達美航空 (DAL) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Airlines September quarter earnings results conference.

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

(Operator Instructions) As a reminder today's call is being recorded.

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

Please go ahead, ma'am.

Thanks, Kelly Ann, and good morning, everyone.

Thanks for joining us for our September quarter call.

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

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 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 page at delta.com.

With that I will turn it over to Richard Anderson.

Good morning.

Today we reported a $1.2 billion net profit for the September quarter.

We increased our profit by 56%, or $444 million year on year; expanded our pretax margin by 3.7 points to 11.5%; and achieved our $10 billion net debt target.

EPS is $1.41, beating consensus by $0.05.

Importantly for our shareholders, we bought back $100 million in stock in 3Q and paid $51 million in dividends.

We are pacing well ahead of our goals for 2013.

We ran a good operation with on-time performance at 83% and completion factor at 99.8%.

Our employees have hit every operational goal so far this year, including 40 days of 100% completion factor.

Our customer complaints at DOT are at all-time lows for Delta.

For that operational success our employees have received $69 million this year in shared rewards.

We are planning to hit all of our operational goals, so we should have maximum shared reward payouts for our people for over two years in a row.

The success in this quarter is a credit to the 80,000 Delta employees worldwide.

We are pleased to recognize their efforts with $249 million accrued profit-sharing, which now puts us at nearly $390 million for the year which exceeds last year's total.

We look forward to a record profit-sharing payout for Delta people on Valentine's Day 2014.

Delta has significant opportunities ahead throughout our businesses and we must keep our heads down and work hard to continue advancing Delta.

We will have a record year in 2013 and there is a sizeable opportunity in front of us to drive improved service, better RASM, further margin expansion, and increased cash flow in 2014.

Our revenue performance is currently at 106% system revenue premium to the industry, and we have a variety of initiatives underway that will grow the Delta premium.

Our ancillary revenues are top tier and we believe significant upside exists going forward.

Our operational and customer service performance is overall the best in Delta's history.

We will continue to deliver and improve upon that performance.

Good operations in customer service drive a revenue premium as business customers demand quality service.

This is reflected in our 10% corporate revenue growth.

Running a solid operation also improves our cost efficiency, which is reflected in our nonfuel CASM performance in this quarter.

On the corporate side, our momentum is building and we are capturing more corporate share, particularly in New York.

The investments we have made to upgrade our product will be completed by midyear 2014.

Whether it is flatbeds on long-haul flights, Wi-Fi across the fleet, JFK facilities, or similar product attributes, corporate customers are showing they value these investments.

While these investments are tapering, the paybacks will grow going forward.

On the Pacific network we had good profitability in the quarter and we are building Seattle as a West Coast gateway to Asia.

New flights between Asia and Seattle, along with the domestic feed we have added there to support this, will allow us to provide broader service to our customers, including direct flights to the top five destinations in Asia and the top three destinations in Europe.

The Atlantic network in conjunction with the AF/KL JV lead all of our entities in performance.

With our Virgin antitrust immunity coming online January 1, we are well-positioned for long-term improvement in the transatlantic.

Likewise, our Latin network along with our exclusive partners, Aeromexico and GOL, had solid performance with improvements across the network.

We have nice opportunities ahead in those markets.

Our domestic network continues to generate excellent revenue performance.

Our domestic revenue index was over 112% for the quarter and we posted a gain of over 5% in PRASM in the quarter on a capacity increase of 2.6%.

We look forward to even stronger domestic performance as the cost benefits from our domestic re-fleeting and upgauging begin.

Between now and 2016 we will take delivery of 180 mainline and two class regional aircraft allowing us to retire 150 additional 50-seaters and 50 to 60 older mainline planes.

Our goal is to cut our 50 seat fleet from 260 at the end of this year to 100 to 125 over the next two years.

Not only do new aircraft provide maintenance and fuel efficiencies and they are much better for our customers, but the upgauged fleet can produce capacity growth below GDP with fewer aircraft, further improving our return on invested capital.

With regard to costs, through a lot of hard work Delta has the best unit cost position among the network carriers.

We are determined to achieve our goal of keeping annual cost growth below the rate of inflation.

This quarter is indicative of our long-term expectations.

We also have a tremendous opportunity with the Trainer refinery.

Importantly, the refinery's production has proven to be effective in keeping jet cracks in check, particularly in the New York Harbor.

Our next step is to improve the refinery's profitability through lower-cost domestic crude supply from the Bakken field, increased jet fuel output, and operational initiatives to improve throughput and product mix.

