enhancements.

And I think the way we look at it is the product superiority of the aircraft we're up-gauging to will more than compensate for any RASM dilution we might be seeing.

Okay, okay.

And then just quickly on the Latin entity, you mentioned the strength in Mexico and Central America.

Obviously, there is a fair amount of capacity going into the deep South America -- American markets.

If you extract the competitive capacity dynamics, is that -- how is the underlying demand trend in those deeper, bigger South American markets faring?

David, this is Glen Hauenstein.

Demand in deep South America is quite strong.

And as you point out, in the short run the capacity might be outrunning it by just a tad.

But as we move forward, we think that will catch up with the higher demand levels and we should be in good shape by the mid-level -- the mid-part of this year.

Okay, great.

Appreciate the color, guys.

Michael Linenberg, Deutsche Bank.

I guess just a couple here.

Just on the Virgin piece, I know that the plan is for the transaction to close at the end of 2013.

How soon, though, do you start codesharing?

And maybe where are you on the application for the -- the application for antitrust immunity?

Ben Hirst will take the antitrust (multiple speakers)

I will take the last piece.

In terms of the process, we basically have three sets of regulatory approvals that we have to obtain.

There are competition reviews that are underway at the Justice Department and EC.

We will be filing probably by the end of the month for antitrust immunity with the Department of Transportation.

And there is a review in the UK of the shareholders agreement to ensure that citizenship and control remains with EU citizens.

We also filed with DOJ and we have begun meetings with DG Com and EEC, so the process is well underway.

It is on schedule.

And we are hoping that these reviews all come together within a six-month timeframe.

And on advancing the codeshare and frequent flyer reciprocity, we are working very hard on the system side of that, and expect to have that up and running in the second or third quarter -- end of the second, beginning of the third quarter, with the desire of having those codes in place before we head into the winter Iota season and fully functioned and active.

Okay, great, thanks, Glen.

And my second question, I know giving your NOL position, I don't think it is going to be many years, I think, before you guys are paying cash taxes.

But at what point do you start incurring a book tax?

And I realize so many people, or the market itself, is fixated on EPS.

Is that something that kicks in later this year or is that more or a 2014 type phenomenon?

This is Paul.

There is no hard and fast rule.

We are working with the accountants on that.

And the reversal has to do with historical earnings and where we are on book tax differences.

So, as we continue to work through that, that is something that could happen in 2013.

Okay, very good.

This is Ed.

Let me just clarify Paul's comments.

He is right.

We are working through it, but I also -- I don't think we're going to see it in 2013.

And I think what we are looking at is maybe by the end of 2013 we will make that determination for 2014 looking forward.

Okay, very helpful.

Thanks, guys.

Glenn Engel, Bank of America.

A couple questions, please; one, on Trainer, I guess I was seeing some reports about something wrong with the pipeline slurry and that the refinery was -- the Trainer refinery was closed right now.

Is that true?

No.

This is Paul.

There was one unit that we have taken down briefly as a result of some of the slowdowns from the storm.

That unit is expected to be up and running within a week, but we have not shut down the refinery.

The ancillary businesses had revenues down about 15% from a year ago in the fourth quarter -- [185 versus 216].

What is driving that?

And will those businesses start to grow again?

That represents a shift in our strategy from our MROs.

We are starting to streamline to higher-margin accounts and business, and we expect to grow off that platform in 2013.

So you will start with a lower base, but start to grow from a lower base?

Yes, with more profitable business.

And, finally, just an update on pensions.

How much -- what is the pension unfunded liability now and what is the impact on earnings in 2013?

The pension unfunded liability is going to increase at year-end by about $2 billion.

That has a minimal effect on expense based on where we are in amortization and the result of a lower interest rate.

And there is no material change in funding because we have the benefits of the airline relief under the Pension Protection Act.

Thank you very much.

Jamie Baker, JPMorgan.

Good morning everybody.

First question for Glen.

The changes in the SkyMiles program are obviously relevant to passengers.

I suppose as an enthusiast I am somewhat interested, but usually frequent flyer issues fly below the radar screen for me as an analyst in terms of what I obsess over on a daily basis.

