達美航空 (DAL) 2013 Q2 法說會逐字稿

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

My name is Kelly Ann, and I will be your coordinator for today.

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

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

At this time I would like to turn the call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations.

Please go ahead, ma'am.

Thanks, Kelly Ann.

Good morning, everyone.

Thanks for joining us on our June quarter call.

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

We also have the entire leadership team here in the room with us 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 with 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 also discuss non-GAAP financial measures.

All results exclude special items, unless otherwise noted.

And you can find the reconciliation of our non-GAAP measures on the Investor Relations (technical difficulty) Delta.com.

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

Thank you.

Good morning, everyone.

We reported an $840 million pre-tax profit for the June quarter.

We increased our earnings year-on-year by $255 million; group passenger revenue by $63 million year-on-year; extended our pre-tax margin by 2.6 points to 8.7%; generated operating cash flow of $1.3 billion; and earned $0.98 per share, meeting first-call consensus of $0.95 per share.

We close the Virgin Atlantic equity acquisition, and ended the quarter with $5.7 billion in liquidity.

The entire Delta team is executing well.

Our results include $138 million year-to-date for profit sharing, in addition to $45 million in year-to-date shared rewards payments.

I want to thank the Delta team for all the good work they do every day.

Summer weather has been unusually difficult, with repetitive thunderstorms around the country.

And I want to particularly thank all our flight attendants, pilots, and airport personnel for providing fine service.

We are aiming for a record profit sharing payout on February 14, 2014, in recognition of the great job by all the Delta people.

And we are on pace in our operations and customer service to have a full payout on share rewards for 2013.

On the revenue front, we increased passenger revenues by about 1%, even though economic factors reduced fuel costs by more than 10% in the quarter, which resulted in almost $300 million in year-on-year fuel expense reductions.

This is an important point.

We increased our revenue base while fuel dropped $0.34 per gallon in the quarter.

This illustrates the resilience of the Delta business model in a more rational industry environment.

We intend to stay focused on closely managing our capacity to keep the fuel and revenue equation correct so as to expand margins.

In that regard, Delta is consistently generating a revenue premium to the industry, with the June quarter at 108% of industry average.

This is testament to the many initiatives we have underway to increase corporate share and to provide high-quality products, customer service, and operations.

Our operational performance and customer service continues to lead the industry.

We ran a DOT on-time arrival rate of 83%; a 99.8% completion factor; finished number two in baggage performance; and had the lowest number of DOT customer complaints for the month of May in Delta's history.

On the cost side, the team has been a fine job accelerating the pace of structural cost initiatives.

Our 2Q nonfuel CASM increase of 2.5% was a full 2 points lower than our guidance at the start of the quarter.

We expect that positive trend to continue in our third-quarter performance.

We will continue strong execution on our structural cost initiatives as we recognize the requirement to maintain a unit cost advantage.

On fuel, operations at Trainer refinery are going well.

Our objective in purchasing the refinery was to reduce jet fuel costs for Delta.

And the Trainer strategy is playing a role in the fuel savings we will see this year.

We're also seeing significant benefits from debt reduction, which delivered more than $40 million in interest savings this quarter alone.

We ended June with $10.4 billion of adjusted net debt, and we will achieve our $10 billion net debt target by the end of the year.

While these operational and financial results are among the best in our history, we will continue to expand margins and improve cash flows.

We expect 2013 will be one of Delta's most profitable years ever.

And for the third quarter, we are guiding our operating margin to 11% to 13%.

Beyond 2013, we have a number of initiatives underway to continue expanding our margins and cash flows that will continue to build a long-term, sustainable franchise for all our stakeholders.

We will continue to deliver new and innovative products, services, and the best overall operation in the global industry; because running a consistently reliable operation with high-quality customer service is the most value service we can bring our customers, particularly our important corporate customers.

As we look out at the remainder of the year, our forward revenue is strong and our cost management plan is ahead of budget, resulting in strong profitability and cash flow for 2013.

We will continue to manage our capacity conservatively, as we have done over the past several years, in order to prioritize profit margins and improving cash flows.

The first half of 2013, our capacity was down overall; and we will be up slightly, about 2%, in the back half of 2013; for full-year capacity, up less than 1%, below GDP growth.

We will also remain disciplined with our capital, as our track record on capital discipline can be seen in the $5 billion in free cash flow we have generated since 2010.

With our $10 billion net debt target in sight, and a business that is consistently generating solid free cash flow, we announced our new capital deployment strategy in May.

This plan follows a five-year financial strategy and provides good benefits for our employees, customers, and shareowners.

Our shareholders will benefit from further debt reduction.

Our new goal is a $7 billion net debt target.

This will lower our interest expense to $500 million annually, and take more risk off the balance sheet.

Our employees will benefit from our deleveraging as we become more a financially stable and flexible company.

This means industry standard pay and benefits, along with excellent profit sharing payouts and continued shared rewards payouts.

Our customers will benefit from the $2 billion to $2.5 billion annually, or roughly 50% of our operating cash flow, that we will invest back into the business.

These investments will be made only for demonstrated returns, with a minimum internal rate of return of at least 15%.

Our Board has also made the correct decision that the Company must begin returning cash to our shareowners through both a quarterly dividend and a share buyback.

With our $0.06 quarterly dividend beginning in September, and a $500 million repurchase authorization, we expect to return more than $1 billion to our shareholders over the next three years.

So, to conclude, we are looking at 2013 as a year of important goals obtained for Delta.