For our shareholders, the business has produced more than $7 billion of free cash flow over the past four years and we will continue to be very responsible stewards of that cash flow stream.

We are now executing the balanced capital deployment plan we laid out for our shareowners in May 2014, which creates more than $5 billion in shareholder value through additional debt reduction, returning cash to shareholders, and addressing our pension liabilities.

In fact, we are performing ahead of the May 2014 long-term capital deployment plan.

We have produced a 14% return on invested capital over the last 12 months and we are incredibly focused on maintaining that performance.

That means we will continue to maximize free cash flow; paydown debt because the EPS accretion opportunity is significant for our owners.

We will return excess cash to shareholders and be very disciplined about capital investments.

To close, we are continuing to work hard to build a better airline for our customers, employees, and investors.

There are significant opportunities ahead of us and we will keep our heads down and execute on those opportunities.

We expect to set an all-time profit record for Delta in 2013 and in turn expect to improve on that performance in 2014.

Thanks for your attention and we look forward to seeing you at our annual investor day in New York on December 11.

With that I will turn it over to my colleague, Ed Bastian.

Thanks, Richard.

Good morning, everyone.

Earlier today we announce the September quarter profit of $1.2 billion, a $444 million improvement over the prior year.

Our EPS of $1.41 beat consensus by $0.05.

I will echo Richard and congratulate the entire Delta team for an outstanding quarter.

Summer weather posed considerable challenges across the system and our employees did a remarkable job in running a solid operation and taking great care of our customers.

It is an honor to be able to recognize those efforts with a record profit sharing accrual.

At a high level our revenue performance was remarkable as we increased our top line in a declining fuel price environment.

This combination has been key to the margin expansion we have seen this quarter and this year.

Passenger revenue increased 7%, or $581 million, on 2.6% growth in capacity.

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

Our corporate revenues increased 10% during the quarter, driven by strength in the domestic market.

Banking, financial services, and healthcare all grew at greater than 15%, proof that our efforts, especially in New York, are paying off.

Our passenger revenue performance has also been bolstered by a double-digit increase in sales of seat-related products and other services.

While this is still a relatively small portion of our total revenue base, we see good growth potential as our experience so far has shown that customers are willing to pay extra for products and services that improve their travel experience.

This is an area that Glen and the marketing team will update you on at our December investor day and is a key part of our future revenue growth strategy.

Cargo revenues were down almost $15 million and continue to be impacted by a weak global freight demand and yen devaluation.

Other revenue was flat for the quarter as growth in our third-party staffing business offset a decline in our MRO revenue, stemming from our decision to exit certain lower margin contracts.

Domestically we had a strong summer season with high load factors, which produced unit revenue growth of over 5% on slightly higher capacity.

Our domestic revenue strength was one of the key drivers of our earnings improvement this quarter.

We saw robust revenue generation among the business travel segment in our core markets, including noticeable gains in Atlanta.

In New York, we have now seen unit revenue growth outpacing the system average for several quarters.

In the transatlantic, despite sluggish European economies, solid corporate revenue share gains and effective collaboration with our JV partners, Air France/KLM and Alitalia, contributed to a 6% unit revenue improvement for the quarter.

Once again Heathrow unit revenues led the pack by a sizable margin with a nearly 20% unit revenue improvement.

We have significant potential with our alliance partners.

Our Air France/KLM relationship is a model of how these alliances can be mutually beneficial.

By working together, we have doubled our profit within the JV over the past three years and quintupled it since the JV was implemented five years ago as we provide higher quality and more comprehensive service to our customers.

We will leverage this experience as we implement our joint venture with Virgin Atlantic.

We received the final approval of our antitrust immunity a few weeks ago and are on track to implement the JV starting January 1. The Virgin and Delta teams are working well together and our customers will benefit from this innovative partnership.

We have already announced a number of changes to improve service between New York and Heathrow, including retiming our schedule to better meet customer demand.

The team at Virgin is making great progress in turning around their financial performance and delivered a solid profit for the September quarter.

For Delta, included in our non-operating line is a $40 million benefit, representing our 49% portion of Virgin's September quarter profit.

Turning to the Latin entities, improving yields drove 2% unit revenue growth against a 14% increase in capacity.

We are building on our partnerships with Aeromexico and GOL.

During the quarter the Aeromexico relationship helped drive unit revenue improvement in Mexico despite a 15% increase in capacity.

And in Brazil additional traffic from the GOL partnership delivered nearly $20 million in incremental revenue during the quarter.

