達美航空 (DAL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Delta Air Lines March Quarter financial results conference call.

My name is Sherlan, and I will be your coordinator.

(Operator Instructions)

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

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

Thanks, Sherlan.

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

Speaking on the call today will be Richard Anderson, Delta's CEO; Ed Bastian, our President; and Paul Jacobson, our Chief Financial Officer.

Richard will open the call, and Ed will then address our financial and revenue performance, and Paul will conclude with a review of cost performance and cash flow.

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

To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up.

Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events.

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

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

We'll discuss non-GAAP financial measures, all results excluded special items unless otherwise noted.

You can find the reconciliation of our non-GAAP measure on the Investor Relations page at IR.delta.com.

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

Good morning.

I want to take a minute to introduce our new Chief Operating Officer, Gil West.

Gil is a 28-year industry veteran, including his most recent position as Delta's Senior Vice President for Airport Customer Service and Technical Operations.

He's a great leader, and he's led the tremendous performance at Delta in completion factor baggage, on-time customer service, and our non-fuel CASM performance.

He's a good friend, and we congratulate him on his promotion.

We also owe a huge thanks to a really dear old friend, Steve Gorman, for his outstanding career as the Chief Operating Officer at Delta.

We miss his friendship, leadership, and of course his always unique point of view.

We wish him the best in his well-earned retirement.

This morning, we reported a $444 million pretax profit for the March quarter, which is an increase of $363 million over last year.

We earned $0.33 per share beating consensus by $0.04.

We grew our top line 5%, grew unit revenues 3.2%, kept our non-fuel CASM that 0.3%, and expanded our operating margin by 4.4 points to 7.9%.

We generated $390 million of free cash flow, reduced our net debt to $9.1 billion, and returned $176 million to our owners through dividends and share repurchases.

Our March quarter performance is remarkable, because the severe weather in January and February reduced our pretax by $55 million.

But for the weather, we would've had a $500 million pretax profit in the seasonally most difficult quarter of the year, and that says a lot about the franchise we have here at Delta.

I want to take a moment to recognize the extraordinary efforts of all the people that work at Delta.

We canceled about 17,000 flights in the first two months of the year due to weather.

Through it all, our people stayed focused on taking great care of our customers, which helped produce the highest customer satisfaction scores of any network carrier, and a record March quarter profit.

Our operating performance and customer service across the board has fully rebounded to the top of the industry.

And as a result, we've accrued $99 million for our 2014 profit-sharing program.

I think these numbers reflect a resilient foundation that's really based upon the creativity and execution of the people at Delta.

Despite the weather in the quarter, we met or exceeded our guidance for mid-January on margin, revenue and costs.

That's because we're determined to be a consistently high performing S&P 500 company that deserves the trust of long-term investors.

We are focused on the significant opportunities ahead, as we continue to transform Delta.

And let me reiterate our long-term goals.

10% to 12% annual operating margin, 10% to 15% EPS growth, 15% ROIC, return on invested capital.

$5 billion operating cash flow, with 50% reinvested in Delta.

And we're going to operate the Company under investment-grade balance sheet metrics, with a target of $7 billion in net debt.

In 2014, we will meet these goals again, as we are forecasting another year of significant earnings improvement, margin expansion and cash generation.

The demand environment remains strong, as we expect single-digit unit revenue increases in Q2 on 2% to 3% capacity increases.

Fuel prices are relatively stable, and we have a significant positive fuel hedge book for the year.

We are building additional momentum through our revenue fee ancillary businesses and aviation related businesses, which all are performing quite well.

We are confident of our ability over the long-term to maintain a non-fuel cost structure with sub 2% YOY growth, and significant non-op benefits from debt reduction.

The strategies are expected to produce a June quarter operating margin of 14% to 16%.

This Company is run for long-term shareholder value.

We measure our return on invested capital with a goal of generating at least a 15% return on invested capital, which is nearly double our weighted average cost to capital.

This requires not only a focus on earnings, but also strict discipline around capital deployment.

Our Board of Directors under our Chairman Dan Carr is exacting and requiring management to prove returns for every dollar we invest.

Management micro manages capital expenditures, as we require an internal rate of return well above our return on invested capital, with rapid paybacks.

Long-term, executive compensation and management compensation throughout the Company is tied to achieving the 15% return on invested capital.

Our owners have entrusted us with their money, and we promise to be good stewards.

Our fleet strategy is a good example of prudent capital deployment.

In addition to 19 new 737-900s this year, which were cash flow positive day one, we'll take delivery of 42 717s this year.

These aircraft have at least 12 to 20 years of useful life, and a cost substantially less than $10 million a copy without a dollar of upfront investment by Delta to bring them into the fleet.

This approach to re-fleeting will drive margin expansion at a lower capital cost.

The strategy has produced a 16.4% return on invested capital for Delta over the last 12 months.

We will consistently improve our free cash flow.

The cash generation of this business is in the top tier of the S&P 500.

We expect to produce more than $5 billion of operating cash flow in 2014, with more than $3 billion of free cash flow.

This puts our free cash flow yield north of 10%.