We are on track to produce another record year of solid earning improvements.

Our operational and customer service metrics are among the best in Delta's history, and the top of the global industry.

Later this year, we will hit our $10 billion net debt target and return cash to our shareholders.

The plan is working, and we look forward to delivering more to our shareowners in the future.

With that, I'll turn the call over to Ed and Paul, and they can go through the details of the quarter with you.

Thank you.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us today.

Earlier we announced the June quarter profit of $845 million, a $255 million improvement over the prior year.

Our EPS was $0.98 per share, and our free cash flow in the quarter was $730 million.

Passenger revenues for the quarter increased $63 million, with unit revenues flat on less than 1% capacity growth.

Cargo revenues continued to be impacted by the weakness in the global economy, with the yen devaluation contributing to a significant portion of that weakness.

Our MRO revenues declined by $88 million from our decision to discontinue some lower margin producing contracts.

Although this decision reduced revenues, it was margin accretive, and a positive decision to take.

Our ability to increase passenger revenues against declining fuel prices is a sign of the strength of the demand environment that we are in, and the success of our revenue initiatives.

On the domestic front, unit revenues were down 1 point on slightly higher capacity.

New York City yields and unit revenues year-over-year outpaced the system average, despite a 29% capacity increase from the LaGuardia expansion.

Atlanta had solid performance for the quarter and generated 3 points of margin expansion compared to the prior year.

We are continuing to make good progress in increasing our corporate travel share.

Corporate revenues increased 4% year-to-date, and are up 8% in the last four weeks, driven by strength in the domestic market.

The improving momentum we've seen throughout the quarter continues into our summer bookings.

Banking and financial services have led all sectors in growth, posting double-digit year-over-year increases, proof that our efforts, especially in New York, are paying off.

On the trans-Atlantic, fares continue to improve, led by solid corporate share gains and growth in our hub-to-hub flying, contributing to a 2% unit revenue improvement for the quarter.

Our Heathrow unit revenues led the pack by a sizable margin, with a 10% improvement.

And JFK-to-Europe unit revenues improved 4% for the quarter, outperforming all other hubs to Europe.

Looking ahead, this performance level will build as we implement our Virgin Atlantic alliance.

Turning to the Latin entities, load factor contributed a 1 point unit revenue growth against a 3 point increase in capacity.

In Mexico, capacity rationalization, unit revenue growth in the beach markets, and improvement in the business markets from our Aeromexico relationship contributed to a 6% unit revenue improvement.

And revenues coming from our expanding GOL relationship continue to improve significantly year-over-year, despite a sluggish Brazilian economy.

Moving on to the Pacific, the 25% yen deterioration continues to negatively impact the beach markets, primarily in the Japanese point of sale.

We have proactively adjusted our beach capacity throughout the summer to offset this weakness.

The yen devaluation and its impact on bookings negatively impacted the quarter's profit by a net $60 million; with an $85 million revenue impact, net of hedges, partially offset by a $25 million benefit in expense.

As we look into the fall in 2014, we expect to take further steps to rationalize Japanese capacity in light of the new economics of the weaker yen.

For the June quarter, our total unit revenues were at 108% of industry average; our ninth consecutive quarter of outpacing the industry in year-on-year improvement.

That said, we still have a number of initiatives in place to build on that momentum going forward.

We closed on our Virgin Atlantic investment at the end of June, and implemented the codeshare just a few days later.

The codeshare has added six additional daily frequencies from New York to Heathrow, enabling us to fly our corporate passengers to the number-one destination between the US and the UK.

We will also have nonstop flights between London and Chicago, Los Angeles, Miami, San Francisco, and Washington, DC.

And just yesterday we announced plans to start service between Seattle and Heathrow, starting in March.

Since the codeshare launch, more than $8 million in joint sales have been generated in just three weeks.

We have made the antitrust immunity application needed to start a joint venture with Virgin, and we expect approval later this year, which will allow us to have the JV in place starting January 1.

The investment we're making in our international fleet is nearing completion.

By the end of 2013, 85% of our international fleet will have flat-bed seating.

And Delta will be the only US carrier to offer audio/video on demand product offerings at every seat on long-haul international flights.

With the benefit of these and other product and commercial initiatives, we are committed to driving revenue improvements regardless of the fuel environment.

In terms of guidance, we are forecasting an operating margin of 11% to 13% for the September quarter, which would represent 2 points of margin expansion over last year.

We have gotten off to a strong start to the summer season, and had record revenue performance over the July 4 weekend, as the Sunday and Monday following the holiday became the second- and fourth-highest system revenue days in our history.

Corporate travel continues to be strong.

In our most recent survey of corporate travel managers, 80% indicated their second half of the year spent on Delta will either be maintained at the same pace, or increase on a year-over-year basis.

We expect to post a 3% increase in year-over-year July unit revenues, with our improvements in August looking similar to what we're seeing in July.

These gains are net of about 1 point of continuing weakness in Japan, driven by the yen's devaluation.

On capacity, we expect the back half of the year to increase by approximately 2% compared to 2012.

This growth is being driven by our up-gauging strategy which will allow us to produce these capacity levels with 16 fewer aircraft, or about a 1.5% reduction in our fleet size.

And despite this strong performance we're posting, we will remain cautious in our capacity plans, ensuring that our capacity grows at less than real GDP.

Before I hand the call over to Paul, I'll conclude by echoing Richard's comments, that our results are a reflection of the hard work and dedication of our 80,000 employees worldwide.

