達美航空 (DAL) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines Second Quarter 2014 Financial Results Conference Call.

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

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session following the presentation.

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

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

Please go ahead.

Thanks, Cheron.

Good morning everyone, and thanks for joining us for our June 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 then Ed will 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 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 exclude special items unless otherwise noted.

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

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

Thanks, Jill.

Good morning.

The June quarter results showed Delta as the top performing S&P industrial Company.

We reported a $1.4-billion pre-tax profit, an improvement of 70% year on year, with 13.5% pre-tax margins.

We grew 9% on the top line, with over 4% -- 4 points of margin expansion, and more than $1.5 billion of free cash flow.

We grew unit revenues by 6%, kept our non-fuel costs flat, and used the refinery and hedges to lower our fuel prices despite the increase in market fuel prices.

We earned $1.04 a share, beating consensus estimates of $1.03.

Our adjusted net debt ended the quarter below $8 billion, its lowest level in 20 years.

We have accelerated our shareholder returns, paying out $550 million to our owners already this year.

Our return on invested capital for the last 12 months was 18.2%.

In the quarter, we delivered exceptional operating reliability for our customers, with a 99.9% completion factor, including 27 days with zero main-line cancellations, and a 1-point year-on-year improvement in our on-time rate to 83.4%.

We saw an 11% improvement in our baggage performance.

Our operational reliability, combined with the top-notch service delivered by our employees every day, has produced a steady increase in our customer satisfaction levels, and a 6% increase decrease in customer complaints.

Delta runs the best overall airline in the industry by a significant margin, with the lowest capital cost per aircraft among our competitors.

The credit for this record performance goes to the Delta team worldwide.

I want to thank them for their efforts.

It's an honor to serve them, and to reward them with an additional $340 million accrued toward our profit-sharing plan, along with $22 million in shared reward payments this quarter.

As part of our capital deployment announcement in May, we laid out a new set of long-term goals which raised the bar on our performance expectations for our owners.

These annual goals, 11% to 14% op margin, 10% to 15% EPS growth, 15-plus ROIC, $3 billion in free cash flow each year, and an investment-grade quality balance sheet, are aggressive but clearly achievable, and we will continue to make meaningful progress year in, year out, against these goals.

As we look forward to the remainder of 2014 and beyond, Delta will continue to maintain the steady course we have been on, especially our disciplined approach to capacity levels.

This discipline continues to be a key driver of our success, as we will post record results for 2014.

We see a good demand environment, combined with modest capacity increases that will result in solid top-line growth.

More than 60% of our business is domestic, an entity that is performing quite well, and where we run a 13% RASM premium to the industry.

We will see further margin benefits from our up-gauging strategy.

We're also improving international performance by making capacity adjustments to our network.

In the Transatlantic, the industry has a very rational structure, with 90% of the capacity within three immunized joint ventures.

Delta's JVs represent about 30% of industry capacity in the Transatlantic, and we manage this capacity at the JV level.

The Delta JVs are very profitable, as we operate those JVs as fully integrated businesses.

That is, as if they were one airline.

Over the past several years, Delta has taken the industry's most discipline approach to capacity, which has resulted in strong returns across the Transatlantic.

We're going to remain disciplined with our capacity, and keep both Delta's and our combined JV Transatlantic capacity growth at 1% to 3% this winter season.

In the Pacific, we're running a profitable operation, and we will further restructure our network by better aligning our Tokyo flying, and building our US gateway in Seattle.

These efforts, along with the benefits of smaller gauge, wide-body replacement aircraft which begin delivering in 2015, will drive better returns in the Pacific region.

On the cost side, we made a commitment to you three years ago to keep our non-fuel cost growth below 2% annually by taking out over $1 billion in structural costs.

Our results show these initiatives, especially the domestic re-fleeting and maintenance cost management, are delivering the projected benefits.

Our non-fuel costs will be less than 1% this year.

We also believe in actively managing fuel, and we have invested in our fuel organization.

Graham Burnett has done a fine job running our fuel organization.

This has allowed us to regularly produce quarter after quarter of one of the lowest fuel prices in the industry.

The refinery has made an impact on market fuel prices, and we have a solid hedge book in place that should reduce our fuel expense by more than $350 million for the year, including $100 million in the September quarter.

Our fuel price this quarter of $2.93 per gallon compares quite favorably to the industry average fuel price, excluding Delta, of $3.08 per gallon.

All of these factors combined should produce more top-line growth, margin expansion, and operating cash flow improvements in the back half of the year.

By maintaining capital discipline and keeping our CapEx at $2.3 billion this year, we should generate over $3 billion in free cash flow.

We will use that free cash flow to further improve our balance sheet, and return more cash to shareholders.

We have already returned $550 million to shareholders through dividends and buy-backs this year, including $100 million so far in the month of July, and we are on a path to return over $1 billion this year to our owners.

Across the board the business is performing extremely well, but our goals demand continued improvement.

We have a solid plan in place, and we are executing well against it.

Our performance is setting a new standard, and rivalling that of high-quality industrial peers.

We are one of only 80 companies in the S&P 500 with free cash flow of $3 billion or more, and among S&P 500 industrial transports, only UPS and Union Pacific have greater free cash flow.

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

We will post even better results in the third quarter, with a forecast operating margin of 15% to 17%.

I want to thank Jill and the IR team for tolerating our many edits to the materials for this call.