I am sure a lot of effort went into the SkyMiles overhaul, but is this something where we should actually expect to see an impact, either on the income statement or in terms of the liabilities on the balance sheet in 2013?

I will let Paul talk to the balance sheet implications, but from a revenue perspective we are looking at the evolving SkyMiles to be better a loyalty program for its customers, and drive the type of customer behavior that we would like to encourage in the future.

So, I think before we didn't discern between a customer that was a high-yielding customer versus a low-yielding customer, and I think as we continue to evolve those programs, we will be continuing to favor the higher-yielding customers over lower-yielding customers.

Okay.

And on your question about effectiveness, the change that we announced is not effective until 2014.

Correct, yes, that is a good point.

For my brief follow-up, while I have you, Richard, or for Ed, the typical area of pushback that I get from investors is that Delta is under investing in aircraft.

Sure, you're generating cash, but you are living on borrowed time.

You're going to faces massive re-fleeting bill somewhere down the road.

Now, normally, I countered by pointing out that as you shrink capacity, fleet age actually doesn't rise very quickly, and the Company has a demonstrable preference for, shall we say, experienced airplanes that require far less capital than buying new.

I will admit this isn't so much a question as an opportunity, I guess, for you to just bring us up to speed on your thoughts as it relates to this issue, as it relates to capital deployment and the potential need for new planes down the road.

Well, first, airlines -- and Delta in particular -- have to take the cost of capital into account when making investment decisions around the Fleet.

And what we have done at Delta is adopted a strategy of making sure that we use our shareholders' money -- we use that money prudently to get returns from day one on a fleet investment.

So, we have the right mix going forward.

If you look at our wide-body fleet, the average age of the wide-body fleet is 13 to 14 years.

And on our domestic fleet, we begin this year with a significant number of new deliveries, so we are always working to calibrate the right mix of new deliveries and used deliveries.

Given the glut of narrow-bodies coming on the market right now, we think that there is going to be significant opportunities, because residual values on 8-year-old to 10-year-old narrow-body airplanes are on a significant downward slide, and will continue to be, with the glut of airplanes there.

And you see our operating performance.

In terms of completion factor, on time and the like, it is at the very top of the industry.

So we have a firm, specific capability of being able to manage a stream of new deliveries, but at the same time making sure we are averaging down our cost of capital so that we can always hit our 10% to 12% return on invested capital.

These are very long-lived assets.

And a long-lived asset, in order for us to be able to hit our returns, we have got to capture the residual value.

And be certain that when we are making pricing and investment decisions that those pricing and investment decisions are properly taking into account the cost of our capital.

And I think this is the kind of disciplined approach that any capital-intensive business must take.

I appreciate the color.

It is a point that we have tried to make, but I think it certainly helps hearing it directly from you.

Thanks again.

Savanthi Syth, Raymond James.

Good morning everybody.

Just a question on Pinnacle.

I know historically Delta and Northwest have had in-house regional carriers that you either sold or shut down.

And historically, the airline industry hasn't had a good track record of having a carrier within the carrier.

I was just curious as to what might be different with Pinnacle and maybe what the longer-term plan is for Pinnacle.

Actually, if you look at what we have done with Pinnacle, it has really been -- it is going to be a pretty revolutionary step because we actually, for the first time, have the right cost structure in place and the right fleet in place to be able to operate the most efficient 70-seat, 76-seat operator in the industry.

And the way the pilot agreement is set up, we don't end up with the seniority issues that have caused issues in that industry in the past.

And it gives us the ability to provide a very high-quality product at the most efficient returns on capital investment in that fleet.

So, we are pleased with the opportunity, and believe that it is going to drive a very significant advantage to Delta over the long run.

Great.

Just a follow-up on that.

Do you have an idea of the timing or how many 50-seat retirements you will see in 2013 and maybe 2014?

Or how is that planning going?

Actually, we are well down the path.

In the Pinnacle DIP agreement and the agreement to bring them out of bankruptcy, we have the right to retire their entire 140 airplane fleet of 50-seaters.

