達美航空 (DAL) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Delta Air Lines 2013 first-quarter financial results conference call.

My name is Jay 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.

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

I would like to turn this call over to Miss Jill Sullivan Greer, Managing Director of Investor Relations.

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

Here in Atlanta today are Richard Anderson, Delta's CEO, 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 cash flow.

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 today.

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.

With that, I will turn the call over to Richard.

Thanks Jill.

Good morning and thank you all for joining us.

We are pleased this morning to report a March quarter profit of $85 million.

This is Delta's first March quarter profit since 2000, and tangible proof that we are successfully changing the global airline business model at Delta.

Our earnings increased by $124 million over last year, and we had 1.4 points of margin expansion.

We earned $0.10 per share, beating consensus of $0.06 per share.

Our operational performance and customer service are outstanding.

We know how important a first-rate operation is to our customers, and Delta runs the best all-around customer service operation in the global industry by a wide margin.

We have been doing so for two years, and we will continue to do so because it is an important strategic advantage.

We ran a domestic on-time arrival rate of 86.2%, showed a 2% improvement in DOT baggage performance, a 99% completion factor with a lot of tough weather, and reduced DOT customer complaints by 12%.

In fact, February had the lowest number of DOT complaints in Delta's history going back to 1997, when the DOT first started collecting the data.

I'd like to thank the Delta people worldwide for all their work that went into achieving this great performance.

Our results include $20 million in profit sharing expense for the quarter, and this marks the first time we had ever accrued profit sharing in the March quarter.

We have consistently articulated our financial and operating strategy to our shareholders.

It is important to note that Delta has also delivered year-in year-out on our strategic commitments to make Delta the airline of choice for our shareholders.

Our financial and operating results this quarter confirm that success.

It is really important that, as we look forward, you understand that Delta has significant and important opportunities ahead to continue producing expanding margins and growing cash flows.

We have a great franchise and the great brand at Delta.

Delta has a full plate of new initiatives and opportunities ahead to continue widening our competitive advantage and operating margins.

Whether it's through running the most reliable on-time operation with the best employees in the industry, delivering top-notch customer service, building our presence in New York with a profitable LaGuardia expansion, the Virgin Atlantic investment, or our new JFK terminal 4 which will open on May 24, you should expect that we will continue gaining operating strength as we further improve the customer experience, go through a massive upgauge of our domestic fleet, deploy a variety of new technologies, and operate our Pacific franchise with full wide flat seats in business class this summer.

Now, let's move to the specifics of the quarter and our outlook.

Looking ahead, I know the top-of-mind issue for many of you is the demand environment.

After a strong January and February, we did see a drop in close-in bookings as well as some softness in leisure demand midway through March.

We approached the quarter with a yield bias at Delta which, coupled with sequester tax increases and other global economic factors, affected demand.

Against this backdrop, we currently expect unit revenues in the second quarter to be flat to down slightly on system capacity, which will be flat to up 1%.

To address any capacity issues in the -- or to address these issues in the short-term, we have recalibrated our revenue management approach and are reviewing off-peak capacity levels by day of week in our summer schedule.

As you know from our history, Delta is quick to manage capacity.

We will continue to watch the revenue environment as we move through the summer, and we are prepared to make necessary changes to our fall capacity levels in response to market conditions.

But it is quite important to point out that the dynamic between fuel and revenue has shifted over the past two years with capacity as the fulcrum.

As the industry has consolidated, we have experienced a much tighter correlation between revenue and fuel.

For the past few years, this has manifested itself in strong revenue growth to cover rising fuel costs.

This is an important correlation to our investors and is a significant change in the industry fundamentals.

The same economic factors which caused passenger revenue softness also pushed down oil prices.

The recent drop in Brent crude from $113 to $99 per barrel represents roughly a $1.3 billion annual cost reduction for Delta.

We anticipate the lower fuel costs, combined with prudent capacity management, will more than offset any revenue softness.

At Delta, we are focused on margin expansion.

Turning to the specifics, our unit revenues in 1Q grew 4% on a 2.5% decrease in capacity.

The investments we've made in operations, product and service combined with our capacity discipline have built a strong permanent revenue producing foundation for Delta with the eighth consecutive quarter of a year-on-year revenue premium versus the industry.

On the cost side, we faced some pressures in the quarter, which resulted in a 5% increase in our nonfuel unit costs, but this is substantially below our earlier guidance of a projected 6% to 8% increase.

The significant improvement is the result of our structural cost initiatives taking hold as our operations and finance teams work quite successfully to limit nonfuel unit cost growth in the quarter.

With the domestic repleting accelerating in the fall and other structural initiatives continuing to gain traction, we expect our nonfuel CASM growth to be 1% to 3% for the back half of the year.

On the balance sheet, we ended the quarter just under $11 billion in adjusted net debt, a $6 billion reduction in three years, and we will hit our adjusted net debt target of $10 billion later this year.

These debt reduction efforts lowered interest expense for the quarter by $50 million.

We generated $1.1 billion of operating cash flow in the quarter.

With our growing cash flow and earnings coupled with an improved balance sheet, we are preparing to move into the next phase of our capital deployment strategy.

Our Board of Directors is guiding our long-term capital deployment strategy, and we expect to make an announcement in the month of May on our overall capital deployment strategy going forward, and how we will return cash to shareholders.