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

Thanks, Richard.

Good morning, everyone.

Thanks for joining us today.

For the June quarter, we reported a $1.4-billion pre-tax profit, which is a $593 million improvement year on year.

Our net income was $889 million, or $1.04 per share.

Our pre-tax margin was 13.5%.

I also want to thank the Delta people for just an outstanding quarter.

Their efforts have resulted in a $439 million accrual to profit sharing so far this year.

That compares to $506 million for all of 2013, which at that time was the equivalent of 8.25% of employee pay.

Just a great job by the entire team.

Turning to the specifics for the quarter, we had a number of commercial successes: including our corporate gains, merchandising initiatives, international partnerships, and our investments in New York and Seattle.

These initiatives were a key factor in driving our solid 9% top-line growth for the quarter.

Our corporate revenues increased 8% year on year, with the largest gains in the financial services, media, and banking sectors, all growing at double-digit rates, showing the momentum we're building in both New York as well as Los Angeles.

In a recent survey, 85% of corporate travel managers expect to maintain or increase their future spend on Delta.

Our passenger unit revenues increased nearly 6% on 3% higher capacity.

Approximately 1 point of this gain was attributable to the shift of Easter into the second quarter.

The domestic entity was our best performer, as unit revenues increased 7%, with particular strength in the Atlanta and New York hubs.

Our largest hub, Atlanta, continues to out-perform, with double-digit gains on 2% higher capacity.

New York's performance was supported by a strong spring break.

In addition, our upgraded product and service on the New York trans-cons helped produce double-digit RASM gains in these markets, on 12% higher capacity.

Transatlantic unit revenues in the quarter increased 7%, on a 2% reduction in capacity.

June quarter benefited from a strong shoulder period, partially as a result of the Easter shift.

Within the Transatlantic, our Virgin joint venture helped drive our Heathrow unit revenues up 5% on 18% higher capacity.

In addition, Virgin's June quarter profitability contributed $7 million in non-operating benefits from our equity stake.

Our Latin unit revenues were flat, which was solid performance considering the entity absorbed the 25% increase in capacity, and experienced some demand weakness around the World Cup.

We have been investing in our Latin network to leverage our equity investments in GOL and Aeromexico.

The carriers both produced solid contributions to our revenues this quarter.

Both provided 25% of the traffic on our US-to-Brazil flights, and Aeromexico delivered nearly 25% of the traffic on our flight to the key Mexican business cities.

This traffic contributed $36 million in incremental revenue this quarter year over year.

In the Pacific, our network restructuring helped offset the impact of the weakened yen, resulting in a unit revenue decline of 3% on slightly higher capacity.

The end revenues declined by $10 million net of hedges.

We remain well-hedged on the yen, with more than 75% of our net yen exposure hedged between 85 and 90 through 2015.

These hedges are currently valued at over $130 million.

Part of our Pacific restructuring is building out the Seattle gateway.

Our Seattle international franchise is doing well.

We had a 2% unit revenue improvement despite 30% capacity growth, in a quarter where we launched new service to Seoul, Hong Kong, and London.

The domestic unit in Seattle also continues to perform well, producing unit revenue improvement in line with our system averages.

Our domestic unit revenues in Seattle grew 6%, while absorbing a 25% increase in capacity.

We're also seeing good success with our seat merchandising initiatives.

This is one of our fastest-growing revenue streams, increasing by $45 million over last year.

The success of our first class up-sell initiative helped push paid first class load factors up more than 6 points to 45%.

In terms of guidance, as we look into the fall, we see good forward bookings, and all signs point to a continued solid demand environment.

We are seeing particular strength in the domestic entity, and expect the World-Cup-driven weakness in Latin America to subside.

However, our Latin RASM will be impacted by 3 to 4 points due to our recent decision to pull down our flying into Venezuela, as we work to repatriate over $190 million in revenues that are currently held in bolivars.

We know the capacity situation in the Transatlantic has been a concern for investors.

This summer, we're seeing Transatlantic industry capacity increased by 8%, as carriers have shifted flying to capitalize on the region's recent out- performance.

While our revenue generation this summer will be strong, we expect our Q3 Transatlantic revenues to grow 5% to 6%, on capacity growth of 3%.

Our unit revenues are being somewhat impacted by industry over-supply.

It's important to remember that we have very profitable immunized joint ventures with both Air France, KLM, Alitalia, as well as with Virgin Atlantic, which allow us to effectively manage this entity.

As Richard said, combined we manage over $13 billion of revenue, and 30% of the industry's capacity.

To continue improving our revenue and margin performance, we are leveraging those joint ventures and staying disciplined in our combined offerings.

Together with our partners, we are currently making adjustments to our joint capacity plans, and expect our combined Transatlantic capacity to be up 1% to 3% for the upcoming winter season.

As we approach, the winter months, those adjustments will become more visible in published schedules.

This level of capacity growth is in line with expected economic growth in the region, and it will be accomplished with better utilization of existing Delta assets.

We believe we are well-positioned on Transatlantic capacity, and our advance yields for the fall are ahead on a year-over-year basis from where we were at the same point going into this summer.

We have flexibility in the business, and we'll make additional changes to our joint capacity levels if necessary, to continue on the path to achieving our financial goals.

In the Pacific, we expect better performance in unit revenues, as we passed the one-year anniversary of the sharp move in the yen, and as our new international flights from Seattle mature.