There is great upside potential with these partners and we are continuing to strengthen these commercial and operational relationships.

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

And we tactically adjusted our beach capacity throughout the summer to offset this weakness.

The yen devaluation and the associated weaker demand negatively impacted the quarter's profit by $80 million.

Fortunately, our foreign exchange exposure was fully hedged and the $80 million impact represents the impact on Japanese point-of-sale demand.

The yen impact peaked in September quarter since August and September are the heaviest demand months for Japanese point of sale, especially in the resort markets.

But even with the yen's impact, it's important to note that the Tokyo Narita operation was our highest margin hub for the September quarter.

We expect our Pacific restructuring will improve our Pacific performance next year.

Moving into the December quarter, we are forecasting an operating margin of 7% to 9%, which would represent roughly 200 to 300 basis points of margin expansion over the December quarter of a year ago.

As Richard mentioned, our domestic re-fleeting is a key source of margin improvement over the next few years and we are just beginning to see the benefits.

We expect to put 27 new aircraft into service during the quarter and retire 41 aircraft.

As a result, our December quarter capacity from this upgauge should increase 1% to 3% on 14 fewer aircraft.

Rest assured that our commitment to maintaining strong capacity discipline remains in place.

In terms of unit revenues, our fall bookings look strong.

For October we are expecting a 2 point increase in RASM; however, I need to provide some context.

Our comps in October are substantially more difficult than they were in September and the Sandy impact last October alone created 1 point of higher RASM that we are now lapping.

In addition, we did see approximately a $25 million impact this month from the government shutdown.

So after giving effect for these two factors, the Sandy impact and the impact of the government shutdown, we estimate our core RASM for October to be up approximately 4%.

November will be a tough month to forecast.

The late Thanksgiving calendar shift this year means that peak Sunday/Monday return travel dates are in December, which will shift 2 to 3 points of RASM between those months.

In addition, we had a $30 million negative hit for Sandy last November which impacted a considerable volume of walk-up traffic in the Northeast.

And when you also factor in the national election held last year, we have a lot of unusual factors to account for.

That said, what we have on the books for November and December indicates a strong holiday period and a solid close for the year.

With that I will now turn the call over to Paul to cover cost and cash flow.

Thank you, Ed, and good morning, everyone.

We came into this year with a clear goal of stemming the rate of growth in our costs and expanding our margins, and our results today show the entire Delta team has executed well on that goal.

Total operating expenses increased 2% on a 2.6% increase in capacity during the quarter.

More than a third of that increase was driven by $75 million of higher profit sharing accrual.

With three quarters of financial results that were better than our plans set out at last year's investor day and a solid profit expected for the fourth quarter, we have adjusted our full-year effective profit sharing rate to reflect that a portion of this year's results will accrue at the higher 20% range.

Our nonfuel unit costs for the quarter increased 1.1% year over year as we have begun to lap cost pressures from wage increases and targeted investments in our operation.

We expect our nonfuel CASM to increase about 2% in the December quarter in keeping with our long-term goal.

It will take hard work and innovation to maintain this level of cost performance going forward, but we have the right plan and commitment in place to do so.

On the fuel front, our fuel expense declined $81 million on lower market fuel prices and better hedge performance.

The all-in fuel price per gallon was $2.97, which included a $0.06 per gallon hedge gain.

The refinery produced a $3 million profit for the quarter despite lower overall crack spreads toward the end of the quarter.

These lower crack spreads also resulted in lower market jet fuel costs for Delta.

With every penny of jet fuel change equating to $40 million in annual expense, the decline in jet fuel relative to where it has traded historically has produced savings that more than offset the year-to-date loss at Trainer.

Our fuel cost benefited also from $67 million of hedge gains this quarter.

As our hedge performance shows, we have effectively positioned our hedge book to provide protection against significant increases in crude while maintaining meaningful downside participation.

For the December quarter we were hedged approximately 30% up to $120 per barrel, and those positions are currently worth approximately $70 million.

So as of the October 18 forward curve, we are forecasting a December quarter fuel price of $3.03 to $3.08 per gallon including the refinery and the hedge impact.

Moving on to cash flow, we generated $1.2 billion of operating cash flow and $627 million of free cash flow during the quarter.

We have used our strong cash flow generation over the last three years to delever the balance sheet and ended the quarter with $9.9 billion of adjusted net debt.

Debt reduction has lowered our interest expense by more than $30 million this quarter over last year alone.

With our initial $10 billion target now achieved, we have already begun marching down the path toward our new $7 billion target, which will further reduce our interest expense in the future and expand our pretax margins.