We truly have the best employees in the industry.

And I want to thank them and congratulate them for a great quarter.

Paul.

Thanks, Ed and Richard.

Good morning, everybody, and thanks for joining us this morning.

As we laid out at our Investor Day in December, one of our major focus areas for 2013 was to address the rate of growth in our costs.

The entire Company has rallied around this effort.

And our results show that we are successfully identifying opportunities through both our structural cost initiatives and tactical efforts to minimize cost growth and improve our margins.

In addition, high completion factors, strong operational performance, and a favorable mix of mainline and regional flying helped our June quarter costs, allowing us to both provide a superior experience to our customers while improving our unit cost performance.

Non-fuel costs increased 2.5% for the quarter, beating our initial guidance for the quarter by more than 2 points, driven by lower maintenance and savings initiatives throughout the organization.

The positive trend in non-fuel unit cost performance is expected to continue in the back half of the year as our domestic re-fleeting begins.

In the third quarter, we will start taking delivery of 8 to 10 aircraft per month that will enable us to retire 14 mainline aircraft and more than forty 50-seaters by the end of the year.

This will generate immediate savings in both maintenance and fuel costs by retiring these older and less fuel-efficient aircraft.

This puts our nonfuel CASM growth for the back half of the year at less than 2%; 2 points lower than our own original guidance.

That also sets a solid foundation for our long-term goal of keeping cost growth between 0 and 2% annually beyond 2013.

Turning to fuel, our fuel expense declined $290 million on lower market fuel prices and the prior-year hedge losses.

Our all-in fuel price per gallon was $3.03, which included a $0.01 per gallon hedge gain, and a $0.05 per gallon loss at Trainer.

Trainer's loss for the quarter was driven by the recent market volatility for RINs, which are required to comply with the EPA's Renewable Fuel Standard, which impacts gasoline and diesel production.

Without the higher RINs expense, Trainer would've broken even for the June quarter.

We are working to mitigate this exposure on multiple fronts, including commercially and through Washington lobbying efforts.

There has been a change in fuel market dynamics since we restarted production at Trainer.

Jet fuel is currently trading approximately $0.13 per gallon below diesel fuel compared to an historical premium.

This change has partially been driven by an increase in the market supply of jet from Monroe's production, combined with other refiners' shift into non-RIN fuels.

This has resulted in an overall reduction to our jet fuel expense far exceeding our expectations, and having a significant impact to our bottom line.

We expect this market dynamic to continue, and have also structured our hedge book to provide protection against significant market increases in crude, while maintaining meaningful downside participation.

As of the July 19 forward curve, we are forecasting a September quarter fuel price of $3.05 to $3.10 per gallon, including the impact of the refinery and projected hedge gains.

Looking ahead, the market dynamic between jet and diesel, coupled with the plans we have in place to receive 50,000 to 75,000 barrels per day of Bakken, means that there is more opportunity in store for us with our fuel strategy.

Shifting to cash flow, during the quarter we generated $1.3 billion of operating cash flow, and $730 million of free cash flow.

Included in the operating cash flow is $500 million of pension contributions, including $350 million of accelerated payments.

These contributions complete our required funding for the year.

Capital expenditures were $700 million, and included the $360 million that we paid at the end of June to close on our investment in Virgin Atlantic.

We expect CapEx for the September quarter to be $740 million, including the purchase of $140 million of aircraft off lease.

We ended the quarter with adjusted net debt of $10.4 billion.

We are on track to achieve our $10 billion target by the end of this year.

Our interest expense for the June quarter was more than $40 million lower than prior year on lower debt levels, and will only continue to improve as we continue to reduce our debt.

Our strong cash generation, combined with the progress we have made toward achieving an investment grade balance sheet, allowed us to move forward with our new capital deployment plan and earn upgraded ratings from all three of the credit rating agencies.

September will mark the initial return of cash to our shareholders, with an approximately $50 million payment in the form of our $0.06 per share quarterly dividend.

We are proud of our performance during the first half of 2013.

Our results have proven that we are focused on both the financial and operational aspects of our business, and that the same diligence we exercised in the first half will sustain us through the second half of the year.

Thank you, again, to the entire Delta team for the efforts contributed across the system, and for the performance that delivered the results this quarter.

Jill.

Great.

Thanks, Richard, Ed, and Paul.

Kelly Ann, we are now ready for questions from the analysts.

Would you please review the process for asking a question?

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

(Operator Instructions).

John Godyn, Morgan Stanley.

Hey, everybody.

Thank you for taking my question.

First of all, I just wanted to follow-up a little bit about the PRASM commentary.

It sounds like a very solid outlook for the summer.

In the past, we have sometimes seen you add a little bit of a layer of conservatism because of the uncertainty in modeling September this early.

If you could just speak to maybe what you're seeing to September to date; how the outlook looks.

And is there some uncertainty over conservatism baked into the PRASM outlook, just to account for the natural volatility in that month?

Hi, John.

It's Ed.

You're right.

September is historically a fairly volatile month.

I wouldn't say that we have an undue level of conservatism in the guidance for the forecast we provide you.

But it is a month that's a little bit choppy.

We have the holiday period, particularly New York, that shifts the calendar around a bit.

I'd say what we're seeing for September is very, very early.

It's very preliminary.

It's encouraging.

But the only guidance we can really give you with any concrete specificity is what we said for July and August.

Fair enough.

And if I could just ask a follow-up on capacity.