Please stay tuned.

We have a solid financial foundation and combined with the momentum we've built from our initiatives and the favorable fuel and revenue dynamic, we are well positioned to generate improved earnings and margins for the June quarter, where we expect an operating margin of 9% to 11%.

Given the strong March quarter, actual performance and our June quarter operating margin forecast, we expect strong year-over-year profitability improvement for Delta in the full year of 2013.

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

Thanks Richard.

Good morning everyone.

Thanks for joining us.

Earlier today, we announced a March quarter profit of $85 million, which was a $124 million improvement over the prior year, excluding special items.

Our earnings per share of $0.10 is $0.04 per share better than consensus and represents our first March quarter profit in over a decade.

During the quarter, we had a net $78 million charge from special items which included $24 million of mark-to-market gains and fuel hedges, offset by $102 million in facilities, fleet, and other charges.

I'd also like to thank the entire Delta team for their contributions towards generating a profitable March quarter, which was an important milepost in the improvements we are making to our business model.

It's their dedication to this Company and to our customers that makes these results possible.

Turning to the revenue line, during the March quarter, our topline revenues grew $87 million, a 1 point increase despite 2.5% decrease in capacity.

We had strong demand in January and February with unit revenue growth above 5%.

However, in mid-March, we did see a drop in close-in bookings coupled with some softness in leisure demand.

A number of factors are weighing on the economy to produce this result, not only the sequester but also the increased payroll tax and continued economic sluggishness in some of our major markets.

And because of the strong demand that we had seen at the start of the year, our revenue management systems were biased towards pushing for yield, which exacerbated this impact.

Now, while the month did not play out as we had anticipated, we moved quickly to address the changing demand environment and the impacts from our yield strategy should be largely isolated in March and April.

We will keep a watchful eye on the revenue environment and capacity levels, but I would make a couple of important points for context.

First, even with the lower-than-expected revenue, we posted the most profitable March month in Delta's history, generating a net profit of $300 million, a great result by any measure and an indication of the core strength of our business.

Second, while the revenue environment has shifted a bit from expectations, fuel prices, as Richard mentioned, have also been dropping for the last 60 days.

In deeming our internal outlook for the June quarter, the change in fuel is more than offsetting the change in the revenue environment.

And lastly, as we look forward, it's important to remember we will face some tough comps as we have now completed two straight years of double-digit unit revenue growth, outperforming the industry by some large amounts during that period.

Our forward-looking goal is to maintain those premiums we've earned and seek to grow them.

Despite the softer close, our overall unit revenue performance for the quarter was strong.

Passenger unit revenues grew 4.1% against a tough base period with yield up 2% and load factor up 1.6 points from the prior year.

We generated a revenue premium to the industry, our eighth consecutive quarter of year-over-year improvement versus the A4A average.

Our revenue performance was driven in large part by corporate revenues which increased 6% from the prior year, and we continue to grow our corporate revenue share.

Breaking revenue out by region, we had solid performance in our domestic markets with unit revenues up 2.9% on a 1 point decrease in capacity.

New York performed well with JFK unit revenues up 7% on a 5% yield improvement.

We are excited to open up our new Terminal 4 in JFK next month which will give our customers in New York a world-class facility and further improve our competitiveness in the New York international and trans-con markets.

And we're also quite pleased with our expanded platform in LaGuardia, which produced a profit for the month of March and generated a 2 point unit revenue improvement for the quarter despite a 36% increase in capacity.

Capacity discipline and cooperation with our joint venture partners drove transatlantic unit revenues up 8% over the prior year, despite continued economic uncertainty in the euro zone.

Our JFK to Europe unit revenues improved 16% with seven markets gaining more than 20% due to improved corporate share.

Our London unit revenues improved more than 20% as we continue to strengthen our competitive position.

Our momentum in this market should continue to expand when we begin co-chairing with Virgin Atlantic later this year, the first step in deepening our new partnership.

Turning to Latin, our unit revenues improved 3% against a 2% growth in capacity, driven by a 5 point increase in load factor.

Capacity rationalization in Mexico and Central America drove unit revenue improvements in the high single digits while our Caribbean and South American markets experienced unit revenue expansion on par with the entity average against increased capacity.

And finally, in the Pacific, we were impacted by the weakened yen.

While our overall net yen earnings were minimally affected as we are hedged at JPY80 per dollar, it did impact revenues with costs also benefiting, and reduced the quarter's RASM by 60 basis points.

Our yen hedge book runs through 2015 and is currently valued at $240 million.

While this will offset the majority of the underlying exchange rate weakness, the yen weakness has also impacted demand in our Japan point-of-sale, particularly on the beach markets.

The total impact of the yen devaluation on the quarter, both the exchange rate impact and demand driven, was about 1 point against system RASM.

And as the yen has continued to devalue into April, we are looking at an overall system impact of up to 2 points for April and the rest of the second quarter.

As a result, we are reviewing our Pacific capacity, particularly in the off-peak periods and in the beach markets, to determine possible reductions.

In summary, while we are seeing some pockets of weakness such as the yen devaluation and the impact of the sequester, our summer bookings are in line with expectations and appear quite solid.