Our cash generation over the last year has allowed us to accelerate all aspects of our capital deployment plan.

Our adjusted net debt is $9.1 billion, and we are on track to reach $7 billion in net debt next year, two years ahead of schedule.

We've made $500 million of incremental contributions to our pension, and have reduced the unfunded liability by nearly 25% to just over $10 billion.

And we've returned $525 million in cash to our owners through dividends and buybacks in the last nine months, and expect to complete our $500 million repurchase authorization two years ahead of schedule.

A year ago, in April 2013, our Board adopted a five-year plan, which included our shareholder return strategy.

We expect, by the end of 2014, to have achieved the goals in that plan three years early.

Our Board and management are in the process of determining the next phase of our shareholder returns, and we look forward to publicly announcing that strategy and discussing our new five-year plan in early May, just as we did last year.

So across the board, our performance is the Delta standard for the industry, while rivaling that of other high quality industrial transports.

We run our business on the same metrics as high-quality S&P 500 industrial transports, with the same kind of disciplined determined decision-making you see from fine, well-run companies.

We have a lot of work ahead of us, but also significant opportunity.

I want to just take one minute, because we haven't done this before.

And I want to thank Jill Greer and Benita Reynolds Bailey for putting up with us in the process every quarter of producing our press release and our earnings material.

And I want to thank them.

I think we have the best IR team in the industry.

With that, I'm going to turn it over to Ed.

Well thanks, Richard.

Good morning, everyone.

Appreciate you joining us today.

This morning, as Richard said, we reported a pretax profit for the quarter of $444 million, which was $363 million higher than last year's March quarter.

Our op margin expanded by 440 basis points to 7.9%.

And given the introduction this quarter of non-cash book tax expense, we believe pretax results provide the best year-over-year comparison of our performance.

Our net profits at $281 million or $0.33 per share beat consensus by $0.04.

We achieved these results despite the impact of the severe storms in January and February, including two storms that shut down our major hub in Atlanta for several days, costing us $90 million in revenue and $55 million in pretax profits.

I'll join Richard in also thinking the Delta team for their dedication and determination in producing great operational performance, customer satisfaction and financial results during a very tough quarter.

The Delta people continue to prove they are the very best in the business.

On the revenue front, we are seeing a solid demand environment, which produced revenue growth of 5% or $416 million despite the $90 million revenue loss due to weather.

Our passenger revenues grew 5% on a 1.7% increase in capacity.

We're seeing solid gains in the corporate space, with corporate contract revenues up 6% for the quarter.

We did see some weather impact on corporates in January and February, but demand rebounded in March.

And our corporate revenues were up in the 8% range for the last four weeks, led by double-digit gains in the financial services, automotive and media sectors.

Passenger unit revenues increased 3.2%, driven by both higher loads and yields.

There was about 0.5 point RASM benefit in the quarter from the storm cancellations.

We saw our best unit revenue performance in the domestic system, which increased 6%.

We saw a particular strength in hub to hub flying, continued strong results in Atlanta.

And importantly, both Los Angeles and Seattle delivered high single-digit unit revenue improvement on double-digit capacity growth.

In fact, Seattle had the highest domestic unit revenue gain of any of our hubs for the quarter.

Internationally, trans-Atlantic was our best performing entity, despite the impact of the shift of Easter into April.

Unit revenues increased to 0.05 point, with about up 2 points of RASM pressure from the Easter shift.

The revenue improvement was driven by a combination of yield improvement and the higher loads on 1.5% lower capacity.

Latin unit revenues were flat, as we absorbed an 18% increase in capacity, primarily to Mexico and Brazil, to improve connectivity with our partners Aeromexico and GOL.

In the Pacific, our unit revenues were down 5% on flat capacity.

The yen weakened 11% year-over-year, moving from $0.92 in the first quarter of 2013, to its current level of around $1.02.

This weakness drove a $54 million decrease in revenues, while the bulk of that was offset by our hedges, as well as savings in expense.

You should note, our yen hedge book at the end of March had a value of $180 million.

One bright area in the Pacific portfolio has been China, with all of our China markets showing year-over-year unit revenue gains, despite a 15% capacity increase.

Looking forward to the June quarter, we expect to continue the trend of top line growth and margin expansion.

We are expecting a solid increase in unit revenues on 2% to 3% higher capacity.

The late calendar placement of Easter this year has shifted that holiday's traditional travel from March to April.

And we are seeing, currently, April unit revenues up in the 6% range.

Our forward expectations for May and June are strong, with both months showing unit revenues up in the 5% to 7% range.

This solid demand environment, coupled with the success we've had with our cost initiatives and the declining fuel price-point to an operating margin of 14% to 16% at the midpoint is 400 basis points of expansion over last year's 11% margin.

Looking beyond the June quarter, we see a number of sources of profitable revenue growth, which we've been aggressively investing in over the last six years.

First, our investments in the network, product and operations are producing solid, sustainable revenue gains, but there is more room for growth.

We have recently completed our full flat bed installation and business elite across our entire international widebody fleet, becoming the only US carrier to offer this service with direct-aisle access.