And if you'll recall, the Bombardier transaction that we did earlier this year for 40 firm and 30 option, 76-seaters, they have facilitated the removal of 60 of those airplanes, and we have a clear path to get down in the range of 100 to 125 within the next 18 to 24 months.

All right, great.

Thank you.

Duane Pfennigwerth, Evercore Partners.

Just wondering, with the Easter shift here in March, why would unit revenue by default decelerate from, I think, the 5% to 6% level that you've outlined here?

This is Ed.

We are not necessarily anticipating it is going to decelerate.

I think that the clarity that we have to January is obviously much better than looking out towards the end of March.

So we want to put guidance out there on a quarterly basis that we are comfortable on the [balance], but we hope to do better.

But with the bookings where they are at now, we see January very strong.

We see every month in the quarter very strong.

And our visibility into March isn't as clear as it is currently here in January.

Okay, thanks for that.

And then just on the structural cost initiative, the $1 billion, my question is relative to what is that $1 billion.

It feels like, at least based on the current schedules, you go from pretty material capacity declines in the first quarter to modest capacity growth in the June and September quarter.

It feels like these fleet initiatives you are going to higher trip costs, but obviously lower unit cost fleet mix.

Seems logical that your CASM pressure moderates in the second half, just given those two factors, but what is the $1 billion relative to?

Thank you.

What we said is that after the results of this $1 billion are fully baked in, we would expect to see forward-looking trends of flat to 2% CASM off of 2013 levels.

So it is a combination of 2012 base as well as anticipated growth in cost, but we are flattening out unit costs based on that 2013 level.

Sorry, what is the underlying capacity growth assumption in that flat to 2%?

Flat.

Thank you.

John Godyn, Morgan Stanley.

Thanks a lot for taking my question.

First, I was just hoping to ask about thoughts on the shareholder returns strategy.

Of course, this is a decision that is going to happen later in the year and it is a Board-level decision.

But to the extent that you could just share your own preferences, in so far as your informing or advising the Board on what to do on dividends versus buybacks, and how you think about that, just be helpful to hear your thoughts.

I think that we should respect our Board processes, and we'll -- I will be certain to keep the investor base well-informed as we move through this process.

Got it.

Okay, thanks.

And just another question, Richard; as investors try to forecast the next couple of years, I think one of the big risks they focus on is the degree to which a reacceleration in capacity growth at large, low cost carriers or maybe a new entrant could force an end to the profit cycle for legacies.

I know it is a tough question to answer, but how can investors be confident that your financials are more insulated from this threat than they have been in the past?

I would make two key points there.

The first, if you think back to Airlines like Skybus, $2 billion of capital is no longer available.

With the new Basel rules and the rules in the US on the requirements for banks and financial markets to keep capital in reserve, it is a much different situation in terms of capital in the marketplace.

The second piece of that is, Brent is at about $1.10 and that model is a very difficult model at these sorts of fuel prices.

So, when you look at where the capital markets and how the capital markets approach financing airlines today, and look at where fuel prices are today, I think we are in a very different dynamic.

Great, thanks.

Hunter Keay, Wolfe Trahan.

When you talk about taking corporate market share, can you just explain what you mean by that?

Are you talking about winning new clients?

Are you talking about getting a bigger piece of the pie from, say, like a Fortune 25 company?

And how has that mix contributed to the growth in share that you have gotten?

And how are you going to think about that mix as it contributes to the overall corporate share that you have growing?

How is that mix going to go forward between opening up new clients and getting a bigger piece of the pie from existing ones?

This is Ed.

I think it is all the above.

We have picked up, over the last couple of years, some very significant new accounts.

We have improved our share substantially in a number of existing accounts.

And I would say the financial services and the banking sector is probably the most important there, in terms of where we have been able to not just pick up new accounts, but also improve.

We had a very, very large one -- one of the largest banks in the world -- that we just signed, in the last six months, a corporate deal with out of New York that we had never previously had a corporate arrangement with.

And what they're looking for is they are looking for a carrier that can take them anywhere they need to go and the schedule and the frequency.

That is a big part the reason behind the Virgin Atlantic transaction, because the JFK-Heathrow market is the sector that those -- the financial services firms travel most -- have the greatest amount of need for and schedule frequency for.