As Richard mentioned, we have also shifted to the balanced capital deployment plan we articulated to you earlier this year, which includes returning capital to shareholders through dividends and share repurchases.

In the September quarter we distributed $51 million through our $0.06 per share dividend payment.

We also began our share repurchases, buying back 4.8 million shares at an average price of $20.82 for a total of $100 million during the quarter.

Combined, these programs returned $151 million to our shareholders.

Capital expenditures for the quarter totaled $635 million, of that $450 million went towards fleet investments and $61 million to purchase 12 aircraft off-lease for debt reduction purposes.

For the December quarter we expect CapEx to be $800 million, primarily for the aircraft that are a part of our domestic re-fleeting initiative.

As our financial and operational results show, we have built solid momentum across the business.

As we move forward, we will not waver on our commitment to improve our margins, maintain our cost and capital discipline, and generate free cash flow while taking great care of our customers and our employees.

In closing, once again, thanks to the 80,000 Delta folks making this happen every single day.

Jill?

Thank you, Richard, Ed and Paul.

Before we go to the Q&A session I did want to remind everybody about our annual investor day which will be held on December 11.

If you could mark your calendars now, we will be sending out more information in the next few weeks with all the details.

So with that, Kelly Ann, if you could give everybody the instructions for asking a question.

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Just two here.

Ed, I want to go back to the comments you were talking about the Pacific and how the Narita hub was very profitable.

Then you sort of quickly alluded to a Pacific restructuring that is expected to take place next year.

What does that entail?

Are you pulling out of some of interport flying?

Are you assuming some pickup of some Haneda slots to do some additional service?

Can you just maybe shed a little bit more light on that?

Sure, Mike, I will give you a little bit of color and then Glen -- Glen is here; he can provide more background as well.

As you probably are aware, we are continuing to diversify our network, not just through the Pacific but internationally.

And the growth of our direct flying to Asia using Seattle as our principle hub that we are creating off of the West Coast is affording us the opportunity to get some additional frequencies and opportunities in China.

So part of the strategy is to reduce the concentration in Japan with some additional flying, both to Korea as well as to China.

Then, secondly, as you look at Japan and the interports, you are right, there are a handful of interports that we have been pulling down over time and we are going to continue to as we fly directly into Haneda.

And then we have those additional Chinese frequencies.

Okay, great.

Then just my second question.

As we look out to 2014, what are some of the potential capacity hotspots that you see?

Like, for example, we are starting to see carriers, both US and Asia, ramp up.

Is that a potential concern?

Are there any other regions that you are sort of watching closely as things play out over the next six months or so?

From what we can tell the capacity seems to be relatively in line with demand.

I would say the area that we are watching closely here is clearly in the US.

We have been adding a bit of capacity in the US, but that is coming through the form of an upgauge strategy, which is clearly margin accretive and very cost effective.

And, in fact, reducing the amount of flying we are doing in terms of volume but increasing the size of the aircraft.

Internationally, Europe has probably some capacity this winter that is at a little higher level than we might like to see relative to the economies there, but as far as Delta sits, we are quite comfortable where we are positioned.

Okay, very good.

Thank you.

David Fintzen, Barclays.

Good morning, everyone.

Just a quick follow-up on some of that Pacific commentary, maybe for Ed and for Glen.

As you are shifting around new routes and opening China and Korea, etc., how long should we think about the spool curve for these new routes?

Is this like a two-, three-year process?

And I guess the flip of that would be what is the spool for some of the domestic feeds that obviously you have to put into places like Seattle and you are developing LA to feed into that.

Ultimately, what I'm trying to get at is, as we think about 1% growth, is this a more developmental 1% system growth kind of going forward?

Or maybe there is a little more RASM dilution in that growth than we have seen in the past?

David, it is Glen.

I think you have to look at it as we are calling the system for the underperforming assets and then we are trying to deploy them into higher potential.

And usually that is actually RASM accretive to us, so if we are doing our job right we are making that RASM accretive for the airplane from day one.

Additionally, in Seattle, markets like Shanghai have been out-of-the-box profitable for us, so we are very pleased with the results of our Seattle expansion.

Remember these are really not necessarily all new customers to us because we have been in those markets for many, many years.

We are just changing the routings of how we get them there and making it better for the customer and more efficient for the airline.

Okay, that is very helpful.

Thanks.

Just maybe a quick follow-up; just on the CASM side that 2%, the re-fleeting, how much of a CASM benefit from the initial re-fleeting is there in the fourth quarter and maybe how much of a RASM penalty?