And we are also now the only US carrier to offer personal on-demand entertainment at every seat in all long haul international flights.

Our product and service investments are especially important to our corporate customers, and a large driver of our 107% revenue premium to the industry.

And not only are we continuing to see gains in corporate share, overall corporate travel spend is expected to increase.

Our most recent corporate travel surveys show that nearly 85% of corporate travel managers expect their spend will increase on Delta in 2014.

Our initiatives in New York are also delivering results, and we're on track to bring our entire New York franchise to profitability this year.

New York unit revenues increased 5% on 2.6% higher capacity in the March quarter.

This was a significant achievement, as the region was particularly impacted by the Easter shift.

We are seeing RASM improvements in the double digits for April in New York.

All of our New York to LA flights will feature our premium flat-bed product starting July 1st.

We're also getting good traction with New York corporate's with the expansion of our Heathrow service through our joint venture with Virgin Atlantic.

We officially launched our Immunized JV with Virgin on the January 1st.

We're now coordinating on pricing, scheduling and capacity with the introduction of the first combined schedule on March 30th.

We have also colocated our departures to New York, Boston and Seattle at terminal three at Heathrow, offering Delta customers access to more amenities, including the Virgin Clubhouse.

Customer response has been overwhelmingly positive.

Our non-operating expense this quarter includes a $31 million charge for our share of Virgin Atlantic's March quarter loss.

This is the seasonally weakest quarter of the year for Virgin, and we expect they will deliver standalone profitability in 2014, providing non-operating benefit to us for the full year.

Our Seattle expansion is a key part of our Pacific network restructuring.

We're pleased with our performance so far in Seattle, with unit revenues improving despite, in the quarter, despite a 17% increase in capacity, which helped drive several points of margin expansion.

Connected traffic now accounts for 65% of our current Seattle flows, a trend we see increasing as we mature our new service to Hong Kong, Seoul and London.

And finally, another important area of revenue opportunity is our merchandising efforts.

These are products and services that allow customers to tailor their travel experience, and improve their overall satisfaction, while also increasing our revenue.

Products like economy comfort, first class upsell and priority boarding grew 20% year-over-year to $165 million in the March quarter.

Our first-class upsell product helped increase our paid first-class load factor by 5 points to 45%.

We think we can grow this high margin revenue stream by $500 million annually over the next three years.

I'll wrap up here by simply stating that while we're pleased with the type of results we're producing, we're even more excited about the opportunities that lie in front of us.

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

Thank you, Ed, and good morning, everybody.

Our cost performance this quarter truly reflects the great work by the entire Delta team.

Our total operating expenses increased $13 million, driven by the impact of employee investments, including $99 million of profit sharing expense during the quarter.

These cost increases were almost fully offset by lower fuel expense, savings from our productivity initiatives, and receipt of a $25 million insurance plan related to Superstorm Sandy.

On the unit cost basis, our non-fuel unit costs increased only 0.3%, despite 1 point of cost pressure from storm cancellations.

When we affirmed our cost guidance in March, we said we expected unit costs to increase more than 1%.

The drivers of our out performance versus that estimate were the finalization of the Sandy insurance plan during the quarter, and higher than expected completion factor in the month of March, which drove slightly more capacity for the quarter.

This is now the third consecutive quarter that we have kept our non-fuel unit cost growth below 2%, in line with our longer-term cost commitment.

With good momentum behind us, we have a number of initiatives in place that should continue to allow us to sustain this rate of growth, while also making prudent investments in our employees, products and operations.

The biggest initiative underway is our domestic refleeting.

We took delivery of 24 aircraft this quarter, and retired 15 mainline planes, and 16 50-seat regional jets.

We are on track to retire more than 70 50-seaters this year, which would put that fleet below 200 aircraft at the end of the year.

The refleeting gives us a strong tailwind on unit costs, as we leverage our scale to produce capacity much more efficiently.

For the March quarter, we generated 0.4 point higher domestic capacity on 5.2% fewer departures, in addition to the maintenance savings from retiring the 50-seaters.

This trend will continue for the next few years, as we move through the refleeting project.

On the fuel side, our fuel cost of $3.03 per gallon this quarter, included $107 million in hedge gains, which helped to offset direct losses that the refinery.

For the March quarter, operations at the refinery produced a $41 million loss.

Production was reduced during the quarter, as we shut down one of our crude units for scheduled modifications.

These modifications to the crude unit are part of our initiative to increase the production of higher value distillates like jet and diesel, which we expect to account for roughly 50% of the production slate at Trainer going forward.

Our other major initiative at Trainer is domestic crude sourcing, which accounted for 50,000 barrels per day of Trainer's needs during the quarter.

We expect this to continue ramp up to a full-year average of 70,000 barrels per day for 2014.

So the first quarter tends to be weak for the refining space, rising RINs expense contributed to the refinery's loss.

We are continuing our efforts to work with the EPA to address this issue.

We expect both refinery and our hedge book to reduce our fuel cost for the upcoming quarter.

We are projecting a fuel price for the June quarter of $2.97 to $3.02 per gallon, including refinery benefits and $100 million of hedge [debts].