And we have been able to knock another thing off the list.

They look for the product, the investments in the new international product.

The flatbeds upfront will be fully complete by spring of 2014 there.

So it is a combination of our geography, our schedule, our service levels, the great service our employees provide, which matters.

That is all contributing here.

And probably the easiest way to sum all that up is if you look at our fourth quarter, our total corporate revenues were up almost 10% against a marketplace that was pretty flat in terms of overall corporate travel spend in the fourth quarter of the year.

That is a big number.

Okay, thanks, Ed.

And, Paul, a question for you on Trainer.

You gave some color on the sourcing of Bakken, which I appreciate, but can you maybe -- feel about giving a little more?

Where are you in the process of overall sourcing crude?

Where do you stand with, say, some of your supply relationships now that you have gotten a few months under your belt, say domestic versus international suppliers?

Where do we stand with Bakken?

You said you're getting a shipment this quarter.

What percentage of the overall crude that you source to Trainer do you think will come from Bakken now versus by the end of the year?

Any other thoughts on general crude sourcing will be helpful.

Our crude sourcing is handled by a multiyear agreement with BP that we entered into at the time of acquiring the refinery.

So there is no change in that.

Bakken as a source of crude, it is a little bit early to tell as to what kind of volume we can run in it.

But as we run this first shipment this quarter we'll have more color as to what the total potential is, but it is pretty significant.

Okay, thank you.

Kevin Crissey, UBS.

Can you give us an idea of capacity by month, if -- your RASM?

You gave January RASM 5% to 6%.

What kind of capacity are we looking at January through February?

I didn't know the 3% for the quarter.

We gave you the [quarter].

We typically don't give the forward months, but they are all generally in the range we talked about.

I think February we might have a little more capacity out because of the leap year, from last year.

But they are all relatively consistent.

Okay.

January/February with it being the highest months of capacity constraint as compared to March.

Okay, thanks.

And can you talk about, and maybe it is gone, talk about Atlanta and any changes you're seeing, competitive positioning there?

There is not a whole lot of changes to what you have seen.

We have AirTran/Southwest down to about 170 departures.

If you recall, their peak was just under 300 several years ago, so continued rationalization of capacity on their part.

And as we look forward into the published schedule, that capacity rationalization continues.

Thank you.

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

Basili Alukos, Morningstar.

Thanks for taking my question.

I wanted to go back to the joint venture with Virgin Atlantic; I guess two questions.

First, given what happened with the TNT/UPS decision, I am wondering if there is a breakup fee in that contract.

And then, secondly, you mentioned where you are in the review process and finalizing the deal.

I am just wondering if you can give us context in other deals that you have done.

If you would say you are at a similar up pace behind, ahead where you would be for another M&A or a transaction deal?

In terms of the detail of the contract, there is no material breakup fee involved in any of the contracts.

The pace of the deal, we think, is -- as we expected, we are, as I said earlier, in the midst of three separate regulatory or kinds of regulatory reviews -- competition, ownership and control in the UK, and the joint venture review at DOT.

Our objective is to get those completed within a six-month timeframe.

That can extend a bit.

There are some variables in all the agencies, but we think that is a realistic target and we have made our filing at Justice under Hart-Scott.

We have made our initial filing at DG Com in the EU, and by the end of the month we should have filed for ATI with DOT.

We have had initial meetings with all agencies.

And we are, on the basis of those, reasonably optimistic about our [contracts].

Okay, and then I guess I asked at the analyst day.

You guys hadn't decided as far as what plane size you were going to use or what gauges.

And I think you were still reviewing that with your pilots.

Just thinking about that decision, which planes to use, and then where you are in the process of having figured out what you're going to fly, more gates and routes in the context of capital discipline -- just trying to figure both of those out.

If you haven't decided your planes, is that something that is typical?

Until we get all the requisite approvals, Delta will continue to make its route decisions and capacity decisions by route independently, as will Virgin.

Okay, so the fact that -- discussions haven't started or haven't been finalized, that is a normal occurrence?

That is not abnormal?

Correct.

Okay, great, thanks, guys.

Appreciate it.