On the CASM side, David, we actually are just getting started with that, so many of those aircraft that delivered at the back end of the quarter are just going into service.

So it is somewhat limited in the fourth quarter of 2013 and will continue to appreciate over 2014.

I think if you're looking at the sequential cost performance there were some higher spend in third quarter of 2012 that gave us a little bit of an advantage, but overall we remain balanced at less than 2%.

Okay, great.

I appreciate it.

Thanks, everyone.

Jamie Baker, JPMorgan.

Good morning, everybody.

First question for Paul.

On the fourth quarter cost guidance, it does appear to be sort of at the upper end of your target for the year despite a little bit more fourth-quarter capacity than I expected and what looks like a pretty easy cost comp on Hurricane Sandy.

I realize there is a fair amount of demand uncertainty, particularly in November, but I can't help but wonder, I mean, are there some real cost drivers in this 2% CASM guide?

Or is this just where you are kind of building in some cushion for the quarter?

No, I think we believe that we are going to come in around that 2% level and we will get inside of it.

But as we look at where we were in 2012, actually third quarter was the easier comp than fourth quarter is.

But as we go through it, again, we are committed to keeping inside of that 2% and we think we will achieve it.

Jamie, this is Ed.

One of the things that we've got going on, as we mentioned, we have a lot of new aircraft delivering this quarter so there is a little bit of uncertainty on the timing and the induction.

So, rest assured, we are going to strive to come in below the 2%, but for modeling purposes we think 2% is probably a good estimate right now.

Okay, helpful.

Second question for Richard, and this isn't intended to take away from the success that you are having here in New York and the share that you have picked up from corporate employers such as my own.

But the fact of the matter is your largest New York-based competitor, which is a polite way of saying United, is having a rough go of things.

You came out swinging in your opening comments, but I'm curious if you are baking in any competitive headwinds next year or just extrapolating from the current trajectory.

In other words, how big of a threat to your considerable bullishness is a potential Renaissance at United or even a merged LCC/American, who knows?

Well, Jamie, I wasn't intending to make any commentary on any of the competitive dynamics in the market but just focus on what we need to do at Delta.

If you look at the New York market it is a huge market, and what we have been able to do in LaGuardia has been pretty remarkable in terms of turning that to a fully allocated, profitable business.

As we ramp up the Virgin arrangement, our antitrust immunity with Virgin, we will now have the number two position across the transatlantic to the most important airport in the world for travelers out of the US, which is London Heathrow.

So when you look at -- and I am just speaking for Delta.

I am really making no reference to any other carrier, because at Delta we are really just kind of focused on what Delta does.

If you look at the momentum we have in LaGuardia, it is going quite well and JFK has tremendous upside, because we have seen enormous improvement in our transatlantic operation to London Heathrow with Virgin and we haven't really started the joint venture yet.

So the joint venture doesn't even start until January 1.

And so when you take the combination of those events for Delta specific, it is a really strong base to be able to continue to grow.

When you take the quality of our product, the new facility, and JFK, it gives us a very strong base to be able to grow our unit revenues in New York.

All right, well, that is helpful.

I would agree that LaGuardia and the Heathrow momentum are likely unrelated to any RASM benefit that you might be gaining at the expense of the competition, so appreciate the input.

Thank you very much.

Duane Pfenningwerth, Evercore.

Good morning, thanks.

Just a cash flow question.

Your earnings were up $440 million, yet your cash flow was up $650 million year to year.

Are you seeing any change in seasonality around advanced ticket sales?

Can you help explain that difference?

I think if you are looking at just quarterly cash flow there was an event in third quarter last year -- third quarter this year, where we have actually unwound some fuel securitization deals that generated a little bit of extra performance.

I think on our forward cash we see continued strong receipts are giving us some comfort around that.

Okay.

Can you give us any thoughts at this point on 2014 CapEx and your hedge position at this point for next year?

We are going to look forward to seeing everybody on December 11 in New York at our annual investor day.

Okay, great.

I will sneak in a little detailed one then.

Just the fleet was 900 versus 725; can you explain -- maybe that had something to do with consolidation of a regional.

Can you give some detail there?

It's Endeavor.

Endeavor.

It's Endeavor.

It is -- we picked up Endeavor as a wholly-owned subsidiary.

Was formerly Pinnacle.

Formerly Pinnacle.

Thank you.

John Godyn, Morgan Stanley.

Thanks for taking my questions.

I wanted to first ask about the repurchase.

It looks like you executed a good amount the last quarter.