We're also making further changes to our Pacific network, realigning our flying in Tokyo to better match demand, and building more efficient connections with the remaining flying.

Capacity from Tokyo to the beach market is down 15% this summer, and we have reduced our intra-Asia flying by 10%.

Based on this overall environment, we are forecasting another quarter of solid top-line growth and margin expansion.

The comps do get tougher as we move through the year.

In fact, compared to Q2, our Q3 unit revenue comps are 300 basis points more difficult.

We expect our September quarter RASM to improve 2% to 4%, on 2% to 3% capacity growth.

When combined with our cost outlook, that result should drive an operating margin of 15% to 17%, or approximately 300 basis points of margin expansion year over year.

With that, I will now hand the call over to Paul to cover costs and cash flow.

Thanks, Ed.

Good morning everyone, and thanks for your time this morning.

A key focus for the organization has been our cost performance.

Our results this quarter are a product of that focus across the board in non-fuel, fuel, and non-operating expense.

Total operating expenses for the quarter increased 3%, with nearly all of that increase from higher profit sharing accrual.

On a unit cost basis, we continue to meet our goal of keeping our growth below 2%, while consistently investing in our employees, products, and operations.

Our ex-fuel CASM was flat for the quarter, as the benefits of our domestic re-fleeting and other cost initiatives continue to take hold.

On the fleet side, we put 22 new aircraft into service during the quarter, which allowed us to retire older less efficient airplanes.

This up-gauging is producing meaningful operating leverage.

For the June quarter, we produced 3% higher domestic capacity on almost 4% fewer departures.

Going forward, our re-fleeting benefits will continue, as we expect to retire an additional 47 aircraft in 2014, and another 80 to 90 in 2015.

The re-fleeting is also the catalyst for a significant amount of maintenance savings, helping drive our maintenance expense down by more than $60 million for the quarter, as a result of more than 60 fewer airframe and engine events, primarily on regional jets.

Not only have we avoided costly maintenance events on the aircraft that we are retiring, we're also able to harvest certain parts from retiring aircraft to reinvest in our active fleet at a lower cost.

Beyond the re-fleeting, we have a solid stream of other cost initiatives that have already been implemented, as we continue to find new opportunities to reduce expenses.

We're staying disciplined with our head count and overhead additions, as we begin to modestly grow the airline.

We are also currently offering a voluntary retirement program to help in these efforts.

We've also been investing in technology that has improved the productivity of our front-line employees.

Investments in new systems for our reservations and airport agents are helping to create a better experience for our customers, as well.

Our supply chain team, led by Chris Collette, has successfully leveraged our scale to drive efficiencies from our vendors.

These efforts should save north of $50 million this year.

The success of these cost initiatives has allowed us to keep our unit cost growth well below 2% for each of the last four quarters, while building a foundation to be able to sustain this performance into the future.

As a result, we expect our non-fuel CASM growth to remain below 2% through each of the September and December quarters.

In addition to addressing our non-fuel costs, we are also actively managing fuel, as Richard mentioned.

Our fuel expense for the quarter decreased by $40 million, even in the face of higher market prices, and consumption were more than offset by improvements in the refinery's profitability, and $98 million in hedge gains.

Our fuel price was $2.93 per gallon, which includes a combined $0.11 of benefit from the hedges and the refinery.

These results show the effectiveness of our investments in our strategy in meaningfully reducing our largest expense.

The refinery made a $13 million profit for the quarter, which was a $64-million year-over-year improvement.

Our domestic crude initiative has lowered costs at the plant, with more than 40% of the refinery's inputs for the quarter from domestic sources, compared to only 5% a year ago.

We had announced an agreement earlier this week for 65,000 barrels per day of domestic crude for the refinery, as well.

By combining this transaction with our other sources of domestic crude, we expect to meet our full-year goal of 70,000 barrels per day of domestic crude for all of 2014.

This will provide additional benefit for the back half of the year, and a good tail wind for 2015.

For the September quarter, we are expecting to pay $2.88 to $2.93 per gallon for fuel, including the impacts from the refinery and hedges.

At current prices, our hedge book should deliver another $100 million in benefits, and we expect the refinery to be roughly break-even for the quarter.

Turning to cash flow, the cash generation of Delta has obviously been a key driver of value for our shareholders.

We generated over $2 billion of operating cash flow this quarter, while our capital expenditures were $520 million, primarily for aircraft.

This level of investment resulted in more than $1.5 billion of free cash flow for the quarter.

As Richard mentioned, we will stay disciplined with our capital spending, prudently re-investing in the business, while also maintaining our CapEx in the $2 billion to $3 billion per year range.

For 2014, we're on track to spend $2.3 billion, including $600 million to $700 million during the September quarter.

We continue to take a balanced approach to capital deployment.

Debt reduction remains a priority for the Company.

Our adjusted net debt fell to $7.9 billion, more than 50% reduction since we began this program in 2009.

Not only is this strengthening our balance sheet and our foundation, but it is also improving earnings.

In the last quarter alone, our interest expense declined by $40 million year over year.

We're also using a portion of our cash flows to proactively address our pension liability.

This quarter we contributed an additional $300 million to the pension plan, completing our contributions for the year at just over $900 million, in line with the plan we outlined in May.