Corporate demand continues to be strong and we are making the necessary calibrations to our revenue management systems to address the current revenue environment.

Due to the factors mentioned earlier, we expect unit revenues to be down 2% to 3% with the softness largely in the domestic and Japanese entities, and then expect unit revenues to show modest year-over-year improvement in May and in June.

While our expectations for unit revenue performance are flat for the June quarter, we see our consolidated unit costs coming in over 1 point better than last year, leading to a solid June quarter operating margin of 9% to 11%, continuing the path of margin expansion from the March quarter.

On capacity, we expect our June quarter system capacity to be flat to up 1 point with domestic up 1% to 2%, and our international capacity flat to down 1% versus the prior year.

Now, I'll turn the call over to Paul.

Thanks Ed.

Good morning everybody.

As you've heard in Richard's and Ed's remarks this morning, we have been on a steady path of margin expansion at Delta.

This has required some targeted investments on the cost and capital side to improve our operations and our product, but it has produced strong results.

As we mentioned at Investor Day, we are now at the point where we have good line of sight on lower cost growth than we've seen over the past several years.

Combined with the revenue producing foundation we've built, this will be the driver for further margin expansion.

For the March quarter, our nonfuel unit costs increased 5% as the impact of wage increases and investments in operations and service were partially offset by benefits of our structural cost initiatives.

This performance is better than what we had originally expected going into the quarter.

While there was an element of timing that will impact the June quarter, we also saw better-than-expected underlying cost trends.

As we move into the June quarter, we expect these trends to continue and we are forecasting our nonfuel CASM to increase 4.5% to 5.5%, which is better than prior expectations despite some of the timing shift from the March quarter.

We continue to rally the organization around better cost control and we are starting to see the results.

Our cost growth should moderate substantially in the back half of the year and we expect nonfuel CASM growth of 1% to 3% over that time.

This puts our nonfuel CASM growth for the full year at 3% to 5%, a full point lower than our original guidance.

We will see more substantial savings from our structural cost initiatives starting in the fall as the pace of our domestic re-fleeting accelerates.

We will begin taking delivery of eight to ten aircraft per month starting in September, which will allow us to retire nearly 40 older mainline aircraft, primarily 757s and the remaining DC-9s, and over a 50-seat regional -- over 40 50-seat regional jets by the end of the year.

These retirements will produce meaningful maintenance and fuel savings later this year.

To the extent that we make changes to our fall capacity levels, we would have the opportunity to retire even more aircraft.

We are also beginning to see the benefits of our maintenance redesign which is allowing us to reduce our component and engine expense by pursuing market part-out opportunities.

And we are on track to achieve $600 million in cumulative savings from our structural initiatives in 2013.

Turning now to fuel, our fuel expense declined $78 million on lower fuel price and fuel consumption.

Our all-in price per gallon was $3.24, which includes $0.06 per gallon in federal hedge gains.

We've structured our hedge book so we've had almost full participation in the recent drop in fuel prices.

As of Friday's forward curve, we are forecasting a June quarter fuel price of $2.95 to $3 per gallon, including hedge and refinery impact.

The refinery produced a $22 million loss for the March quarter, which was slightly below our expectations.

While operations have since recovered from the impact of unexpected supply disruptions and an outage in a gasoline production unit that slowed output during the quarter, we have since stabilized operations and expect a modest June quarter profit for Trainer.

We have also entered into agreements to begin receiving a regular supply of Bakken crude oil in the second half of the year, which will lower our crude input costs.

Shifting to cash flow, our strong cash generation over the past few years has allowed us to make the necessary investments in our business while also significantly improving our balance sheet.

For the March quarter, as Richard mentioned, we generated $1.1 billion of operating cash flow and $457 million of free cash flow.

Operating cash flow included $150 million of regularly scheduled pension funding.

However, just after quarter end, we contributed $500 million to the pension plans and we have now completed our required funding for 2013.

Capital expenditures for the March quarter were $650 million, which included $500 million in fleet investments and $47 million for two pairs of Heathrow slots.

The aircraft CapEx includes 21 aircraft purchased off lease during the quarter for approximately $120 million as part of our continuing debt reduction efforts.

We ended the quarter with $11 billion of adjusted net debt, a $6 billion reduction over the last three years.

In addition to reducing our balance sheet risk, our debt reduction efforts are producing significant P&L benefits.

Our interest expense for the March quarter was $50 million lower than last year and nearly $100 million lower than the same period in 2010.

We should again have strong cash generation in the June quarter and expect to produce $300 million to $400 million of free cash flow.

To conclude, this quarter's performance is evidence of the momentum that we have built at Delta, momentum we expect will continue to drive profitability and margin improvements through 2013 and beyond.

Let me echo Richard and Ed in congratulating our employees on a great quarter and thanking them for their dedication and determination as we build a better airline for employees, customers, and shareholders.

We couldn't do it without them.

Jill?

Thanks Richard, Ed, and Paul.

Jay, we are now ready for questions from the analysts, so if you could review the process for asking a question, and again, we ask everybody to limit themselves to a question with a brief follow-up.

(Operator Instructions).

Michael Linenberg, Deutsche Bank.

Good morning everyone.

Two questions.

Ed, you went through the impact of the yen weakness and the impact it had on revenue.