Our non-operating expense for the quarter included the $23 million charge associated with the devaluation of the Venezuelan Bolivar for transactions related to 2014.

With the reversal of our tax valuation allowance at the end of last year, our net profit was reduced to reflect a 36% tax rate for the quarter.

However, we have minimal cash tax obligations due to our $15 billion NOL balance.

As Richard mentioned earlier, we are transforming Delta into a high-quality industrial Company.

And two of the important ways we will do that are through our balance sheet and our cash flows.

On the cash flow side, we have strong cash generation from the business, as Richard mentioned.

We generated more than $950 million of operating cash flow during the quarter.

A solid result, but even more so given that it is net of more than $600 million in pension funding, and $500 million in profit sharing payouts during the quarter.

In early April, we contributed another $300 million to the pension, completing both our $655 million required funding, plus $250 million of additional funding.

These payments will complete all of our funding for 2014.

Our CapEx for the quarter was $570 million, which included $275 million in aircraft purchases, and $165 million in aircraft modifications.

This resulted in $390 million of free cash flow for the quarter.

Turning to the balance sheet, we ended the quarter with $9.1 billion of adjusted net debt, and a debt to total capital ratio of 44%.

The debt reduction is moving our balance sheet closer to investment grade metrics, and it's also driving P&L benefit through lower interest expense.

Our interest expense declined by $34 million in the March quarter, and we expect to save more than $100 million for 2014.

We are on track to reach our $7 billion debt target next year, which will put us on a run rate of $500 million in annual interest expense, down from $750 million in 2014.

During the quarter, we continued with the accelerated pace of capital returns, sending back $176 million to our owners through dividends and buybacks.

We repurchased 4 million shares during the quarter at an average price of $30.94, for a total of $125 million.

We have now completed $375 million of our $500 million authorization, and expect to complete that authorization during the June quarter.

Let me close by saying thank you to the entire Delta team for their contributions this quarter.

It is their dedication and determination that really drives our results, and makes Delta the airline of choice for customers and our investors.

With that, I'll turn it back to Jill.

Thanks, Richard, Ed and Paul.

Sherlan, we are now ready to go to the Q&A session, if you could give everybody their instructions.

(Operator Instructions)

Jamie Baker, JPMorgan.

The first question relates to the pilots.

And I realize it's a little bit early to be asking, given the contract run through next year.

But when you achieved the current contract, you had pretty clear [asks].

You needed improved access to large RJs.

You needed a better mechanism to facilitate this the 50-seat retirements, and of course the 717 was a component of the current contract.

So as we look forward and ponder what the pilot ask might be for 2016 and beyond, it isn't clear to me that you're in as strong a position to negotiate.

It isn't clear what the management incrementally needs.

Is this something we need to be concerned about?

Well, no.

You shouldn't be concerned about it, simply because of our track record.

I think if you look back over the past eight years, we've always been able to partner with our pilots, and figure out what we need to do to keep Delta at the top of the industry.

And while we don't talk specifically about how or when we engage and what we talk about, our track record is the best in the industry in that regard.

I agree with that, Richard.

And while I have you, on the 10% to 12% annual operating margin target, through a business cycle -- or the 15% ROIC, whatever metric you choose.

The question I still get from investors is whether Delta simply going to start growing again once you achieve these targets.

And as you know, the Seattle expansion has made some of your owners a bit nervous, as it relates to capacity discipline.

It's not my view, but I know you've had to confront it.

Should we view the achievement of your financial targets as an implicit license to start growing again?

Or is there a different more shareholder friendly outcome?

Well if you listened to my initial remarks closely, they were all geared toward making the shareholder the priority in our decision-making queue.

And if you look at our capacity management over the past decade, it's been the most disciplined, and will continue to be the most disciplined.

And as we said at our annual Investor Day last December, the growth that we are putting in the marketplace today is below GDP estimated growth.

And second, we're actually doing what we're doing with fewer shells.

This quarter, we operated with seven fewer total airplanes in the fleet.

So, that will continue to be the kind of discipline that we have at Delta, because we are focused on return -- not just return for the whole airline, we like to look at returns by fleet and by sub fleet.

That's excellent.

Always helpful to hear.

Thank you, gentlemen.

Michael Linenberg, Deutsche Bank.

Good morning, everyone.

Just two questions here.

I want to go back to the miscellaneous expense, the $81 million.

I guess $23 million of that is the impact from the Venezuelan bolivar, and then there's the $31 million from Virgin.

What's the other piece?

And then what was the Virgin, that $31 million, how did that compare to the March quarter of 2013?

Mike, it's Paul.

There's other FX related pressure in that miscellaneous income number that we see.

But we called out the largest pieces of that.

Okay.

Good.

And then just on the Virgin year-over-year improvement, or I should say whatever it was versus a year ago, do you have that number?

We didn't close, Mike, we didn't close till I think it was the end of June last year.

So we didn't have a first quarter contribution.

But as I said in my remarks, we expect they're going to be profitable as a stand-alone for the full year.

So, it's going to be an uplift in our reduction, actually in our non-op expense going forward.