We moved aggressively to ramp up our shareholder capital returns also during the quarter, paying out $550 million to our owners since the start of the year.

Through our dividend we returned just over $100 million in the first half of the year.

As we announced in May, the dividend will increase 50% to $0.09 per share beginning this quarter.

We have used share repurchases to accelerate the pace of our capital returns.

So far this year, we have repurchased 12.4 million shares at an average price of just over $36 per share, for a total of $450 million.

These efforts completed our 2013 authorization, and have already initiated the first $200 million of the new 2014 authorization.

Let me conclude by thanking the Delta people for their dedication and determination in producing these outstanding results.

We know we have more work ahead of us, as we continue on the path of becoming that high quality industrial Company.

We have a key competitive and strategic advantage in each of the 80,000 people that are part of our team.

There are no employees in the industry with a better track record of success.

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

Thanks.

Cheron, that is going to conclude the prepared remarks.

If we could move to the analyst Q&A, and you can give them instructions on how to ask a question.

Thank you.

(Operator Instructions)

We'll have our first question from John Godyn, MSSB.

Hi, thank you for taking my question here.

Paul, you had a great list of cost initiatives, and the cost performance has just been tremendous.

As we look out the next few years and we think about sustaining a sub-inflationary CASM ex-fuel growth rate, how does up-gauging as an initiative rank among the initiatives?

And what inning are we in there?

Because it seems like the benefits are really dramatic?

Well, good morning, John, and thanks for your comments.

The team's been working really hard on that.

Up-gauging is obviously a critical element of that, and we're still in the relatively early to middle innings of that program.

We'll continue to be retiring CRJs, 50-seaters, through the end of 2015, which will continue that program and the up-gauging benefit through 2016.

We're also spending a lot of time and effort investing in productivity initiatives and technology to help streamline the things that we do, recognizing that this is part of that foundation that we need to provide for the future.

Great.

Richard, we've heard a lot of comments on XM Bank.

Your point of view is very clear.

Considering that you guys have an RFP out there, I wonder how much your position on the XM Bank influences sort of your position on which manufacturer to deal with?

There are certainly market mechanisms for sending a message here.

No, we are very objective evaluators of airplanes, and will continue to be very objective evaluators of airplanes.

We've done three RFPs over the last three or four years.

Boeing did a very nice job on the 737-900-ER campaign with GE, and then the last two campaigns we did which were smaller, the A321 with the CFM56 prevailed.

It all comes down to economics, and Nat Pieper and Paul Jacobson and the team do a phenomenal job.

I think we get the best prices on airplanes in the world.

We're going to continue to be very opportunistic, and be certain that we're buying proven technology that will give us the kind of returns on invested capital that our shareholders demand.

With the A330 Neo now formally announced, is there any update on thoughts that you'd be willing to share?

Yes, if it's priced in the low $80 millions, high $70 millions, we might be a buyer.

All right.

Thanks a lot, guys.

We'll go next to David Fintzen, Barclays.

Good morning, everyone.

A question for Glen.

Thinking about these up-gauging on the fleet side -- John asked about the cost side.

But on the revenue side there doesn't look so far to be any evidence of RASM dilution.

I'm just curious, since you're kind of in the early to middle innings as Paul put it, how do you start deploying more and more of the bigger airplanes, will we start to see more of that dilution, or is this kind of the structure we should expect on RASM going forward?

We've been very pleased with the RASM results, given the fact that we are continuing to up-gauge the airline.

Embedded within the results for the quarter was about 0.7 of a point of what we call headwinds that would be structural based on the actual up-gauge of the airline.

We've been able to more than offset that by posting a unit revenue increase that was in excess of what the industry did.

I think it's the great product combined with the great people and the great services we're offering, that is creating a demand that's in excess of what we're offering in the market place, and allowing us to continue that up-gauge without seeing revenue deterioration.

That headwind -- do you think that headwind stays pretty constant through the program?

Yes, it does.

Okay, great.

A quick one for Richard.

You mentioned the JVs are being managed, JVs being managed as one business.

Can you just give us some color -- obviously that JV's a part of your broader business and then your partner's broader business -- I'm thinking specifically Air France.

Does that create any tension in terms of how you want to set capacity in your JVs when you're putting in the context of your broader business?

The tensions there, and how do you manage those?

We have anti-trust immunity.

These relationships go back decades.

Ed can probably give even more color.

He's sort of more day-to-day than I am in all of this.

Hi, David.

Particularly with Air France, KLM, and Alitalia, our JV is predicated on a 50-50 sharing on capacity.

There's some years we may be a little bit below or a little bit above that benchmark, but that's a key governor on the capacity decision.

Of course there's always some tension as to which entity will do the flying, and what the economic prospects are for the Transatlantic versus other opportunities elsewhere in the world.

But I think we've proven over the last number of years that we are the most disciplined JV out there, and that we are also the most profitable JV out there.

That success breeds a very good platform for future profitable returns, particularly in the Transatlantic.

The other thing I would add to that is these are highly integrated.

We don't have -- all of our employees are basically AFKL employees in Europe, and we run their operation here.

They run yield management, pricing in Europe out of Amsterdam, and we run it for all the metal out of the US.

I can keep going down the list, but it really is a single run -- you've got to think of it as running as a single airline, even though there are different-colored, different-painted airplanes in the JV.

Okay.

Appreciate all that color.

Thanks.