I realize it's early, but what's -- you have sort of an early feel on the impact of sequestration.

And when I think about that, I sort of think about it in two parts.

One is just the reduced amount of travel from government employees as they look to meet budget on one hand, and then maybe the impact of the delays that we started to see over the past couple of days.

Any thoughts on that?

On the revenue front, Mike, there's no question we saw some impact from the sequester on our quarter.

We are seeing some of it obviously in April as well.

To put some parameters around it, the Defense business within our corporate revenue base, that which we have captured, represents about 3% of our corporate revenues.

And that for the month of -- the ticketed revenues over the last 12 weeks are down about 15% to 20% in that space.

So it is having some impact on the revenue demand equation to the extent it has broader implications on corporate travel and high-yield travel in general.

That's more difficult to quantify, but there's no doubt it's having some impact.

On operational front Richard, do you want to take that?

On the operational front, Michael, the way we see that playing out is the real impact will be on regional operations.

So, so far, our operations we've been able to minimize the effect on our mainline operations, and if you think about how the air traffic control system works, the first flights that end up being thinned or delayed or canceled are going to be 50-seaters, 34-seaters and 44-seaters.

And most all of that revenue is recaptured.

I think Steve Gorman has the specifics from our operations so far, so Steve, do you want update?

Sure Richard.

The first day (inaudible) a couple days in, the first day there was little to no impact.

Yesterday, as Richard noted, in the Northeast, we did some thinning to avoid long delays, and we did thinning of the regional connection flights in the small airplanes, had about 90 cancellations proactively.

And what, 99% of those customers were rebooked within a couple of hours on the mainline flights.

And we have experienced delays, particularly in the Northeast yesterday, mainly in the 60 to 90 minute range that we can manage and still keep the connections.

And it did affect the Northeast by -- overall the Northeast was impacted enough that the system which normally would be around 85%, 86% on time was more in the 77%, 78% on time.

But overall no cancellations mainline yesterday.

We ran 100% completion factor yesterday.

So we think that in terms of the mainline operation, we'll be able to manage it just fine for our customers on the mainline.

And to the extent to which there will be some impact on ATC capacity, the impact will really be in the smaller airplanes.

And that will all be re-accommodated on the mainline or our larger regional jets.

Good.

And then -- that's helpful.

Then just my second question is I guess this is to Paul.

Just on the operating expense line, two areas.

The aircraft maintenance was down a decent amount, the $70 million.

I know you talk about the maintenance redesign and part-out program, so presumably that's driving a lot of that.

But the contract carrier piece, that was up a little bit.

And I know that there's some meaningful change going on with the contract carriers and the amount of shells that will be in that program.

Is that number going to start trending down?

Maybe we see it in the second half of the year?

When do we start seeing that?

I think first question I think for maintenance expense, a lot of the year-over-year benefit or reduction in maintenance expense was driven by the MRO.

As we've talked about, we have been focusing our MRO on improved margin expansion.

That's resulted in less volume year-over-year.

On the contract carrier line, that's really the effect of Comair.

As we pull aircraft out of Comair and reallocate them to other carriers, they flow through that contract carrier line.

This is Ed.

Just to add to Paul's comments on the contract carrier line, we also had some engine volume events in the current quarter.

That's just timing issues.

There were 26 more events.

It drove about $40 million of higher cost on the contract line on a year-over-year basis.

So, that's also impacting that line comparison.

That's a timing issue; that's not indicative of a trend though.

And then that line will trend down through the year, is that right?

Yes.

This is Richard.

Yes.

It will trend down through the year.

Perfect, very solid results.

Thanks.

David Fintzen, Barclays Capital.

Good morning everyone.

A question on sort of capacity versus fuel and the revenue correlation.

I think, Richard, in your comments, you said sort of capacity is the fulcrum.

I'm curious sort of how, if the correlation of revenue and fuel kind of keeps staying high or going higher and the lag time between sort of fuel moves and revenue moves starts to shorten, how does that sort of play into how you're tactical using capacity?

Does that start to let you reassess quicker in the sense of you start to get some disappointments in May in revenue, where you can start to address the summer?

Does that start to sort of feed into how you're thinking about using capacity if that relationship between revenue and fuel is getting tighter?

The short answer is yes.

The goal is to keep the correlation between revenue and fuel type, because that's really, as we said in our prepared remarks, both Ed and I, that's the real see change in the industry.

And we are able to adjust our capacity very quickly.

And I think one of the keys in that is -- and this is another important innovation I think at Delta is our pricing function.

When we make pricing decisions across the airline, we have data in front of us on what the cost of goods sold is.

And so we run our flight profitability system on a flat fuel book.

And we are always tuning the revenue to be certain that we are capturing the fuel price.

If we get to that point where we are, we can adjust very rapidly.

That's the beauty of having a large number of owned airplanes that have no fixed costs, that are perfectly variable.

And given the bid periods are 30 days on our crews, we have the ability to adjust capacity very quickly.

Are there day-of-op adjustments you can make in terms of moving sort of bigger shells around, or taking advantage of some fleet flexibility to try to tweak the schedule as you are seeing sort of revenue and fuel play out in real time, or does it really require sort of getting into the schedules a few months down the road?

We actually do adjust day of departure.