Thanks.

And that is going to conclude the analyst portion of the call.

I am now going to hand it over to Ned Walker for the media section.

Thanks very much, Jill.

Kyle, we are ready for the media Q&A if you could go ahead and review the process for the media as to how to get in the queue for a question.

Also, I'd like to ask the media if they could to limit it to one call and a brief follow-up.

That way we should be able to accommodate most people.

Thank you.

We are ready.

(Operator Instructions).

Josh Freed, The Associated Press.

Ed mentioned earlier some of the change in thinking around the incentives on the frequent flyer program.

And my question is can you tell us a little more about how far you are through that process and, also, if when that process is done, whether American Express will still be your mileage card partner when this is all done?

Yes, American Express is our -- I would say our most important commercial partner globally, and we have got a long-term contract with them.

And we are not going to be able to talk about any forward-looking changes to the plan.

As you can appreciate, we are always thinking about ways we can innovate for the future.

But that is about as far as we can go.

All right, thank you.

Kelly Yamanouchi, Atlanta Journal-Constitution.

I am interested in finding out a little bit more detail on how much in financial benefits you have seen from your operational performance improvements?

Well, I think it is best summarized by two years of industry RASM premium.

Okay.

Do you attribute that mostly to your operational?

Or I guess what share of that premium do you attribute to operational performance improvements?

We don't break those out independently.

It is the coalescence of a great operation, great customer service by our employees, a phenomenal job by our sales and distribution organization and a great job by our network planning.

So, like everything in an airline, it is all a team sport, and everybody is playing a really great role in making sure we deliver a premium product for a premium unit revenue production.

Great, thank you.

Kyle, if you could, once again, review the process for getting into the queue to ask a question.

And with that we will turn it over to the next questioner.

(Operator Instructions).

Mary Jane Credeur, Bloomberg News.

Richard, there was a lot of talk at investor day and again today about how significantly Delta has changed its business model and how peers have had a lot of capacity discipline the last couple of years.

Is the airline industry model overall fixed?

And was Warren Buffett wrong when he said back in, I think it was the early '90s, that someone should have shot the Wright Brothers?

Mr. Buffett is a lot smarter than I am, so I would never opine on his investment strategy.

So I will set that question aside.

If we look at overall where Delta is, and we can just speak from the perspective of Delta, 2013 will be a really strong year for this Company, and it will be a good improvement over 2012.

And so it will be the fourth consecutive year of strong performance.

And when we look out across our -- at our three-year strategic plan, we see continued strength in the business model.

I think we have the obligation and the opportunity to continue to innovate, to be certain that we approach this as a business and approach the deployment of capital in a rational and prudent way.

And if we continue to do that, and we continue the kinds of innovations that we have undertaken here at Delta, we are confident about the long-term investment thesis for our enterprise.

How much skepticism are you still hearing, though, when you're talking to big institutional investors who have been afraid of the space for many years, and rightfully so?

What is their biggest holdback?

This is Paul Jacobson.

I think in our conversations with investors, I think there is meaningful consideration given to history of the business.

And we believe that fundamental change has occurred, but we are in the early stages of consolidation, which makes the industry more stable than it has been.

And I think when you look at our recent performance over the last few years viewed against the lens of history, I think the signs are pretty promising.

And we expect that continued improvement going forward.

Great, thank you.

Linda Loyd, Philadelphia Inquirer.

Thanks for taking my call.

Other than the impact of Superstorm Sandy on the Trainer refinery, have there been any other unexpected costs or difficulties that you did not anticipate?

No.

This is Richard.

If you took Sandy aside completely and the effects it had a distribution in and out of the facility, everything has gone as planned.

And so you are still very satisfied with your business decision to buy a refinery?

More -- actually, since we have actually closed on the refinery and spent a lot of time in the turnaround process, we have become more certain of how prudent that investment is for our Company.

Thanks very much.

Okay, great, Kyle, that will conclude the call, and thanks to Richard, Ed, Glen, Paul and Ben, concludes the December quarter call.

We will be back in three months for the March quarter.

Thanks very much everyone.

This does include today's conference call.

Thank you all for your participation.