Richard, I think last quarter, when we were looking at a PRASM outlook that was a little bit less exciting at the time, you made the comment that you were prepared to make the necessary changes to the fall capacity in response to how market conditions evolved.

Obviously, it seems like PRASM is tracking quite well.

But I was hoping you could just speak to how you see risk to capacity going forward.

And give us confidence that we won't see a surprise uptick in capacity growth in response to the great results that you're producing here.

Well, I think if you look at the history of our capacity management at Delta, we've always been pretty conservative and that, we have not changed our tack.

I think, as you look out, you can always expect that we will be conservative and well under, in terms of capacity, versus where GDP is.

In the fall, we begin a pretty significant restructuring of the fleet, and the up-gauging strategy commences -- I think Ed commented, or Paul commented, on the significant number of 50-seaters that we have coming out of the fleet.

And so the up-gauging strategy will actually result in our having fewer airplanes over time in the total fleet.

It's just our gauge is going to be up a bit.

But that shouldn't be mistaken for any change in philosophy about how we manage capacity here.

And last point I would make is, we still have a significant number of depreciated airplanes in our fleet.

And so the marginal capacity is really easy for us to reduce pretty promptly in response to any conditions in the marketplace.

So, bottom line is, we are very focused on being certain that we're expanding margins.

And capacity will continue to be one of the important levers in doing that.

Thanks a lot, guys.

Very helpful.

Michael Linenberg, Deutsche Bank.

Yes.

Just a quick clarification on the pension piece, Paul.

You talked about that you were done for the year.

Now, that doesn't include -- I guess it's up to, what?

$1 billion, but no more than $200 million per annum.

That's still a possibility this year?

Mike, when we talked about the additional opportunity for putting money into the pension plan, we're really beginning in 2014 and beyond.

(Multiple speakers) believe that completes our contributions for the year.

Okay.

And just on the pension, just given the significant move in rates, if we were to look at where the discount rate is now -- and I realize maybe this is rough.

How much of an impact do you think -- a positive impact it has had on those sides of the pension liability, just given that move over the past month or so?

We estimate that the change in the pension liability as a result of the discount rate changes is probably $1.5 billion to $2 billion lower than it was at year-end.

Perfect.

And then just one last one, and maybe this is more to Ed -- I believe you indicated that the margin improvement in Atlanta was 3 points better than a year ago.

What's driving that?

Is some of that a function of decisions and changes in the schedule by your competitor?

Is some of that a change of gauge?

I realize there's a lot of 50-seaters that have been moving out of the marketplace.

That's a big move.

How much of that is more structural, or even competitive?

Hi, Mike, it's Glen.

How are you doing?

Hey, Glen.

I think you have -- everything you just mentioned is going on in Atlanta is no surprise.

And it's public information that our competitor gets used to retrench in Atlanta.

They are going to be down around 150 departures by the end of this year.

And, certainly, that's an improved competitive environment for us here in Atlanta, as well as optimizing through the up-gauge and through the reduction of our reliance on 50-seat equipment; which is first starting in Atlanta, or primarily focused initially in Atlanta because of the flexibility we have here in terms of demand.

Okay, very good.

Thanks, Glen.

David Fintzen, Barclays.

Good morning, everyone.

Maybe one for Glen.

Just curious, over the next couple of years, as competitors are working through integration and maybe the business -- you're up against maybe a little more steady-state set of network competitors.

I'm just curious how you think about the vulnerabilities in the network, so to speak.

Or what are the parts of the network that you're really going to watch as the competition evolves in the industry?

Is it New York and LA?

Or is it corporate travel?

What are the key places we should be watching as we're watching that play out?

Well, I think that each carrier has a different competitive environment that we face in a consolidated industry.

I think we're very excited about what we're facing with the integration of Southwest aircraft.

As that continues to move forward (technical difficulty) somewhere around the third part of 2015 is what they have announced.

And the integration of American and US Air -- we think all of that benefits the relative strength of us in the southeast.

And (technical difficulty) very good tailwind of how we move ourselves in that region of the country.

In New York, I think we feel very confident with the slots we have in New York, and the fact that we have a leading slot portfolio in New York, that we will continue to be able to outpace the industry as we continue to improve our products and services in the New York City area.

And then Detroit and Minneapolis have been very, very steady over the past few years.

We don't see any change to that; and great profit centers for us.

So, as we look around our network, I think we are very excited about what the integration of other carriers will present to us in terms of opportunities.

That may not be the case for all of them, but you'd have to ask them.

Right.

No, I appreciate that color.

And then maybe just a quick one, probably for Ed.

The MRO business -- where you're getting out of some of the lower margin contracts.

Is that something we can expect to continue, or is that pretty much complete now?

I think we have made the decisions we're going to take.

So I think over the course of this year, you will see some of that revenue decline.

And then we're going to look, going forward, and selectively build back that operation.

Okay, great.

Appreciate it, everyone.

Kelly Ann, we are ready for our next question.

Jamie Baker, JPMorgan.

Good morning, everybody.

Just a couple of easy housekeeping items, uncharacteristically; I can't actually find much to complain about this morning.

Paul, you touched on the elevated price of RINs.

I believe that phenomenon has only worsened in the last month or so.

Can you give us some color as to what the anticipated expense in Q3 might look like?

Jamie, good morning.

We're not giving any guidance on the RINs.

As you know, they've been incredibly volatile (multiple speakers) by as much as 50X from the beginning of the year.