And actually, every day, we probably have somewhere around 30 to 40 adjustments up or down, which we are actually matching capacity at the moment to demand.

And we continue to invest in the systems and the know-how we need to be able to do that.

Most typically where that happens is an upgauge, so we see that loads are up in a given market with close-in demand from where we were 30 or 45 days out on a schedule.

And we were able, for instance, to take a 757 and upgauge it to a 767 in a market.

So we do that, but the most important lever is the 30 to 45 day outlever, where the real opportunity comes to be certain that we keep the correlation between revenue and fuel close.

Okay.

That's helpful, great.

Just one quick one for Paul.

Just in the cost guidance, is it fair to say there's no real sort of sequester operational impact baked into cost?

You just sort of need to wait and see?

That's right.

Okay.

Appreciate the color everyone.

Jamie Baker, JPMorgan.

Good morning everybody.

First one for Glen.

If I had been in I guess in a coma for the last seven years, and I woke up to find America West, Northwest and Continental to no longer be part of the landscape, I would expect a truly firm pricing environment.

Put differently, Glen, if I had told you in 2005 that we would see this much consolidation, I expect you would have been beaming in terms of what it implied for pricing, but we just don't seem to be seeing it.

And other sectors that have witnessed this much consolidation have, but the airline industry just doesn't seem to be getting any better in extracting more revenue from the economy than it has in the past.

Same as it ever was.

Same as it ever was.

I can't get that song out of my head.

Is there something fundamentally different about airlines as opposed to other areas of travel spend that explain why pricing isn't more inspiring?

That was then asked and answered question it seemed.

I don't know.

You're a lawyer.

Is that a leading question?

I think you may have just come out of the coma.

You know, Jamie, I think, not to be the eternal optimist here, but I think all those things that you just mentioned, we have a lot of consolidation that has been announced but really hasn't happened yet.

And so you still have quite a few pricing departments.

You still have airlines looking to figure out what their new combined network strategy is.

And I think that's all frictional costs as we move through the actual consolidations, not the announcements of the consolidations but actually getting through the consolidations.

And if you think about, for example, since we sit here in Atlanta and we look out at what AirTran does a lot, that consolidation is taking a lot of time and they're doing it very slowly and deliberately, but the big benefits that we see are still probably in the pipeline for us on that.

And similarly with American and US Air, that's another year, year and a half away, and lastly United still trying to get their act together after a very difficult merger.

So I think all the pieces are in play and I think you will see a much more robust environment in the future.

But all of this dislocation and all of this rearrangement and all of the realignment of capacity and all of -- that hasn't all taken place here.

We are in the process there.

Okay.

And a second, maybe for Richard.

You can obviously manage around sequestration in the short run.

It certainly helps when it's sunny out.

But yours is an industry that's predicated on selling speed.

And if you can't do that or can't do it as well as you once did, it is going to hurt demand longer-term.

So, aside from just cutting 50-seaters and trying to upgauge, and I get all that, but are you looking at anything that would improve the overall speed proposition of air travel if sequestration and AT staffing are just sort of the new normal from here?

I think we have shown a real operating strength at Delta.

We operate generally, if you look at the global industry average, we generally operate about 8 points ahead of where the industry is in terms of performance, on-time performance, and our completion factor is much higher.

You should expect that we will continue to make those kinds of operating decisions to maintain that advantage versus the industry, both domestically and globally.

Okay.

Thanks everybody.

Take care.

Glenn Engel, Bank of America Merrill Lynch.

Questions on the cost side.

One, Paul mentioned some of the first-quarter costs will shift into the second.

Can you talk about the categories and the amounts?

Two, on the maintenance side, are we going to see a more flat pattern over the year?

In the past, it has always been front-end loaded.

And three, the fuel cost assumption for the second quarter seems high, given where spot is.

Can you walk us through that number?

On the cost front, I would say that the benefits were probably split about half and half between timing and permanent structural costs.

I think better weather was a result of part of it that you see through the operational lines, and there was some maintenance events slipping.

So I think you will see some of that come back in the second quarter, but we're going to be working to keep those costs down as much as we can.

On the fuel question, that's based off of Friday's forward curve where we pulled those numbers from.

Obviously, as we look at jet differentials throughout the country, they are changing pretty rapidly.

So I think we'll continue to see that number move.

But we feel pretty good about where we are in a hedge book.

We have only minor hedge losses in the quarter.

And we do expect a modest profit at Trainer.

And your third question, if you could restate it please?

On the maintenance pattern, it's been typically very front-end loaded.

Is it going to be much more even throughout the year this time?

Yes, I would expect it to be flattish for the rest of the year.

Thank you very much.

Year-on-year.

Savanthi Syth, Raymond James.

Good morning everybody.

Could you share what your current run rate is on the structural cost initiatives, and perhaps where you've achieved some of the savings today and what is yet left to do?

Sure.

This is Paul.

We are probably at a run rate of a little over $200 million right now.

Primarily, as we said at Investor Day, with the savings from the retiree medical program, the voluntary reductions that we had, we've seen a little bit of traction and maintenance I think.

We are trying to figure out right now how much of it is accelerated realization where we got the savings faster than we had anticipated and how much of it might be accretive to our guidance for the full year.