We'll go next to Dan McKenzie, Buckingham Research.

Hi, good morning, guys.

You obviously did a nice job of taking Atlantic revenue worries off the table here.

Air France's profit warning obviously not tied to the Transatlantic, and demand out of the UK is obviously strong.

I'm wondering if you can compare and contrast the corporate share gains out of London, versus New York City driving that strength to London and also elsewhere in Europe?

Then to what extent is foreign exchange a tailwind in the PRASM results here?

Dan, on your first question with respect to corporate, then Glen can maybe answer the FX question -- he can think about it while I'm answering.

(laughter) We can work on an answer to that one.

(laughter) Maybe he can't answer and we'll get back to you on that.

(laughter)

Or maybe somebody else in the room can answer it.

On the corporate volumes, clearly Virgin has been a big assist with respect to our being able to get a stronger foothold into the lucrative JFK, Heathrow market place, particularly with the financial service providers.

And we continue to see very strong growth in New York.

I think I mentioned on the call double-digit RASM gains on top of the capacity growth that we've been implementing.

With respect to Continental Europe, obviously those are much more established relationships.

We're seeing good growth in Amsterdam and Paris on the corporate side as well; and Rome, for that matter.

But it's not nearly at the level of growth and development as we're seeing in London.

Okay, very good.

Foreign exchange, any perspective you can provide there?

Yes, come on, Glen.

Can we get back to you on that one?

(laughter)

Okay.

Thanks very much, guys.

Let me go ahead.

When you stop and think about how our JV works in the EU, the Euro versus the dollar -- because of how the joint venture works, we have a natural hedge because Air France, KLM, Alitalia are euro-denominated.

Unlike the Pacific where we do hedge the yen very profitably, we don't hedge the yen in Europe because we have a natural hedge with our joint venture partners.

If I might add something about our -- transition of our Transatlantic over the last several years.

I think this quarter's very important, but when you look back it's even more important to see where we've come as an airline.

When you think about Delta many years ago there was a big reason not to invest in Delta in the Transatlantic, because London represents 35% of all the business traffic from the US to Europe.

We had no access to it.

Through Open Skies, hen through the creativity of the Management team to go ahead and create a joint venture with a Virgin, we now have the number two position in the US in the UK.

We've made incredible gains in that, and really we think there's a great opportunity for us to continue to build with Virgin as we move forward, using the best of both brands.

You take our network to Europe, what it was several years ago, primarily US to points in Europe, it really didn't have a lot of business traffic.

You look at the concentration of our network today, heavily centered on the big business centers in Europe.

One other point, Dan, on FX.

The two areas I don't think Europe was a big mover for us in the quarter.

But the two areas of FX where we did see big impacts, one is Japan, obviously.

We already commented about the RASM decline we're seeing in the Pacific driven by the yen's weakness.

While we do have a good hedge, it's still not 100% effective.

The other one is Venezuela, where we're taking capacity steps to reduce our exposure to Venezuela, given the inability to access the bolivars in the country.

Those capacity steps will result in about a 3-point hit to our Latin RASMs in the third quarter.

Very good.

Thanks, guys.

We'll go next to Jamie Baker, JPMorgan.

Hi, good morning, everybody.

First question for Paul.

2014 is shaping up to be one of the worst years in terms of worldwide commercial hull losses, I think in over a decade now.

I actually haven't given much thought to insurance premiums since they spiked after 9/11.

It isn't a line item we actually model.

Can you remind us what sort of flexibility your insurers might have to upwardly adjust rates after a year of potentially billions in claims?

I'm trying to assess whether this is a conversation we even need to have?

Feel free to tell me you think the question is irrelevant.

It won't hurt my feelings.

Good morning, Jamie.

I would never deliberately or unintentionally try to hurt your feelings.

(laughter)

We'll leave that for other airlines this season.

The changes in the insurance market that we anticipate over the next year are probably not material to the overall performance in the Company.

But a couple of things I think worth noting.

One, we're actually getting sizable year-over-year improvements in our insurance premiums as we reshape our portfolio with a lower-risk balance sheet in the entity that we've created, being able to take on a little bit more retention, and using that leverage in the market place.

Secondly, we also during the quarter opted out of the FAA war risk program, and it went back into the commercial programs, and have realized significant savings on a year-over-year basis.

While the market might be challenged during the renewal periods, I think some of the structures and some of the initiatives that we've taken will help to mitigate that.

Either way, we don't think it will be material.

Excellent, I appreciate that.

For Richard, and forgive me, this is a bit of a replay from last quarter, as you consider the next pilot contract, it still isn't clear to me what Management's ask is going to be.

Unlike last time, you don't need additional scope relief, I don't think.

You don't need a 717 rate and so forth.

My concern is that Delta may have the upper hand this time around at the negotiating table, which could put pressure on the longer-term ex-fuel CASM targets that you were you speaking about earlier.

Any thoughts on this?

We have an incredible track record working with our colleagues at ALFA.

If you just look at the track record over the last 10 years, it's been just phenomenal, and we expect it to continue to be that way.

If you look at what we've been doing in the business, we've really taken the labor risk totally off the table at Delta.

Our employees are fully engaged and they're delivering a great product.

That's one of the key de-risking events that we've undertaken at Delta that's unique to the Company.

We're not -- it's one of the most valuable things we have, and that relationship is very important to us.