We don't want to speculate where they're going to end up at the end of the quarter.

All right.

Second question, how do you anticipate breaking out Virgin's contribution going forward?

Any parameters that you could put around them and their profitability would be helpful.

Well, we'll be -- Jamie, this is Ed -- we will be reporting our 49% ownership stake on a net basis.

We haven't decided, relative to what additional disclosure we would be making.

As you know, Virgin is a privately held company.

So we'll provide good transparency relative to Delta's -- the benefits we see from the relationship, both on the ownership level, as well as on the JV.

Okay.

And I'm going to try to sneak in a third, since the first wasn't answered.

Glen, any commentary on the state of relationships with Alaska Airlines right now, vis-a-vis some of the capacity that you've added in Seattle?

I certainly am not modeling for any sort of divorce in terms of the relationship there; though it has been suggested here and there that maybe both sides could, I don't know, enter couples therapy, in terms of trying to ease out some of the capacity issues.

Any update on that?

We have a great relationship with our partner in Alaska Airlines.

And we're so confident in it, that we're continuing to build in our long-haul operations out of Seattle.

And just yesterday we announced that we would initiate nonstop service, in conjunction with both Alaska and Virgin, between Seattle and Heathrow.

And I think that really goes to the core of our confidence in our relationship with them, is that we're willing to continue to build our long-haul operations in Seattle where we see opportunities.

Okay, perfect.

Thanks, everybody.

Take care.

Glenn Engel, Bank of America Merrill Lynch.

Good morning.

A couple questions; first to Glen.

If I looked at the second-quarter RASM, you outperformed on the Pacific by about 4 points; you underperformed on the Atlantic by 3 points.

Can you talk about why the divergence?

And touching on Seattle, can you talk about the strategy in Seattle and how that fits in with Tokyo?

Seattle and Heathrow?

Well, I think in Seattle, what we're trying to do (multiple speakers).

Seattle, just in general -- the hub versus the Narita hub.

Oh.

Well, I think we've been very transparent that our Narita hub is really a great asset for Delta.

And it will continue to be a great asset for Delta, but it is challenged by the environment that's around it -- the opening of Haneda.

So, I don't think we can count on that being our only way to get to Asia over the next decade or two.

So, we have been proactively managing diversification of our Pacific portfolio over the last years, and we continue to do that.

Not that Narita isn't an important destination; not that it isn't an important part of our network.

But I don't think we should solely rely on that, as that's really got some external factors that we may have to face at some point in time.

So, right now, we're flying about 50% of our trans-Pacific is not touching Narita.

And you can consider that, that would be the opportunity for us to continue to grow in Asia; not to straight Narita necessarily, but to grow the rest of Asia.

And the outperformance of the Pacific, and the underperformance of Atlantic versus the industry in the second quarter?

Quite honestly, given the fact that we don't report the hedge in the A4A data, I was surprised that, given our reliance on Japan and (technical difficulty) point of sale that our numbers went up in the Pacific.

I think that you'd have to ask other carriers why our numbers went up, really, given the fact that they rely on the yen.

And in the trans-Atlantic, we're dissecting that.

We know that there were some out of periods on settlements.

And we're trying to work with the A4A to clear that up, so that it's easier for you and for us to understand, because we believe that the joint venture settlement should not be in the A4A results.

They should be separate.

We report ours separately.

And I think we're working to get to some consensus so we can better understand how that works moving forward.

Glenn, we -- I just want to add on to trans-Atlantic -- we were very pleased with our second-quarter performance across the trans-Atlantic.

So I agree with Glen.

I think it's more a function of some out of period adjustments some of the other carriers may have had, either in the prior-year comps or the correct quarter as compared to Delta's performance.

Our performance was very strong in the --

Very strong.

It was great.

We had some of our best margins on a combined basis with our JV partners that we've ever seen in trans-Atlantic.

And two technical ones -- regional capacity growth in the third and fourth quarter; and two, on the headcount side, is that distorted by adding Pinnacle, what would the mainline headcount look alone?

Glenn, I don't have the regional headcount in front of us.

We can take it off-line get back to him.

Unless, Paul, you have that answer (multiple speakers).

Regional capacity is going to be down.

Yes, regional capacity has been down, but we don't give physically that level of guidance, dissected.

Thank you.

Savanthi Syth, Raymond James.

Good morning.

Just to touch on Trainer real quick.

I know this is -- it's a small impact versus how much fuel has come down.

But even without the RINs, your breakeven -- I expected it to be profitable.

Is that just short-term issues with spreads narrowing?

And I think in June, Bakken prices moved up.

And how should we think about it going forward?

Is Trainer going to be profitable, net-net, for the year?

Good morning, Savi, it's Paul.

Part of the Trainer performance -- and when you look at the breakeven performance -- is driven by the lower jet cracks that you've seen.

This is, and always has been, a bit of a hedge against jet cracks as well.

I think as we look at the WTI to Brent convergence that we've seen, we are still actively pursuing Bakken opportunities that we believe has a sizable opportunity, compared to the import of the West African grades into the East Coast.

So we do believe, longer-term, that we can hit the profit objectives of the refinery overall.

But there's still a forward view on gas cracks and the overall refining margin.

Depending on what RINs do, and crack spreads, we could see our way to breakeven performance for the year.

Yes.

This is Ed, Savi.

I think the volatility of RINs makes it pretty difficult to forecast a full-term view looking at Trainer in isolation.