It didn't really hit the share count.

I think you had kind of a lump of shares that crept in there, but first of all, if you could just kind of talk about this $100 million.

Is that a reasonable quarterly run rate to assume, or should we view that as very opportunistic?

And, secondarily, if you could just explain sort of what neutralized the benefit on share count that would be helpful.

Sure, John, the share count was primarily a happy problem.

When the stock price was up 20% quarter over quarter, the dilutive impact on treasury stock method for accounting for options and restricted stock actually increases your higher diluted count.

The repurchases during the quarter were somewhat backloaded during the quarter, so that the average calculation didn't give them as much of an impact.

And then on your other question, I am not sure I would be in good stead if I gave forward-looking guidance on repurchase.

Let me just give a little bit of qualitative.

In my remarks I said that we were running ahead of the long-term plan that we provided to investors in May of 2013.

Got it, that is very helpful.

If I could just ask a question more broadly on corporate travel, not necessarily focused on the New York market, is there anything you can tell us sort of about how you are tracking it internally in terms of how much of the corporate travel revenue growth has been market share driven versus the market overall and how much market share opportunity you think you continue to have?

Well, I think, John, is that I think it is clearly both.

We have seen continued uptick in the overall volume of corporate travel across the industry.

I note that GPTA just put out a survey last week that said that looking into 2014 they are estimating travel expenditures to be up 7%, so clearly there is a continuing rising tide for corporate travel.

But given our double-digit performance that we have been running consistently year on year on year, clearly there is a considerable amount of share shift that we have also been picking up.

So it would be hard for me to split the two, but I would say they are both significant contributors.

And the opportunity going forward?

We think there is great opportunity going forward, and I think Richard covered a lot of that in his opening remarks when you think about the product that will now be consistent across our entire international fleet, with wide-bodies starting in the spring of next year.

When you think about the progress we are making in New York, the new facilities at JFK and LaGuardia, and you think about the inroads we're making, particularly in the banking and financial sectors; markets we didn't have much share of at all and we are going to be a strong contender.

And then you add Virgin on top of that, we have got a lot of confidence that we are going to continue to grow that share.

Very helpful.

Thanks a lot.

Glenn Engel, Bank of America.

A couple of smaller questions.

One on the yen side, you mentioned the impact this year is really on the lost traffic as those -- if the yen stays where it is and as those hedges roll off, do we have a yen impact on yield next year?

You are asking about a 24 -- could you rephrase your question, Glenn; I didn't quite follow?

This year the yen should have diluted your yield, but you hedged it.

As those hedges roll off and the yen stays at this level, do we see a further impact from the yen next year but this time showing up in the yield?

Sure, sure.

We have a considerable hedge book out for another 18 to 24 months.

We are building our Pacific restructuring around the assumption that the yen will be at at least 100 going forward.

Glenn, we are 50% hedged in the 80s through 2015.

Oh boy.

On the Endeavor side you mentioned, even though it is wholly-owned did that show up entirely under the contract carriers on your operating income statement line?

No, it is on the unusual line items in the P&L, Glenn.

I am sorry, the Endeavor, is that -- the expenses tied to Endeavor, does that show up in contract or does that show up throughout the operating expense lines?

It is in the operating expense lines, Glenn.

Oh, all the pieces, so it is all spread out.

Okay.

Yes.

[Subsequent to the live webcast of this call, Delta would like to correct the response to this question and clarify that Endeavor expenses are reflected on the Regional Carrier Expense line item of the Statement of Operations.] (corrected by company after the call)

And on LaGuardia, could you talk about connections, what level of connectivity you are up to right now?

We're sitting right around 20% connectivity in LaGuardia, which is the targeted range that we thought we would be in.

We are going to continue to refine our schedule now that we know actual demand, and we feel like we have a lot of momentum going into 2014 with the LaGuardia operations.

Would you like a number to be higher or is 20% really where you want to stay?

I think our original target was 20% to 25% so we might be a little bit on the lower range, but we have made a lot of adjustments to really tailor capacity for demand.

I think we are very satisfied with the P&L and where we sit today, and we think there is a lot of upside as we move forward.

Thank you very much.

Helane Becker, Cowen.

Thank you very much, Kelly Ann.

Thanks for the time.

Richard, I was wondering if I could ask a follow-up question to my last question on the last conference call when we talked about CBP and JFK.

I know you guys added a bunch of self-service kiosks.

Can you just talk about the performance there and how that is going for you?

Actually, the self-service kiosks have been fairly remarkable in terms of reducing line waits for people coming into the US.