But we are still sitting at about $600 million for the year.

The savings really start to accelerate the latter part of the year as we start to take in the 717s and exit the 50-seaters at a much more accelerated fashion.

Okay, that make sense.

And then just to follow-up, on the Trainer, how much of your fuel needs will be met with the Bakken field?

We expect that the agreements that we have right now are roughly about 10% of the total crude diet of the plant.

Long-term, we are looking to settle out somewhere in the 75,000 to 100,000 barrels a day to build that delivery stream.

Great, thanks guys.

Dan McKenzie, Buckingham.

Good morning guys.

With respect to the cost guidance, to what extent are the operational inefficiencies resulting from the sequestration impacting the outlook for the quarter?

This is Paul.

As we just mentioned, there are no sequestration impacts assumed in those numbers.

Okay, thank you.

And then, with respect to China, China Southern, China Eastern, both in the Sky Team alliance, growing aggressively from China.

Korean Air appears to be expanding into China as well.

However, slots at key times have been an industry-wide issue that have sort of stunted growth for the US airlines.

And with respect to the market, I guess I'm just wondering what, if anything, Delta can do to eliminate operating constraints to participate in some of the growth to that market.

This is Richard.

We have been effective with our partners at China Southern, chairman Xu and Chairman Liu at China Eastern and adjusting our slot portfolios at Beijing and Shanghai to provide for good connecting times to and from the US.

And we are beginning to grow our connectivity to both China Eastern in Shanghai and China Southern in Beijing quite effectively.

So the overflight part of our Asia-Pacific franchise is positioned well and we expect to have a strong summer.

Okay, thanks.

Appreciate that.

Helane Becker, Cowen Securities.

Thank you very much operator.

Hi everybody.

Thanks for the time.

Two questions.

One is, was there any impact of the avian flu in the Asian markets that you might have noticed either in connecting traffic from your SkyTeam partners or in your own business?

And two, when does the acquisition of Pinnacle close, and do you just swap out Comair for Pinnacle in contracted revenues going forward?

Thanks.

On the first question, we've seen absolutely no impact from the avian flu.

Second, we close on Pinnacle May 1, and it will not replace Comair but will become the most efficient, best run regional carrier.

We actually have -- we actually -- it's really important to note this because this --

I'm sorry.

This is a big strategic advantage for Delta that I don't think people quite understand.

We have fixed kind of the scale and cost issues that have plagued the regional carrier industry.

So Pinnacle will probably, as a wholly-owned subsidiary, we have a capped scale and a flow-up agreement now.

So, we probably will end up having a 20% to 25% all-in once we get it all fully up and running and the 50-seaters out and the 70- and 76-seaters in.

We'll have a very significant competitive advantage on the regional industry.

And number two, we will have the ability to really control the product and make it same as the mainline.

So, a very important strategic initiative that we have because the whole upgauging strategy is a really massive change in this industry, because all those 50-seat airplanes were bought when fuel was $20 a barrel.

And when you take the original purchase assumptions and now overlay them on what fuel is today and what the scales were 15 years ago for pilots and flight attendants and overlay where they are today at the independent regionals, that's a very tough equation.

And we've actually solved through that equation, and we are going to take our regional carrier fleet down from probably a peak of around 700, 600, 700 airplanes down to the low 400s and we're going to have the best cost structure and the best operations.

That's huge.

And as we think about that then, how many years should we allow for that?

I know it's in the pilot contract.

It's like two to three years.

No, we should be -- we should really I think in '24 to -- it's a seven-year pilot contract, Mike Campbell reminds me.

But in terms of our getting the shift done, it's really in the next 18 to 24 months.

And that's where you see a big improvement in our regional carrier line.

And we have a big ASM pick-up because we're going to be able to operate the airline, the total Delta airline, with probably a couple hundred fewer airplanes and still have the same ability to produce ASMs.

So, there is so much operating leverage in this move that we're excited about closing on the Pinnacle transaction.

Awesome, thank you.

Could I sneak in one question?

A point of clarification.

I thought the sequestration issue was that the FAA let you know kind of in the morning about what flights might be affected.

It was kind of like real-time rather than giving you time to make adjustments.

Is my understanding incorrect then?

No, you have time to make adjustments.

They issue, the National Air Traffic Control Center in Herndon issues different ground delay programs and ground stop programs.

And then we have a tactical team in our OCC that operates 24/7 making adjustments to the operation.

So, we intend on continuing to operate a mainline completion factor domestically of 100%

Great.

Thank you very much everybody.

Appreciate it.

Duane Pfennigwerth, Evercore Partners.

Good morning.

I just wanted to check.

Regarding the decline in close-in bookings and softer leisure revenue in March which you talked about, have you seen a stabilization in those trends?

And specifically if we look at March versus April, how much of this is just the holiday shift, or would you say demand has weakened further in April?

I would say a couple of things.

First of all, the shifts -- the holiday shift did have some impact.

I don't have that quantified.

I think as we look forward, the holidays probably are not driving as much the change for us as they historically have had in the past, so there's a little bit of that between March and April.

Sequestration continues obviously to have an impact into April.

I would say the bigger impact between March and April, why April is a bit worse than March, is really the yen and the changes that we've been able to make real-time to some of the revenue management systems that are starting to improve the April demand and certainly should pick up with some stronger demand profiles for May and June.