Okay, great.

And then just a second question, here.

As one who follows GOL and Aeromexico, one of the things that we've seen at both those companies is that they've seen a significant improvement in how they really produce revenue.

And when you talk to those management teams, they talk about the help that they've received from Delta, the fact that they've had the opportunity to learn the best practices from one of the best carriers out there.

And my question is, when we saw those investments, they seemed sort of more as one-off type deals.

But as you look around the globe, are there other opportunities where strategically it would make sense to replicate what you're doing with Aeromexico and GOL?

And I realized I don't I don't want to exclude Virgin Atlantic from that, of course you're doing that at Virgin Atlantic.

But are there other opportunities like that?

Mike, this is Richard.

And as to your second question, we wouldn't answer it on the call anyway.

Because that's kind of like doing the Virgin transaction, and the Aeromexico transaction, and the GOL transactions.

We're not going to discuss that publicly.

But I think the reason, candidly, the reason why those firms are doing well, is Ed is on both their Boards.

Very good.

All right, well thank you.

By the way, Steve Gorman is on the Aeromexico Board.

John Godyn, Morgan Stanley.

I think the team has done a great job of reframing the focus toward operating margins.

So just building on that, I think when we look at the normal seasonality of the business over the last few years, even regardless of the Easter shift.

The third quarter has tended to have even better margins than the second quarter.

In a fuel cooperative environment, is that the right framework?

John, we're not giving third-quarter guidance on this call.

Obviously, the momentum is strong in the business, and there will be time to talk about that.

But it's not now.

Okay, fair enough.

I was hoping the team could also elaborate a bit on the aircraft RFP.

There were some comments, I think in the press, about a hopeful outlook on the A330 NEO.

On the other hand, of course, the team is very ROIC focused.

And I guess if there was a third component to that, how it relates to the long-term CapEx guidance that you've all spoken to.

Well, we are just testing the market.

And it will be a pretty long process to see whether there's anything that makes sense from an ROIC standpoint, and the number could be -- it could be a lot less than the number that we've talked about there.

That just depends on what happens when we get the RFP responses back.

What we've said in our long-term guidance, it remains unchanged.

We're finished with all the flatbed mods, and you saw this year we're down -- we're in the number of about $2.3 billion in CapEx.

So, we're going to continue to make certain that whatever investments we do make are consistent with what you've seen us do, in terms of return on invested capital and returning capital to shareholders.

Great.

Thanks a lot.

David Fintzen, Barclays.

Just a question on the widebody RFP, but more conceptual.

You've obviously gotten a lot of CASM benefit with the regional up-gauging and the domestic up-gauging.

Are there similar long-term opportunities in international to move towards bigger airplanes, or is that a market that's more fragmented and you actually end up moving down in aircraft size?

I'm just curious how that plays through CASM over the next many years.

Talking about the causes, this is Ed, David.

I don't know that there's a huge up-gauge strategy on the international.

Certainly, there's a big CASM benefit, as we look at the fuel efficiency of the new aircraft.

We do operate a large fleet of 747s still.

We would expect those would be candidates for replacement in this next cycle.

And if anything, we'd be down-gauging a bit there, but certainly picking up a very nice CASM return.

We're probably somewhere in the orders of 20% to 25% more fuel efficiency on the new aircraft.

Okay, that's helpful.

Thanks.

And then just as we're looking at, particularly Seattle and the development of the international there, how should we think about the spool up curve for new international flying?

I think historically, it's been two to three years to get that flying up to system averages.

Is that the right way to think about Seattle, or is that something you think can develop much quicker?

This is Glen.

Well we've been very excited about the spool in Seattle so far.

As a matter fact, in the month of March, all of our new domestic markets were segment profitable.

And Seattle's margin improved by 8 margin points year-over-year, despite a 22% increase in revenues.

So, we're off to a great start, and we have a lot more to go in Seattle, so we're looking forward to those all coming online over the next few months.

And we do expect to become Seattle's largest carrier in terms of revenues in the third quarter of this year.

So we're well ahead of our internal forecast on Seattle, and we're pretty excited about the early returns.

Okay, great.

That's all very helpful.

Thanks.

Appreciate it.

Savi Syth, Raymond James.

I'm just wondering how much of a benefit in this hub to hub flying and just the unit -- domestic unit revenue, are you seeing from the Virgin partnership right now?

And is that some of the $120 million that you had projected in synergies, or is that $120 million yet to come?

Savi, this is Ed.

We're certainly starting some benefit, but it's very early.

(technical difficulty) Not sure who that was.

I'd say it's very early, obviously, since we just launched the JV as of the first of the year, and we had ATI granted not till late last year.

So the $120 million of synergies is the combination of the JV and the revenue benefits that the partnership will bring us well as our share of the earnings of Virgin Atlantic going forward.

It's certainly benefiting our New York Heathrow P&L considerable, and we expect over the next two years you're going to see a pretty quick ramp-up of those benefits.

Okay, understood.

And I apologize for the overhead noise, I'm in the airport right now.

But just a follow-up question, on the refinery, has the upgrade work been completed and is the expectation still that it will be somewhat profitable in the second quarter and maybe profitable in the year?