It is probably one of the biggest innovations that we have seen come along from CBP and we are hopeful that we are able to roll it out.

Actually, what we should do as an industry is roll it out across all the big airports in the US to just facilitate travel into the US.

Steve Gorman, you may have some specifics to provide Helane on what line waits have turned -- how they have turned?

Helane, just to give you a feel, granted it is not necessarily the peak season, but since we have put them in we have seen as much as 90% reduction in line waits.

So line waits in the 45, 50 minute range down to mid-single digits, 5, 7 minutes for line waits.

So a remarkable improvement.

I have to thank Senator Schumer for his work in helping us in New York.

Okay, great.

Thank you very much.

Then can I just ask a completely unrelated question?

As you build out Seattle should we think about that as an international connecting hub versus Salt Lake as a domestic hub, or will you be transitioning some capacity away from Salt Lake into Seattle?

How should we think about those two hub locations?

Thank you very much.

Helane, it is Glen.

Seattle is an amazing city and we are going to continue to expand internationally there, but without taking anything away from Salt Lake.

Salt Lake is a great domestic hub with a couple of international flights into it.

We expect to maintain that status and maybe even grow it over time, and that city is continuing to grow rapidly.

But Seattle is our Asian gateway and will serve the top three cities in Europe next year.

We are very excited about the opportunities that present themselves in Seattle as an international gateway.

Great.

Thanks very much, everybody.

Dan McKenzie, Buckingham Research.

Ed, following up on your commentary to grow to South Korea, it is an open skies country so just a quick question here.

Are you leveraging that opportunity with a JV at this point, or is that an opportunity possibly on the horizon?

I'm sorry, Dan, I couldn't hear your opening remarks.

Are you asking about Korea?

Yes, I was just following up on your commentary to growth to South Korea.

I was just pointing out that it is an open skies country, so my question is are you leveraging that opportunity with a JV at this point or is that an opportunity that might possibly be on the horizon?

We don't have a JV with Korean at this time and I can't project where that is going to go.

I guess just a follow-up question I guess, Richard, for you just on open skies in general.

What is your thoughts about what might be holding back open skies with China?

I think the Chinese carriers are continuing to develop and the Chinese government, to their credit, views -- unlike the United States, the Chinese government views aviation as a strategic asset for its country and so they are making the kinds of investments in growing and developing three strong flag carriers.

And if you were in their situation, you would take similar steps.

Is that something you could see changing on the horizon?

Long term for Delta, ultimately, it could possibly change.

I don't know when that will.

But when you think about how Delta is positioning itself with China Southern and China Eastern -- we have exclusive relationships with two of the three important flag carriers there and we are now actually connecting 30 to 40 passengers a day on to our partners in Shanghai and Beijing.

But if you have a good vision of where you should be a decade from now, you could imagine replicating the kind of joint venture relationships that we perfected in Europe.

To be able to move those to China it is going to take a long time, but that is the kind of work we need to be thinking about now so that we can sustain the free cash flows and the growth of the enterprise over the very long term.

Very good.

Thank you.

Savi Syth, Raymond James.

Good morning.

Just on the MRO side, I know the revenue there has been declining as you get rid of some of the lower profit business.

There is the news about more MRO business coming to the US just because the labor arbitrage has been moving away; do you see that business as growing some time?

I know back in maybe 2011, 2010 you thought that was a business that you could grow and I was wondering what the prospects were for that business.

Savi, this is Richard Anderson and I will have Steve chime in with more specifics.

We like the MRO business quite a lot.

The change that we have made in that business is to transition it more to component and engine work over time.

And given the need around the world for the ability to perform complex maintenance tasks, we are particularly well positioned at Delta.

What we have been able to do, over the last 18 months we brought in a new head of that business, Peter Turner, who ran the MRO business for Rolls-Royce for many years.

And we have built a very strong team and we have significantly expanded our margins in the MRO business.

We expect now that we are going to be moving more into a growth mode in that business.

We have a joint venture agreement with Boeing on the 767 tanker that we expect will be a significant growth opportunity for Delta.

As we look out at fleet maturity around the world, we believe we will be well positioned to be able to leverage our expertise, particularly in engine and component overhaul.

And is that still maybe a $0.5 billion-sized revenue business?

Little more than $0.5 billion.

Got it.

Great, thank you.

With double-digit, fully allocated margins.

Okay.

All right, great.

Thanks, guys.

Thomas Kim, Goldman Sachs.

Good morning.

Thanks for the time here.