We will continue unabated on the track that we've been on for a decade.

As a follow-up to that, in the hypothetical if your primary competitors were ever able to reach the same level of operational integrity, along the lines of what you were discussing earlier.

But without as generous a profit-sharing mechanism, would you ever revisit that structure?

We're not going to get into, Jamie, the details of how those conversations go.

Those are internal conversations.

I would only note that the last time around with our pilots -- Ed, we --

We did restructure the profit-sharing arrangement two years ago.

I think as we look forward to it, that we've got a number of things that we can work with to help fund some of the heightened expectations, but we're not -- as Richard said, we're not going to share those details on the call.

Got it.

I appreciate it.

Thank you very much for both answers, gentlemen.

I appreciate it.

Take care.

We'll go next to Duane Pfennigwerth, Evercore.

Good morning, thanks.

Just on June, wonder if you'd comment on how much of the variance in the months was due to the World Cup -- was it Brazil specifically versus the region broadly?

Most importantly, are you seeing any improvement in bookings there yet?

It impacted the entire sector.

If you look at the recent A4A data for the month of June that came out, Latin unit revenues were down considerably -- I think about 5%, if I'm not mistaken, for the entire sector.

It was a part of the softness near the end of June.

We're pleased to say, though, that we do see the demand starting to pick back up again.

We have a pretty good outlook relative to the fall, as we're heading into -- particularly in some of the central and South American countries.

Appreciate that color.

Just a broader industry question about pricing.

When you think about where fares can go versus things like elasticity of demand, where do you think we are in terms of industry fare levels, and what region do you think offers the most upside?

Thanks for taking the questions.

We like to stay completely off of future pricing discussions on these earnings calls.

We're going to defer answering that question.

How about if I could, is there a reference point or a metric relative to GDP, or relative to I guess travel spend as a bucket more broadly, that reinforces the case that airline pricing generally is too low?

Once again, in the legal business we have something called -- a term called asked and answered.

I think it's been asked and answered and just be better off that we not discuss that.

Fair enough.

Thanks for taking them.

We'll go next to Joe DeNardi, Stifel.

Thanks, good morning.

Richard, I'm wondering if we could talk about, given the positive role that your JVs and partnerships are having on the Atlantic side and down in Latin America, are there opportunities for that on the Pacific side?

It just seems like kind of getting that capacity situation under control is going to be a little bit tougher than on the Atlantic?

Joe, this is Ed.

Yes, we do have opportunities in the Pacific.

I think we've got some great experience that we can attain and take from both the Transatlantic as well as what we're doing in Mexico and Brazil, and apply it to some of our Pacific relationships.

Clearly, Korea is one that we have had a challenge over the last several years in developing a JV construct, and some improved revenue and commercial sharing initiatives.

I'm cautiously optimistic that we can make some progress as we look forward to the next couple years with Korea.

In addition, beyond that, much longer term is China.

With Virgin Atlantic, can you just update us on how that's tracking relative to your expectations?

Should we expect the contribution there to accelerate going forward as they start to get some of these 787s later this year?

Yes, you should expect to see the profitability of Virgin Atlantic improve for 2014.

Current year, they're expecting to post a small profit.

But don't forget, two years ago when we acquired our 49% stake, they were losing -- it was well over $100 million a year at that point in time.

They've done a nice job of cutting the losses and starting to build some profitability and margin improvement.

As we look to the next two years, the fleet changes they're making with the 787s are going to help.

But also the relationship with Delta and our ability to drive increased levels of US share into London and throughout the UK is also going to help them a lot.

Okay.

Maybe a quick one for Paul on Trainer -- what the expectations are for CapEx?

I thought I saw Richard on CNBC mentioning purchasing a tanker.

What's the plan there?

Is that like the first of others?

Maybe I misread something.

Good morning, Joe.

We leased a tanker over the quarter that is going to help to increase our ability to source domestic crude for the refinery.

I think CapEx is generally in line with what we talked about when we acquired the plan at $50 million to $100 million a year in terms of annual CapEx up-keep, et cetera.

I think when you look at the overall sourcing strategy, it's imperative that we get increasing access to domestic crude, especially in declining crack spread environments -- which by the way, is the ideal scenario for us as a large consumer of jet fuel.

Just on that point, when you can get -- we can get domestic crude delivered to the refinery at $2 to $3 a barrel below Brent, so it generates a lot of opportunity.

Okay, thanks.

We'll go next to Darryl Genovese, UBS.

Hi, good morning, guys.

Wondering about your PRASM trajectory from here.

How do you think about your ability to maintain unit revenue growth in line with the industry when you're already operating from a premium position?

How long do you think this can go on, and is the biggest driver that you still have really in developmental markets out of New York and LA and Seattle kind of improving from here?

It's tough to give a longer-term outlook on industry revenues and RASMs.

All I know is that at Delta we have a considerable pipeline of initiatives for improvement that we've been investing in.

And customers really appreciate first and foremost the quality of the service and reliability of the product that our employees deliver.

We've got great opportunities as we look to London, particularly, and the Virgin relationship, will take easily another couple years to ramp up to expectations, and we're making great progress there.

I also think down in Latin America with both Aeromexico and GOL in Brazil, those are very young relationships that still have a lot of growth opportunity.

We're very well positioned in the high-growth markets of the world when you think about where we sit, both in Asia as well as in Brazil and Mexico, and certainly London which is the cornerstone of US travel to London.