This is Paul.

The upgrade work has been completed.

We have been producing approximately 50% distillate products throughout the month of March.

We do expect that we will be profitable in the June quarter.

Got it.

All right.

Thanks so much.

Glenn Engel, Bank of America.

A couple questions, please.

One, other revenue was up 8% in the first quarter, you said mainly SkyMiles.

Is that type of strength likely to continue?

Glenn, this is Ed.

Yes, we do expect to see some continuing improvements in our SkyMile program.

Not just the benefits of the relationship with AmEx, but in the future, the changes that we're going to be making back to our frequent-flier activities.

We also got some benefits in the quarter from our JV relationships, particularly in Europe.

That shows up in the other revenue line?

Yes.

Okay.

And when I looked on the expense side, on the contract, the regional jet capacity cost, it was down 4%.

That was in line with capacity down 4%.

I guess it surprises me with all the cancellations, I would have expected to see cross pressures on a unit basis on the regional side.

Why didn't that occur?

Glenn, this is Paul.

That's going to be offset by maintenance savings as a result of the retirement of the 50-seaters will offset some of that pressure.

And is maintenance cost likely to be more level this year that it has been in the past, where it's been much more front-end loaded?

Yes.

As we talked about at Investor Day, we expected maintenance to CASM to be flat for the year.

I think, due to the timing, there's a little bit of extra business in the first quarter.

But generally, around flat for the year.

And finally, where did the $25 million Sandy credit show up?

In other expense.

Okay.

Thank you very much.

Helane Becker, Cowen.

I just have a couple of questions.

One, and one point of clarification.

When you talk about RASM, are you talking about total RASM, or just passenger RASM?

Generally, passenger RASM.

Okay.

Thank you.

And then just on the new pilot rules that went into effect in early January, can you just talk about where the costs associated from that would be, and whether or not -- and, how you were able to handle that successfully?

We've been able to handle it from an operating perspective incredibly successfully.

Gil, how many perfect completion factor days do we have?

We've got 24 year-to-date.

We have 24 perfect completion factor days year-to-date.

And we've been able to manage through that, actually quite effectively.

Because the way our pilot agreement was already set up we had a fair amount of flexibility, in terms of being able to manage to the new rules.

And we put a lot of work into our systems and our planning in advance of 1-17.

And in fact, we asked the FAA to let us start it a little bit early, so that we could have it for the full month of January for purposes of planning.

So, you see in our -- we don't break out separately our -- that kind of detail in our non-fuel CASM.

But you can see overall, our non-fuel CASM in the quarter was excellent.

I would also add that [Pat] at our operational control center manages that on a daily basis too to mitigate the impact.

Okay, great.

Thank you.

And then can I just ask one other question?

I saw it yesterday, a letter that the airport at Atlanta sent to a bunch of the international airlines, looking around to expand their international service.

To ask other airlines to expand internationally into Atlanta.

And I'm just wondering, if they do this incentive program that they're talking about, can you actually participate in that as one of the larger international airlines there?

Yes.

We will participate, and we are eligible to participate in the program, and plan on being able to qualify for much of the $2 million in grants.

Great.

Okay.

And that would show up in what, passenger revenue?

Or that would just --

No.

It's rents and landing fees.

It's a reduction -- the way it's properly accounted for, is it will just be a straight reduction in rents and landing fees.

But we don't call that out by airport, so you're not going to a be able to see it in the P&L.

And it's a small number, but still, you might as well take advantage of it if you can get it.

Well, in Atlanta is by far the most efficient airport to land an airplane in the United States.

I think our landing fee, to give you an idea, our landing fee costs in Atlanta are half of what Miami is.

Awesome.

That's really great.

Thank you so much for your help.

Dan McKenzie, Buckingham Research.

Thanks for the time.

I guess, first, congrats to Ben and team on winning the legal case in Italy.

I think investors are breathing a huge sigh of relief.

But, a couple of questions here.

One, what's driving the strength to China?

Is the strength coming primarily from new accounts, so call it call it corporate share gains?

Or is it more that your existing accounts are just simply investing more heavily in the country?

Any additional color here would be greatly appreciated.

We see very strong demand from corporates to China through the first quarter, and we also were able to achieve a re-time of one of our Beijing slots from a non-preferred time to a repeat time channel, which had a very positive impact on the Beijing operations.

So, a combination of continuing to work with our Chinese partners on improving our connectivity in our schedules to interior China, as well as a good, strong core demand from the US.

Okay.

Very good.

Thank you.

Second question here is, I'm wondering if you can help us peel back the onion on the fleet re-gauging initiatives?

I believe when you introduced the initiative originally, Delta was targeting $1 billion of structural cost savings.

I'm wondering if you can help us -- or just share what that cost savings contribution was in the first quarter?

Where are we with respect to that $1 billion goal, and do the cost savings straight line from here?

Dan, this is Paul.

When we outlined that $1 billion structural cost savings, there were a number of buckets in there.

Gauge was just one of them, which we had highlighted about $350 million a year of run rate benefits out of that program.