Great to see the contributions out of Virgin Atlantic from the get-go.

I was wondering if you could give us a preview of the increased types of collaboration you anticipate once the JV is formed next year.

Sure, Tom, this is Ed.

We have a big opportunity, principally in the corporate arena, where we can bring our selling efforts together on both sides of the ocean.

So since we already have antitrust immunity, our collective sales teams are working on it today to go out to the market with a single sales plan.

So you will see that will be a big driver of our look-forward opportunity and New York will be a big beneficiary in that regard.

We will be looking at future network opportunities to grow with either the Virgin metal or the Delta metal, and I think operationally Virgin is going to benefit from Delta's operational prowess.

When you think about the size of the company, they have got a great brand and a great name but they are relatively subscale.

We bring a lot of purchasing might to them as well and operational know-how.

So I think it is a great opportunity and our teams are working very effectively.

I am very excited about it.

For modeling purposes, should we anticipate the benefit accruing more through the JV or actually directly through the transatlantic contributions?

I think it will -- well, it is both.

So the JV and the transatlantic it is all going to be through the JV, so that is where the big benefits will be.

It will be in the top line.

Okay.

Then if I can ask one last follow-up on that.

Given that Virgin is privately held, what type of transparency should we expect to see going forward as this contribution could continue to grow and become much more meaningful?

Thank you.

We will continue to give you disclosure of the 49% ownership stake that we have on a real-time basis, and we will keep you posted as to the JV's progress once we get engaged next year.

Okay, thanks a lot.

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

Hunter Keay, Wolfe Research.

Thanks, question for you.

I can tell you that you are excited about this transatlantic JV obviously with Alitalia, but they are having some problems right now and I am curious.

You guys are -- your JV is unique in the sense that you actually share costs and not just revenue.

So can you give us a refresher as to how the costs from Alitalia's operations flow through?

And maybe more importantly, if you guys are facing some sort of liquidation scenario, which is possible, are you guys going to be prepared to step up and potentially offer a capital injection if you have to keep them afloat?

Hunter, this is Richard.

Alitalia is an infinitesimal, a very small part of the transatlantic JV.

It is a $12 billion enterprise.

Air France/KLM have the lead on that and we are not injecting any capital into it.

Okay.

In terms of these corporate share gains, can you give us an idea how much of your structured corporate contract come from foreign companies?

And is this an area that you are targeting for growth in the future and do you have an ideal percentage as to what you would like to get that to be?

We don't disclose or break down the specifics by foreign origin point of sale on our corporate sales.

Is it fair to think it is like a small portion right now?

Like less than 10%?

I mean is this just something that is rounding?

It is just a lot more complex than that because we have joint venture agreements with Air France/KLM, Aeromexico, GOL.

And these joint venture agreements have both foreign point of sale and US point of sale, so really the right way to look at these businesses is in the totality.

Okay, thanks.

That is going to conclude the analyst portion of the call.

I am going to turn it over to Betsy Talton for the media portion.

Thanks, Jill.

Kelly Ann, if you could, please go over again the process for queuing up to ask a question for the media.

And for media on the line, we ask you to please limit yourself to one question with a quick follow-up and hopefully we can accommodate everyone.

(Operator Instructions) Mary Schlangenstein, Bloomberg News.

Good morning.

I may have missed this during the course of your presentation, but did you quantify the impact of the government shutdown?

Yes, we did.

In the month of October we estimated that it had a negative impact of $20 million to $25 million on our revenues.

Okay, thank you.

Are there any concerns with the uncertainty of pushing out the dates on the debt ceiling and the rest of that?

That that will continue to have an ongoing impact due to the uncertainty or --?

It kind of sounds like from your outlook and your expectations that you don't see that impacting things further in the fourth quarter?

We don't expect that it will have any further impact in the fourth quarter.

Okay.

Out into the start of 2014 too far out to tell?

Well, we haven't issued any guidance to the like for 2014, but just overall, it is not good for the US economy to lurch from one sequester government shutdown to another every 90 to 120 days.

It is not good for any company or organization in the US.

Karen Jacobs, Reuters.

Do you anticipate expanding flights beyond what you have already announced for the Virgin venture?

We don't speculate ahead of time on any decisions to enter markets in the future.

Thanks very much again, everyone.

Richard, Ed, Paul, Glen, and team, thank you.

That concludes our September quarter call.

We will see many of you at investor day in New York on December 11 and be back on the phone for the December quarter and year-end results in January.

Again that will conclude today's Delta Air Lines conference.

We thank you all for joining us.