But there's no question that this has served to be a great hedge on our overall jet fuel cost.

And that's really what Delta looks at, our overall jet fuel cost.

And with that we've been quite pleased.

Yes, that makes sense.

And on the breakout, regional capacity was down year-over-year, but your unit revenue was down as well.

I was wondering what's happening there.

Well, we started to retire 50-seat equipment.

And we're accelerating that as we get to the third and fourth quarter.

That will -- the continuation -- we will continue to have reductions in regional equipment.

That is mostly being replaced by existing equipment.

But as we get it into the third and fourth quarters, we begin to take deliveries of the 717s.

The 717s will start to replace a lot of the 76-seaters, which will replace the 50-seaters.

So think of it as kind of a reverse cascade in terms of gauge.

And as Richard mentioned and Ed mentioned, the actual fleet number, despite -- will be down about 2%, despite the fact that capacity is up 2%.

And that will not only provide a better product for customers, but some cost relief or cost assistance as the gauge continues to increase.

All right, great.

Great performance on the cost side.

Thanks, guys.

Hunter Keay, Wolfe Research.

Thank you.

Good morning.

I hate to beat this subject into the ground here, but on fuel, Paul, you said -- in answer to, I think it was Jamie's question -- you didn't want to make to speculate on where RINs are going to end up, and I appreciate that.

But should I take that to imply that the impact of that is not included in the fuel guidance of $3.05 to $3.10 for 3Q?

Because I can't really figure out how you are guiding to such a low number, given where spreads are, given how you are hedged to mostly in Brent.

I'm just not getting that number with spot prices right now.

Should I expect incremental upside risk to that after the calculation of RINs is included?

Yes.

Hunter, first of all, good morning.

Our expectations are built into that fuel price guidance, including our expectations of the hedge performance and the refinery for the third quarter.

We can work with you on your model to figure out where some of your questions might be.

But all of our expectations are built into that fuel guidance that we gave.

Okay, so you're expecting -- are you expecting hedge gains in 3Q on that $3.05 to $3.10?

And we can take this off-line if you want.

Yes, we are.

Okay.

And you answered Mike's question on pension, in terms of the rate environment and the impact of the unfunded liability.

But all else equal right now, can you help me quantify the impact you would have on CASM, ex-fuel, on a four-year basis?

Maybe just -- I know there's a lot of moving parts, but maybe as we look into -- or thinking about CASM ex-fuel in 2014.

How much is the rate going to drive that down on the P&L?

Hunter, the P&L for pension is set based on a full-year basis at the beginning of the year.

So any changes in the discount rate or interest rates would affect in 2014 and beyond.

Right.

If I were to take the rates right now, and run it on a fully annualized basis, are we talking maybe like a full 1 point of CASM-Ex?

Or is it too early?

No, no.

Okay.

That's good.

Thank you.

Dan McKenzie, Buckingham Research.

Good morning, guys.

Thanks.

I'm wondering if you can talk a little further about Virgin.

In particular, I'm just wondering where you're at with ramping up the JV, and when the JV revenues might begin showing up in the monthly PRASM numbers.

And I guess related to that, if the potential contribution from Virgin is included in your revenue and margin guidance, just given the London Heathrow exposure, I'm thinking it has the potential to be a little material here.

Let me talk to the DOT process, and then Ed can go to the specifics.

Our application for antitrust immunity with DOT was filed back in April.

There were no oppositions filed by any other party.

And we expect to get approval for antitrust immunity, which will be the basis of the JV, by the end of the summer.

So that is proceeding apace.

There have been no objections.

And if you saw the approvals that we got from the DOJ and EU on the share acquisition, I think that really signaled the fact that, from a regulatory perspective, it's very positive for consumers.

So we don't expect any issues with respect to antitrust immunity application.

And following on what Richard was saying, Dan -- this is Ed -- we're looking at a January 1 start date for the JV.

That's our current expectation.

And relative to revenues going forward, the Virgin revenues will stay within the Virgin financials.

We won't have Virgin's revenue stream in the Delta consolidated revenue picture, because we own less than 50% of that entity.

The benefits from the JV will flow on the -- that flows to the Delta metal -- will certainly show some improvement on our Heathrow numbers.

And we will also record our net 49% of the Virgin earnings in our -- as a net line item within our P&L.

It will be down to non-op.

Understood.

Okay, very helpful.

And then secondly, I wonder if you can peel back the onion a little further on your corporate travel commentary.

The statistic of 80% corporate travel spending; 80% flat, to up.

It sounds like the growth that you've seen over the past year is beginning to slow, but maybe that's a mis-read.

I guess I'm wondering if you might be able to break that out on a same-store sales versus a shared gain basis.

I know corporate travel spend has been bumping up -- or has been essentially lifted from the gains that you've made.

So if you can help us peel back that onion a little bit.

Well, corporate share gains continue in our current quarter, as well as in our forward outlook.

8% growth is -- most of that is organic growth.

We are continuing to pick up new accounts and new business, as compared to the market growing at an 8% level.

So I don't think that I see any signs of slowing down, relative to momentum.

It's clearly choppy.

You've got some industries, such as our Defense industry and the transportation industries, that are actually down year-over-year, given what's going on in their economies.

We've seen great growth coming in the financial services and the banking sector.

Technology, in the current quarter, is up double-digit gains.

So we continue to be very encouraged by what we're hearing from our corporate travel managers.

And it's the product and the operation that our people are providing that is the real story here.

Very good.