We're probably still in the early to middle stages of that process, as we've just begun receiving and getting in a steady flow of 717s and some of the 76 seat regional jet deliveries.

So we still have more to come.

Okay.

Thanks, everybody.

Duane Pfennigwerth, Evercore.

Just wanted to come back to this seasonality of earnings question.

As you build out Seattle to Asia, restructure Japan, grow to Latin America, is there any reason to expect at this point that the seasonality of your earnings has changed?

No.

There's no reason to expect that to change.

The changes within the network are not that material.

But, I do think what you've seen us be able to do last and this year, is to be able to run a profitable cash flow positive business quarter in and quarter out.

And that's very important for our investors.

It's very important for being a member of the S&P 500.

Thanks for that.

And then on the non-op line, as we think about seasonality, can you give us any sense for the swing that you expect from Virgin as we approach their seasonally stronger quarters?

Well, their strength will clearly be in Q2 and Q3.

As you know, we're expecting them to be profitable for the year, but we haven't given a guide as to what that number is.

So you can expect to see positive contributions in both two and three, and hopefully, Q4, as well.

Thanks.

And then just lastly, on your 10% to 12% EBIT margin target, what happens if you exceed that in a given year?

Does the target change?

And thanks for taking the questions.

That expectation, Duane, is over the cycle.

So we would expect certain years that we would be on the upper end of that range.

Thanks.

Thomas Kim, Goldman Sachs.

I wanted to ask about the competitive environment on the Pacific.

And also with regard to the Pacific, can you help us break down the Transpac PRASM ex-Japan, and what would have looked like in Q1?

We don't, Tom, we don't give that level of detail.

We did say that China was positive.

And obviously, our Japanese flying was the main source of the negative unit revenue driven by the yen devaluation.

Okay.

And then just with regard to cargo.

This has been an area where we've seen, I guess, a couple of years of weakness.

Obviously, not a huge part of the revenue, but it is one that's still a slight drag.

And I was just wondering if you can elaborate on what percentage of business is coming from domestic versus international?

And are you seeing any signs that the cargo should recover?

Thanks.

We are not seeing much signs of recovery.

It continues to be very difficult.

Most of the cargo weakness is coming on the international front versus the domestic front, and there's a lot of yield, as well as tonnage pressure.

It's not unique to Delta.

You're seeing at across, not just the US industry, you're seeing it on global scale.

There's too much capacity, cargo capacity, out there on a lot of these international markets.

All right.

Okay, thanks a lot.

Joe DeNardi, Stifel.

A question for you, Richard, on the international market.

I'm just curious to get your perspective on how you view the competitive dynamics there, in general, relative to domestic.

Obviously, domestic is benefiting from all the consolidation capacity discipline.

So is all of the soft consolidation that's happened internationally, in terms of JVs and alliances, does that effectively change the competitive landscape, so that it looks a little bit more like what you're seeing domestically?

Or does international look a little bit more like what you saw domestic maybe 5 or 10 years ago?

No.

International has gone through a pretty significant amount of consolidation.

And if you just go by region, when we look at our business down in Latin America, you've had significant consolidation in Mexico.

There's just one single flag carrier in Mexico, now.

And they're exclusive partners with Delta.

You've had consolidation in South America, with the Lan Tam merger, the Avianca-TACA merger.

So the world is really involving their very quickly, in much the same way as the US.

If you look in the trans-Atlantic, as Ed pointed out, that's been consistently our very best performer.

And our immunized joint venture, and the immunized joint ventures essentially have three global alliances now in that m marketplace.

And in Asia, when you look at the Transpac market, it's really clustered around the three alliances.

So, we've seen good market dynamics in the regions that we operate around the world, and we continue to expect that worldwide consolidation will continue.

Okay.

And then for Paul, at the Analyst Day, the CapEx outlook was more like $2 million to $2.5 million, now it's 50% of cash flow.

So, can you help me understand why that's the right way to frame it longer-term, rather than saying this is what we need to invest and 75% or whatever the number is goes back to shareholders?

I feel like that's more along the lines of what an industrial's company would do.

So, interested to hear your thoughts on that.

Sure, Joe.

Good morning.

What we've outlined is 50% of CapEx as part of a broader, more balanced capital allocation strategy for all the cash that's generated inside the Company.

I think that's been in line with that sort of $2 million to $2.5 million level against the cash flow that we have been generating over time.

So as we continue to evolve down that space, I think that's subject to continued modification for the size and the cash generation of the Company.

And I would add one other thing.

The great piece of discipline in our business is driving to a return on invested capital metric.

Delta has shown a strong capability of hitting very high internal rate of return targets for very measured investments internally.

And I would focus on the return on invested capital number, and making certain that we hold to that number and produce those kinds of returns on a consistent basis.

Okay.

Thanks, guys.

And, Sherlan, we're going to have time for one more question.

Hunter Keay, Wolfe Research.

Glen, how come you eliminated some of your checked bag fees on Asian routes a couple weeks ago?

Hunter, we're not going to answer that.

Okay.