I think the product and the service offerings are going to drive the determination on the customer side of where the industry revenues go.

I feel very good about our performance at Delta to continue to deliver on their expectations.

On the cost side, you've been coming through kind of at the favorable end of your CASM guidance for the last couple of quarters.

Is there anything in particular that makes the second half harder, other than perhaps more difficult comps in the second half of 2013?

Any kind of discrete cost items that have slipped out of the first half into the second half?

Any comment around the kind of second half versus the first half would be helpful?

Sure, Darryl.

You touched on it.

This is now our fourth consecutive quarter of non-fuel CASM less than 2%, so the comps are getting a little bit more difficult.

But at the same time, we're accumulating more benefits from the up-gauging.

I think we'll continue to have that momentum as we lap that cost performance, but there isn't really anything extraordinary or special.

I think it's just continuing down the initiative path.

Thank you.

We'll go next to Mike Linenberg, Deutsche Bank.

Good morning.

Two questions here.

Ed, if I could just go back to -- you mentioned the joint venture capacity for the winter would be up 1% to 3%.

What was it previously?

When you say winter, is that fourth quarter?

Is that a combination of the fourth quarter and the March quarter of 2015?

It's the winter [added] season, Mike.

Essentially November through March, so covering basically the fourth and the first quarters.

What it was previously, it was probably twice that.

I understand it currently is twice that in the published schedules.

Great.

Appreciate that answer.

Then my next question, this is to Richard.

Richard, you've seen the pilots come out.

I guess this is really around what's going on with Norwegian and their subsidiary carrier.

They've talking about maybe re-thinking Open Skies agreements.

I believe last week the Chairman of Air France came out and even talked about potentially renouncing some of these more liberal agreements, these Open Skies agreements.

Where are your thoughts on that?

Do you -- are you of the view that maybe your negotiators were out-smarted by some of these smaller countries?

Well, I think as a first-line principle we support Open Skies as a general principle.

Overall, just like any trade agreement, open trade agreements are a good idea.

But then there's going to be a sub-set of -- just like in steel or beef or any other industry -- there's going to be a sub-set of bilaterals that need equity.

In other words, the challenge that we have in some of these instances as an industry is that, yes, our negotiators have not done a very good job in the United States.

What we need to be able to do is on a bilateral basis one agreement at a time, make sure that there's parity and equity between the parties, particularly where you have -- we don't compete against airlines.

We compete against governments.

When Delta's competing against a government, we need to make sure that there's equity in that relationship, as part of an Open Skies agreement.

Great.

Thanks, Richard.

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

That will come from Savi Syth with Raymond James.

Good morning.

Just a quick question on Trainer, Paul.

I'm a little surprised that the expectation for Trainer is to be break-even in the third quarter, given slight profit here in the second, and maybe more Bakken or domestic crude being used?

Good morning, Savi.

Thanks for the question.

A lot of that has to do with the crack spread environment.

Particularly been hit hard this year have been distillate cracks, which is actually the great thing for Delta.

We're exposed to 95 million barrels a year on distillate cracks at the airline.

When crack spreads decline and we see that performance at a break-even level, particularly with relatively strong gas cracks from time to time, then we're actually pretty happy from that result.

The important thing for our strategy is to continue to lower the overall input cost for the plant through domestic crude, so that we can help to create that cushion in a low distillate crack environment.

Where we can make a little bit of money at the refinery, while also enjoying the full benefits of lower crack spreads at the airline.

That makes sense.

A quick follow-up on the comments you guys have made on the Latin route here.

A lot of the growth, at least internationally, is focused on LATAM.

It seems like your unit revenue is stronger than the industry in general.

Is that as a result of the joint ventures?

Is it just kind of where you're focused on?

I'm just kind of curious, because a lot of growth is coming there, I guess I worry about if there's softness there, what happens?

Savi, this is Ed.

Clearly, the relationships with Aeromexico and GOL are driving a very nice assist and support to our Latin franchise.

We're seeing improvements across many parts of that sector.

I expect it's going to continue.

Understood.

All right, great.

Thanks so much.

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

I'm now going to turn the call over to our new Chief Communications Officer, Kevin Shinkel, for the media portion.

Thanks, Jill.

We'd like to open up the call to questions from reporters.

Please review the steps for asking a question, and we'd like to ask you limit your questions to one with a quick follow-up.

With that, we should be able to accommodate most everyone.

Thanks.

I'll turn it over to Cheron.

(Operator Instructions)

We'll have our first question from Susan Carey, Wall Street Journal.

I understand Richard said earlier on CNBC that you're not planning to fly to Israel today.

Did any of your airplanes need to be ferried out of Tel Aviv yesterday or today because of this NOTAM.

No, there wasn't.

This is Gil West, by the way.

As you saw, we were a couple hours outside of Tel Aviv, and there was a missile reportedly hit about a mile from the airport, so we diverted proactively, and we did not have any aircraft on the ground.

Gil, do you expect -- the FAA's promising they are going to give us some further word on the status of Tel Aviv flights in about an hour or two.

What's your -- are you guys ready to resume on Thursday if they indeed do lift the ban today?

We're -- what I would say is we're in constant communication with the FAA at all levels within the Company to assess the situation.

Obviously, the safety of our customers and employees are first.

As the situation changes, we're certainly re-evaluating that.