Thanks, guys.

Helane Becker, Cowen.

Thanks very much, Operator.

Hi, guys.

Thanks for the time.

Just a question with respect to the new terminal at JFK.

It opened in May, so you've had about six or eight weeks, maybe two months of operations.

And I was wondering if you could -- how it's going; customer acceptance; and how CPB is doing in that terminal?

One for purely selfish reasons; and, two, just because I've heard negative things about JFK overall.

And yet you have this fabulous new terminal and I was wondering how it was going.

Thanks.

Well, I think overall it's going well.

We have very specific data from our customers about the experience, through our email survey program.

And then, the use of that information to tailor our services and to tailor our operation to be able to continue to improve customer satisfaction scores.

And overall, the scores for the new facility are up significantly.

I think the main challenge -- and candidly, I must say I think it's an embarrassment to our government that, as much as we as an industry pay into customs and border patrol, that we have issues at not just JFK, but at Newark, at Chicago, at Los Angeles, where we cannot seem to get our government to perform a very basic service.

And those of us that travel extensively around the world and go to countries like Japan and China and Europe, customs is a breeze.

And in the US, despite all the investment that we make as an industry, we collect a fee from every passenger, we cannot get the kinds of levels of support that -- if we are going to grow our economy in the US, travel and tourism is an important part of that equation.

And it's one that needs to be fixed; and that we're pursuing every avenue in Washington and in Congress to get this problem solved.

The answer shouldn't be to outsource JFK to Abu Dhabi.

Right, right.

I don't necessarily disagree.

But still, CPB it isn't doing its job.

And is that a job for the A4A to focus on, do you think?

The A4A is incredibly focused on it.

And Nick Calio is focused on it.

We've actually gotten some appropriation language in Congress to increase the funding.

And I think the whole industry has supported those efforts over the years.

I participated in a Secretary of Commerce task force a couple of years ago that gave a whole series of recommendations in this regard to the Executive Branch.

And so far, our government has failed to provide the level of service that we should be providing if we want to see the third-most important industry in the US, travel and tourism, continue to grow and contribute to a growing GDP.

Okay.

Thank you for that.

I appreciate the analysis.

Can I just ask one follow-up question with respect to Mexico to Aeromexico?

I saw some comments they made yesterday in their press release for their earnings that they were building a hub in Monterrey.

And I was kind of wondering how you will participate in that, if at all.

Helane, hi, this is Ed.

You'd really need to go to Aeromexico for that.

We're really not at liberty to talk about their plans on our call.

Oh, okay.

I was just kind of wondering how you guys were going to participate, but that's okay.

We don't have any plans to participate in that.

Okay, thank you.

Duane Pfennigwerth, Evercore.

Hi, thanks.

Good morning.

Just on your fuel hedge -- sorry to come back to that -- but refinery aside, can you just walk us through your hedge positions for 3Q and 4Q, and what the strike prices are on that?

Good morning, Duane.

It's Paul.

We don't give specific guidance as to the strike prices; I would say more generally about 60% hedged at current levels.

And like we said earlier, we expect some hedge gains in the third quarter.

(Multiple speakers) our level of hedge gains in the third quarter, Duane, are -- at today's levels, about $40 million, net of premium.

Just to give you an indication.

That's very helpful.

And then just on the strong nonfuel-cost performance.

I wondered if we could dig into heavy maintenance a little bit.

And, specifically, has your approach on engine overhauls changed at all?

And I'm not sure if you're willing to share this, but if we looked at maybe two buckets -- engine overhaul expense plus engine CapEx last year.

How do you view those two buckets changing into 2013?

Thanks for taking the questions.

Sure, Duane.

It's Paul.

There are really two pieces to the engine maintenance strategy going forward.

One, we are taking advantage of significant part-out opportunities, as we mentioned in our last-quarter call.

CapEx opportunities to acquire older airplanes and harvest them for parts has provided significant savings for us going forward, in terms of a lower cost basis for the overhauls that we have.

And, secondly, as we talked about, a part of our structural cost initiatives, we expect substantial savings as we -- we're basically no longer doing any engine maintenance on 50-seat engines for the foreseeable future as part of that retirement strategy.

How big is that bucket, Paul?

If you could help us.

What was the magnitude of your expense last year on engine overhauls or 50-seat engine overhauls?

Let me try to address it in a much -- we don't usually break down our specific P&L expense by engine type.

But take it up a level, and if you think about CapEx and what's required according to what the OEMs say, typically the OEMs want a carrier to carry somewhere between 11%, 12%, 13% of spare engines versus what is installed.

So if you had -- the OEM model is, if you have 100 engines, they would expect you to own 112 engines.

At Delta, because of part out -- buying airplanes on the marketplace, our engine overhaul facility turn times and cycle times, we have a target of a 5% spare ratio.

So our goal is to continue to drive down the work in process and the overall investment in tech ops, parts, and capital.

And so it's a series of used equipment, PMA authority; cycle times in the engine shops are the best in the world now at Delta.

And what that all results in is a significant reduction in the amount of spare engines versus the OEM model.

Okay, thanks for that detail.

Kelly Ann, this is going to be our last question from the analysts.

We have one more.

Bob McAdoo, Imperial Capital.

Hi, this is a quick one.

Back to the issue of the regional carriers, I know what you've talked about going forward, but can you explain why the RASM for regional carriers was down in the recent quarter?

Yes, Bob, it's Glen.