How come Seattle was only 10% to 20% of connecting traffic three months ago, but now it's up to 65% of connecting traffic?

How did that happen so fast?

I don't think 10% to 15% was an accurate depiction.

I think it might have been a misunderstanding of what we were talking about on the last call.

I think that's why the full [test] of our connecting flows.

Okay.

Thank you, Ed.

And question, is there any revenues from the Virgin JV hitting the revenue line, or is it all showing up in the non-op line?

And if there are revenues, are there also ASMs associated with coming through?

The revenues from the Virgin JV do show on the revenue line to the extent they are coming on Delta Medal Virgin passengers.

But most of the benefits at this point in time will show on the non-op line.

And are other ASMs associated with that, Ed?

And, thanks a lot.

No, we don't have any Virgin ASMs in our numbers.

Okay, thank you.

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

I'm going to turn the call over to Ned Walker for the media.

Thanks very much, Jill.

Sherlan, if could review the steps for the media to ask a question.

Also, we'd like to ask the media if you could limit it to one question, and a quick follow-up.

We should be able to accommodate most everyone.

With that, we'll turn it back to you, Sherlan.

(Operator Instructions)

Jack Nicas, Wall Street Journal.

Richard, hoping you can speak to this.

Can you discuss a bit the Italian court ruling against Emirates, ruling that they could not fly from Milan to New York.

And how important that is for you guys?

And if Emirates tries that flying with Fifth Freedom rights from other foreign countries to the US, is that something you guys are going to pursue legally, and try to block that, as well?

Well, the Fifth Freedoms under the Chicago Convention way back in the 1940s, were never intended to be used the way that they were used in those circumstances.

And so, we're optimistic that the Italian -- the decision of the Italian court will be a precedent that will be followed in other venues.

Because it was never the intention, the Fifth Freedoms were originally intended to take into account the range of airplanes to be able to fly nonstop.

And it wasn't intended to, in essence, set up operations between two countries, neither of which you're a citizen of -- as standalone operations.

So we're pleased with the result, and we will be very vigilant as an industry in being certain that these kinds of unbalanced trade activities from state owned subsidized enterprises don't create an unfair trade environment.

Thank you very much.

Mary Schlangenstein, Bloomberg News.

I wanted to see if you could possibly give us an update on your activity regarding the XM Bank and its reauthorization?

And I also wanted to ask the supporters of the reauthorization of XM Bank have said they're going to launch an all hands on deck effort to win the reauthorization.

And I'm just wondering how big a role you see for Delta in opposing that?

Well we have played a significant role opposing it.

And it's not so much the reauthorization, it's the bank needs to be reformed.

There's no transparency around what it does with the taxpayer's money in the United States, and it creates a huge subsidy for state owned competitors of carriers in the United States.

So in essence, while we don't have any aviation airline policy -- cogent airline policy in the United States, our treasury goes -- and we get a very good view of this.

Because, the companies that we own interests in down in Brazil and Aeromexico, we get a pretty good glimpse of the kinds of financings that the XM Bank provides, and they're well below market.

And they're competing against private marketplace alternatives to capital.

And we believe there needs to be reform, and there's a place for the bank in the marketplace.

When the bank was originally set up back 60 or 70 years ago, it was to provide seed financing in developing nations.

Now we're providing -- at a time when we run huge deficits in the United States, we're taking the United States Treasury, the United States balance sheet and we're financing investment grade state owned airlines at borrowing costs that are probably around 300 basis points less than what Delta would pay.

And that's just not right for our government to do that.

So there's a place for the bank, but the bank needs to be reformed.

And it needs to be transparent, and it shouldn't be providing financing in any instance where there's a private market alternative.

And our concerns are only limited to widebody airplanes, not narrowbody airplanes, or industrial equipment, or the like.

I will point out that both Valero Energy's, the energy in Cleveland Cliff Steel have both old also filed objections in their industries in instances where the bank has financed their foreign competitors to compete against US interests.

In the end, it's about jobs.

And I can tell you that when the XM does this, as in the case of Air India, it takes jobs away from the United States.

Do feel like you're gaining any traction on your efforts to get the reforms put into place?

Yes.

We are gaining traction.

At the last ASU negotiation, we significantly increased the financing costs by 200 basis points.

Second, in the last round of reauthorization, there were transparency requirements, and which have been largely ignored.

And there was a requirement that the United States State Department and Treasury engage with EU authorities to negotiate an end to -- both the EU and the US run these huge, huge deficits.

And the last thing they need to be doing is further funding those deficits by financing airplanes.

Okay, Sherlan, with that, we have time for one more quick question.

Ted Reed, The Street.

My questions were largely asked.

So I'd just like to ask, is it now fair to call Delta, in terms of revenue, the world's second-largest airline due to revenue trends?

We would rather count operating margin.

Are you the second largest there?

I think we're top of the game, there.

All right.

Thank you.

Great.

Thanks, Ted.

Richard, Ed, Paul and Glen, thanks very much for your time.

That includes our March quarter financial results.

We'll be back in three months with our June quarter financial results.

Thanks very much.

Bye-bye.

That concludes today's conference.

Thank you for your participation.