Okay, so the May and June -- I just want to ask a little bit or probe a little bit there.

Is that a function of math, of the comparisons, or is that something you're seeing -- is that something that your business is telling you today?

That's what we see in the outlook.

Our bookings for the summer look quite solid.

Thank you for that.

And then just on the Bakken crude, can you tell us at this point what you're seeing in terms of transport cost per barrel?

I'd rather not get into the details of the transaction.

It really represents significant savings over the transatlantic barrels that are going to the East Coast.

Okay, thanks for taking the questions.

John Godyn, Morgan Stanley.

Thanks a lot for taking my question.

Richard, Ed, when we look at other airlines that have sort of figured out the secret sauce to creating sustainable value in the airline business, after getting their margin situation under control, then they are able to compound earnings growth by growing capacity.

At what point do your margins or returns grow to a level where margin expansion alone just isn't enough to drive earnings growth and it's time to turn a capacity growth to sustain earnings growth going forward?

I think we need to get -- we've always said that our goal is pretax margins in the high single digits.

And I think that we are cautious about growth.

We've been able to consistently sustain nice RASM improvement at Delta through a series of different network, product, and yield management strategies, and we'll continue to do that.

I don't think we can make a prediction about growth at this point, given all the information we have provided to you on this call.

But suffice it to say that we have enough flexibility in our fleet to be able to manage capacity when the economics are right.

But in the meantime, we still have plenty of opportunity for margin expansion with really modest changes in capacity this year.

This is Ed.

One of the things we -- obviously also factors into that equation is what's the state of the global economies.

And that's going to be as much a dictator on what our capacity outlook is than pure airline economics.

And we have a strong philosophy here that we need to keep our capacity below the GDP growth rates.

Going forward, that will allow us to maintain the discipline we are talking about.

And occasionally growth, but it would probably be modestly into the future.

Great.

Just to clarify, pretax margin in the high single digits are pretty far from current levels.

When you look out at the sort of situation, assuming constant macro and what we know about M&A going forward the next few years, is that an environment that kind of gets you to your goal as far as you can see?

I think we should reserve that kind of conversation for the conversation we're going to have with our investors in early May about our long-term capital deployment strategy.

Okay, fair enough.

And just a follow-up on the concept of value creation.

When I think about some of the concepts that I guess were under consideration years ago when Delta and Northwest first merged, I guess one of the things that came up a lot was the potential for unlocking value by spinning out frequent-flier plans.

You executed some pretty creative deals in 2012.

As the core operations improve, is that something worth considering again?

No.

It is not.

Okay.

And can you just offer -- can you elaborate on that?

I think the difficulty in doing that is that's too core to the business.

And in essence, it is a -- it is a revenue generator where it is a form of selling seats.

And when you think about the core of what we do well at Delta, we need to have that lever, that revenue lever and that cost lever on our side of the equation.

It drives our Affinity Card relationships, it drives our loyalty relationships with our most important customers, and we can derive far more value for our shareowners than constantly quarreling with a third-party over what our pricing is going to be for a seat.

Got it.

Thank you.

We're going to have time for one more question from the analysts.

Hunter Keay, Wolfe Trahan.

Thanks.

Good morning everybody.

Richard, how are you?

I am wonderful actually.

Thank you for asking.

So if you believe that fares and fuel are really correlated, why don't you give us EBIT margin guidance for the full year instead of just for the next quarter?

Because I think that would send a huge signal of confidence about the sustainability of that relationship and I would probably think it would discourage a lot of the short-term trading in your stock.

I don't know that it would, candidly, change the view of short-term trading.

I do think one of the ideas that you had in your recent writings is a better idea, which is let's not use EBITDAR.

I agree with that, but I've also talked about not hedging fuel and that doesn't seem to take either.

But in terms -- look at Copa.

They gave us full-year 2012 EBIT margin guidance -- 2013 I mean -- five months ago.

And the stock just does not move.

Granted they don't give PRASM but the stock just does not move on month-to-month data points because people know they're going to catch it up.

Whether it's oil-driven or pricing-driven or what, it's a sustainability question and it's a signal of confidence, which is why the stock gets a huge multiple.

We always appreciate your input, Hunter.

Okay.

Fair enough.

Related question.

Does what happened to your stock in early May when it was off 20% from the top on backward looking March PRASM data, does that make you lean towards buying back stock as opposed to other options?

The reason I was so forthcoming in my narrative was in the hope that I would dissuade anyone from trying to get under the tent on what we are going to do when we have our announcement in the first couple of weeks in May.

So I'm going to hold on that question too.

Since you are 0 for 2, do you want try another one?

Sure.

Why not actually?

Paul, here's one for you.

So, you talked about Bakken coming in.

I don't think Trainer is set up to receive crude by rail.

So if you guys do start to get up to the 75,000, 100,000 barrels per day of output, are you going to have to -- is it going to require some incremental CapEx at Trainer to make it sort of Bakken ready, crude rail ready I should say?

We haven't made any decisions on long-term investments around that.

I will tell you that there are multiple offloading and terminaling facilities on the East Coast.

And there are multiple options for getting it there.

Rail is just the majority of the trip, but you can barge it down from various locations as well.