It's really related to a significant up-gauge, as we take out 50-seaters and rely more heavily on 76-seaters.

The margins actually expand.

And, as you know, when you buy the airplanes for long-term -- we're not buying them for day one.

But the fact that we were able to up-gauge the regional fleet and achieve margin expansion is, I think, is a testament to we're on the right path.

So margin expand -- but because of bigger airplanes, you've got a few more discounts (multiple speakers)?

The RASM goes down slightly, but the CASM goes down dramatically.

Got it.

All right.

That's all I had.

Thanks.

Thanks, Bob.

Kelly Ann, that's going to wrap up the analyst portion of the call.

And I'm going to turn it over to Ned Walker for the media section.

Okay.

Thanks very much, Jill.

Kelly Ann, if you could please review the process for asking questions, that would be very much appreciated.

Also, for the media, if you could limit yourself to one question and a quick follow-up, we should be able to accommodate most of you.

With that, Kelly Ann?

(Operator Instructions).

Darren Shannon, Aviation Week.

Good morning.

I'm looking for some more guidance on the sector breakdown on capacity, both 3Q and 2H.

If you can just give me mainline and regional I'll be happy; but if you go deeper, I'll be very happy.

I think the guidance that we've already given in the press release is as deep as we go, in terms of forward guidance.

Thank you.

You're welcome.

Kelly Yamanouchi, Atlanta Journal Constitution.

Kelly, your line is open if you still have a question.

Sorry about that.

In terms of margin expansion in Atlanta, are there any particular markets where you've gotten the biggest gains?

Is it a sign of more business travel gains?

Kelly, we don't break our margins out by specific route.

I think, suffice it to say, that the employees at Delta are doing such a phenomenal job delivering great service to people in Atlanta, that we see our gains across the board.

Great.

And is there any opportunity for significant capacity increases?

Well, we just stick to the capacity guidance that we've given, in terms -- at a system level.

And that's the extent of the capacity guidance that we give going forward.

Okay.

Thank you.

David Koenig, Associated Press.

Hi.

Mr. Anderson, your yield was basically flat.

And also, today, a US Airways consolidated yield was down 2.8%; kind of on a blip up in capacity.

But what does that say about the price environment that you saw in the quarter that just ended?

Hey, David, it's Ned.

We lost you at the very beginning.

Can you restate the question?

We were unable to --

Sure, sure.

I was just mentioning that your yield is pretty flat here.

And the US Airways consolidated yield was down nearly 3 points -- 3%.

Now, they did have a rise in capacity.

My question was, what those yield figures say about the pricing environment that you saw in the quarter that just ended.

I think we're very excited about business travel; we're very excited about core demand; enthusiastic about it.

Of course, there is a correlation to fuel.

And when fuel goes up, airline ticket prices have to go up as well.

And as fuel came down, airline ticket prices on the margins did go down a bit.

But that had really nothing to do with core demand, and margins expanded.

So, I wouldn't really correlate those small-yield declines to any kind of core yield deterioration in the long-term.

Will the industry ever break that link with oil prices and fares?

I don't think we want to.

Okay.

I don't think --

It's a margin, Dave, so it's not an oil price -- and that's what I think the industry has been able to achieve.

And I think that's why we think it's a pretty good environment right now.

Thank you.

Mary Jane Credeur, Bloomberg News.

Hi, gentlemen.

How long does Delta's contract with BP and Conoco Phillips for Trainer go?

And are you able to adjust or re-negotiate those terms at all because of the rising RIN costs?

Good morning, Mary Jane, this is Paul.

When we announced the transaction, we said we had entered into three-year deals with Conoco Phillips and BP around the refinery.

We're not going to comment on any specific contractual provisions, and our relationship between them.

Okay.

And could you elaborate a little bit more, perhaps Ed, on the underlying strength on domestic business.

You talked about the core strength there.

How much of that is -- what sectors are driving that -- banking; tech?

Is there any pattern to regions that are particularly strong -- Northeast; New York area, et cetera?

You did a good job of answering your own question there, Mary Jane.

Obviously, our growth in New York is contributing a lot to the strength we're seeing domestically.

We've done well here in Atlanta.

I'd say on an industry profile -- technology -- manufacturing has picked up, in terms of our corporate revenues from our manufacturing base has been strong.

That's high-single-digits.

But the overwhelming lion's share of the improvement is coming from the financial services and the banking sector.

Great, thank you.

Okay.

Kelly Ann, we have time for one more question.

Karen Jacobs, Reuters.

Hi.

My question was also about the revenue environment, which you've addressed with some of the questioners already.

I was just hoping you could expand on the revenue environment you're seeing, and if you could address the difficulty you've had in raising fares this year.

Karen, I'd say the revenue environment is really solid.

We mentioned that our summer bookings are strong; our unit revenues are up 3% in July.

And we expect a similar performance for August.

So I'd say everything we're seeing in the revenue environment is solid and quite stable.

Okay.

And what's with fares now?

Is it harder to raise fares these days?

We do not, and cannot, speculate on forward decisions with respect to our pricing of airfares.

Okay.

I only asked the question because I know the Company has tried to raise fares this year about five times, but hasn't been successful with most of those.

So, thank you.

Okay.

Thanks very much, again.

Richard, Ed, Paul, Glen and team, thank you very much for your comments.

And this concludes our June quarter conference call.

We will be back in three months with our September conference call.

Thank you very much, everyone.

Bye-bye.

Again, that will conclude today's conference.

Thank you all for joining us.