Susan, this is Richard.

We make those decisions independent of the FAA.

The decision that Gil made yesterday was well before we heard anything from the FAA, because a Hamas missile lands a mile from the airport on the north side where we approach on final in a 747.

We're going to make those decisions wholly independent of -- we appreciate the advice and consent and the intelligence we get.

But we have a duty and an obligation above and beyond that to independently make the right decision for our employees and passengers.

If they say we're keeping the ban in place, obviously you are going to respect that?

Oh, absolutely.

Because it's a NOTAM.

It's notice to airlines.

We would absolutely respect that.

Even if they lift the NOTAM, we still may not go in, depending upon what the facts and circumstances are.

Okay.

Great, thank you.

We'll go next to David Koenig, the Associated Press.

I guess this is on everybody's mind.

Just to follow up, Mr. Anderson, on what you said there.

Can you say anything more about in addition to the FAA lifting its -- the NOTAM, what do you need to see before you can resume Tel Aviv service?

What do you need to see on the ground there?

Well, I mean a lot of this is information that is not public between Delta and the government.

I don't want to speculate on that publicly, and I want to respect our information sources and the cooperation we have with DHS and the FAA.

The bottom line is we need to make sure that we're discharging our safety obligations to our customers and employees, and we make those decisions here at Delta all the time on an independent basis.

We'll evaluate the information we have, and we'll make the judgment that our passengers and employees rely on us to make for them every day.

Maybe what I was getting at was whether you needed to see a cease fire.

More broadly, are you insisting, or would you like to see some change in the way that international risk assessment is handled for airlines?

No, we do our -- we have an obligation to make our own risk assessments under our SMS program.

We have a broad and deep security network around the world.

We have security directors that work for Delta in the all the regions of the world.

We have a very sophisticated capability and methodology to manage these kinds of risks, whether it's this or a volcano or a hurricane.

That's what we do well.

Thank you very much.

We'll go next to Mike Sasso, Bloomberg News.

Thanks for taking my call.

Just a quick update.

Any updates on the RFP for the 50 wide bodies, and if you could just re-clarify what you said about the A330 Neos, please?

The most clarifying point I can make is we like very low prices.

(laughter)

Kelly Yamanouchi, the Atlanta Journal-Constitution.

Hi, there.

I just wanted to ask about what you think is driving Atlanta's out-performance in the most recent quarter and the double-digit gains in unit revenue, Whether it's the competitive landscape, or strength in particular corporate travel sectors?

Kelly, hi, it's Glen.

How are you?

Good, how are you?

Good, thank you.

I think it's a combination of a bunch of factors.

One of them clearly is that we're running such a great airline here in Atlanta, with leading the on-time performance, with baggage performance, and customers are choosing us.

They're choosing us over the competitive set that's existed in Atlanta for the last 30 years or 40 years.

We're really pleased with our share numbers, our share of business traffic.

But Atlanta's also starting to grow, and that's a good thing for Delta.

Seeing the Atlanta economy turn around and seeing the job creation that's occurring here is really benefiting us, as well.

It's a combination of higher share of the premium traffic out of Atlanta, and a combination of Atlanta starting to grow again.

That's great news for Delta, and great news for everybody who lives here.

Great.

I was also wondering if there's any idea -- I'm not -- this might be a question for Richard or Ed.

How many people you all expect to take the early retirement offer, if there's any goal?

Kelly, this is Mike Campbell.

The program is still open, and we have another week to run, and could be in the 800 to 900 range.

We're forecasting maybe a little higher.

Okay, great.

Thank you so much.

We'll go next to Karen Jacobs, Reuters.

Hello.

My question -- I want to get back to the -- back to Tel Aviv.

The comments earlier were useful, because it did seem Delta was out front yesterday in suspending flights.

My question is, do you think the regulatory agencies worldwide that give the airlines guidance, do you think that they're responding with that guidance soon enough to be helpful to airlines?

Particularly in cases where fightings and conflict can make flying in certain air spaces treacherous?

We have good cooperation with governments around the world, and good cooperation with our government, Secretary Johnson at Homeland Security, Michael Huerta at the FAA, all the agencies here in Atlanta.

They're all very helpful, and they work very hard to make the right decisions.

Thank you.

Thanks.

With that, we will have time for one more quick question.

That will come from Susan Carey, The Wall Street Journal.

Sorry to come back here, but Richard also said earlier today that Delta has no fly-zones over Iran, Iraq, Syria, Ukraine, Afghanistan, and North Korea.

I understand though from your own Company that as recently as like earlier this week your Atlanta-Dubai flights would, depending on the weather to fly over Iraq and Syria, and that your Amsterdam-Mumbai flight had been regularly flying over Ukraine.

Is this kind of like you adapt your routes depending on your judgment, and your government sourcing?

Yes, we have a very dynamic process, 24/7 security desk, and we are always taking information from various sources, and conservatively planning the airline.

We make those kinds of changes regularly in our operation centers.

Just like we got up yesterday morning, Gil made the decision to turn the Tel Aviv flight around because of the Hamas rocket.

Okay, great.

Thank you.

Okay.

Thanks to everyone on the phone.

Richard, Ed, Paul, Glen, Gil, Mike, Ben, thanks very much for your time.

That concludes our June quarter financial results.

Thank you and good bye.

That concludes today's conference.

Thank you for your participation.