Thanks everybody.

That's going to conclude the analyst portion of the call.

Now I'm going to turn it over to you, Ned Walker, for the media portion.

Thank you very much Jill.

Jay, we will go ahead and begin the media Q&A.

Once again, I'd like to ask the media if they could limit themselves to one question and a brief follow-up.

That should allow us to be able to accommodate most questions.

Let's go ahead and begin.

(Operator Instructions).

Josh Freed, The Associated Press.

Hi there.

You mentioned earlier that you had this situation where Delta is biased towards yield I think was how you put it, caused you to need to then come back later and make some adjustments when maybe the efforts to get yield were a little too high.

I was just wondering if you could say a little more about that.

Was it the demand changed all that fast or in some way that was different than what you were used to, or is it that the bias towards yield was sort of above and beyond where it had been previously?

In a yield management system, you make forecasts some six to eight months earlier.

So as we saw demand trends building from the end of 2012 into the first quarter of 2013, demand trends were quite strong.

And so we made decisions, inventory classification decisions, toward a yield bias versus a load factor bias.

And as the close-in load factor build showed some weakness, we take steps to backfill the inventory with perhaps lower-yielding traffic.

Does that answer your question?

Sure.

Yes, that does help.

Has the result of all of that then been a rethinking of how much you sort of bias the system towards yield, or is it -- or do you do it the same as you always have and this was an adjustment that was strictly related to demand?

Let's put it into perspective.

This was -- January and February were really strong months.

We were top of the industry in relative performance.

In the month of March where we saw this weakness was the most profitable March in the history of Delta.

So putting it in perspective shows you that yield management systems and the decisions around yield and inventory are dynamic and are driven by demand factors, external economic factors, pricing in the external environment, and global economies.

So, there's a number of factors that go into it, and we constantly make those kinds of decisions, but I would say that if you look at the track record of Delta for two years, we've run a pretty significant year-on-year revenue premium to the industry.

So we are very good at it.

And I was just trying to get a feel for whether there had been any kind of change in philosophy before or after or if it was just simply an adjustment with the same philosophy in place.

It's just it's an adjustment with the same philosophy, which is to continue to expand the margins at Delta.

Mary Jane Credeur, Bloomberg News.

A quick question.

I missed what you said about those Heathrow slots.

How many and what price?

We had two slot pairs that we purchased for $47 million.

Total or each?

Total.

Total?

Okay, great.

And then furloughs -- are you bracing for this to last for weeks, all summer?

What's the duration outlook on that?

Let's be clear about -- whenever we get a question about furloughs, the answer is we do not do involuntary furloughs at Delta.

I'm sorry, I mean the FAA furloughs.

I apologize.

Oh, the FAA furloughs.

Now, what was your question again, Mary Jane?

I got all focused on anybody thinking we're going to furlough at Delta.

We are not, so --

No, I'm sorry, the FAA furloughs, the controller furloughs more specifically.

Are we bracing for this to last for weeks, all summer?

I mean what is the realistic scenario here?

I think that depends upon what the administration, how the administration handles the situation.

What we're focused on is taking good care of our customers and continuing to provide that to them, the high quality customer service that we always provide, and we will manage through it on their behalf.

Who takes a cost hit on that when those regional flights are canceled?

Ultimately the cost hit is on the consumer because of the FAA reaction to sequester.

But we will do our very best to make certain that we get our customers safely to their destinations on time.

Ultimately, the cost is borne in time by consumers, but we are going to work hard at Delta to make sure we take care of our customers.

We have time for one more quick question so we have an on-time departure here.

That question will come from Linda Loyd, Philadelphia Inquirer.

Thanks for taking my call.

We are having a fire drill here, so we all had to vacate the building, and I missed most of the analyst questions.

So I do have a Trainer oil refinery question.

You said you're expecting a modest profit in the June quarter.

Are you expecting a profit for the full year at the refinery, or are you --?

This is Paul.

We are not giving any guidance beyond the second quarter at this time.

So I guess one last question.

Are you still glad you bought an oil refinery or has it been more of a headache than you originally envisioned?

Yes, we are glad we bought an oil refinery.

Okay.

You say that each time I ask it, and you remain glad that you bought it, right?

Yes.

Linda, one of the reasons why we are going to defer giving full-year profit guidance for Trainer is because the crack spreads are pretty volatile right now and there's a lot of it.

So it's hard to continue to reconcile movements in crack spreads to guidance, so we said that we expect to make a profit in the second quarter and I think that's probably as far as we can give you guidance on at this point.

And this is Ed speaking?

Yes.

Let me put one last piece in about the refinery.

Jeff Warman and the team are doing a great job running the refinery.

We have been running at maximum throughput safely and efficiently for most of the third -- first and second quarter here as we came out of the effects of Sandy.

So, the team there and all of our employees at Trainer are doing a great job running a really efficient refinery with very high liquid volume recoveries.

So, we are really pleased with the operation.

Okay, great.

Thanks very much.

Thank you Richard, Ed, Paul, Steve and Glen.

That concludes our 2013 March quarter results.

We'll be back here in another 90 days approximately with our 2013 June quarter results.

Thanks very much everyone.

Have a good day.

That concludes today's conference.

Thank you for your participation today.