達美航空 (DAL) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines September quarter financial results conference. My name is Kelly Ann, and I will be your coordinator. (Operator Instructions) As a reminder, today's call is being recorded.

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

Thanks, Kelly Ann. Good morning, everyone, and thanks for joining us for our September 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 flows.

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 will also 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 Delta.com.

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

Thanks, Jill. Good morning. Before we start, I want to introduce Joanne Smith, our new Chief Human Resources Officer. Joanne has served as a Delta leader for 12 years in various senior leadership capacities, in marketing, and in-flight service. She has great respect for Delta's culture, values, and our employees, and we are quite pleased for her to take on this new role.

I want to thank Mike Campbell for his leadership and valuable contributions to delta. We wish him the best in retirement, although he will continue to advise us through a long-term consulting agreement.

This morning, we reported a very good quarter, with a $1.6 billion pretax profit for the September quarter, which is an increase of 35% or $431 million improvement year-on-year. We grew our top-line revenues by 7%, held nonfuel costs flat for the third consecutive quarter, and generated a 15.8% operating margin, which is a 2.6-point improvement year-on-year. Our ROIC for the last 12 months was 19.3%.

Our strong cash generation continued, with $1.3 billion of operating cash flow and over $900 million of free cash flow for the quarter. Year-to-date, we have generated $4.3 billion of operating cash flow and $2.8 billion of free cash flow, which has allowed us to fund $900 million to our pension plans, reduce $2 billion of net debt, and return more than $775 million to shareholders in dividends and share buybacks.

We continue to run, by a very wide margin, the industry's best operation. In the September quarter, we delivered a 99.7% completion factor, including 15 days with zero mainline cancellations. Our on-time rate improved 2.5 points to 85.6%; and our customer satisfaction scores are climbing, as our customer complaints decreased by 3%, as we consistently ranked number two in fewest DOT consumer complaints.

These operational results are a testament to how hard our employees are working across the system to raise the bar for our customers. We thank them for our service, and we know that we have huge improvement opportunities ahead in our operation.

We showed our appreciation for our employees' performance on October 3, when we paid out an advance of $305 million on our 2014 profit-sharing, equal to 5% of our employees' pay, which is in addition to the $24 million in shared rewards payments this quarter. We know that Delta's positive employee culture differentiates us from our competitors, and we reward our employees with pay-for-performance through our profit-sharing program and shared rewards.

This alignment reduces risk. And when employees have a vested interest in the future profitability of the Company, they take great care of our customers, they take great care of each other; this drives revenue growth and better returns for our owners.

6 months ago, we raised the bar on our long-term financial goals, and we intend to continue to improve on our financial and operating results. This quarter shows our steady execution even in the midst of a choppy global economy.

We also know we have more work and more opportunity ahead of us to reduce the level of risk in our business and continue to deploy our cash flow for our owners. This will strengthen our foundation and drive greater sustainability in our results regardless of the global environment.

There are three key areas that we will derisk going forward in our business. The first is the continuation of our capacity discipline.

As margins continue to improve, a conservative level of growth is appropriate and will drive higher profits, expanded returns, and improved cash flows for our shareholders. We plan to keep our system capacity fairly disciplined at about the rate of growth of GDP.

Through seat-density increases and upgauging, we can generate modest capacity increases on a smaller fleet count. Since 2009, we have reduced our fleet by 200 airplanes. While we are still finalizing next year's plan and will have the details at our Investor Day in December, we are targeting overall 2015 system capacity growth at approximately 2%.

In the trans-Atlantic this summer, the industry was pressured by excess capacity growth. Despite the capacity situation, our trans-Atlantic profitability increased year-over-year; and again we produced really good double-digit margins with a very significant load factor premium to the industry.

The industry capacity picture has changed significantly in the trans-Atlantic from where it stood 3 months ago. Together with our JV partners, we have adjusted our course and will limit JV capacity growth to around 1% to 3% this winter, a level that is appropriate within the current demand environment.

This capacity reduction in the trans-Atlantic has freed up smaller-gauge widebody aircraft that we can now redeploy to the Pacific, allowing us to accelerate plans to retire our entire fleet of 16 747-400s. We have already retired three in September and another one this quarter.

Four more will be retired in 2015, and the remainder will exit the fleet by 2017. These retirements will be margin accretive and are expected to generate $100 million next year in operating contribution.

The second aspect of continued risk reduction is diversifying our revenue base by widening our global footprint, building immunized joint ventures internationally with our equity investments, and expanding our ancillary and merchandising offerings. These types of changes are building a more stable revenue base and reducing business risk. In just the September quarter, we saw more than 20% revenue growth from some of our ancillary product initiatives.

The final aspect is continuing to reduce financial risk. We are going to keep paying down debt.

High-quality industrial companies have investment-grade balance sheets, and their low interest expense allows them to consistently produce profits even in cyclical industries. With our recent S&P upgrade, we are two notches away from investment grade.

We have reduced our debt levels by nearly $10 billion over the last 5 years, which is saving us more than $0.5 billion per year in interest expense compared to 2009. We are on track to reduce our debt level below $7 billion at year-end, and all the way down to $5 billion by 2016. We will continue to see the benefit to our earnings as our interest expense declines.

Deploying our capital in a balanced manner is essential for our long-term success. To this end, we will invest approximately 50% of our operating cash flow back into the business, keeping our capital expenditures in the $2 billion to $3 billion range through a combination of new and used aircraft purchases. And right now, given the huge glut of airplanes in the global market, we will have great opportunities for used aircraft purchases in the future.

We are very disciplined in all of our capital spending, and we have a path to keep our capital expenditures easily within these ranges while keeping our fleet vibrant. With roughly $3 billion in free cash flow each year, we will continue to pay down debt, address our pension obligations, and return more cash to our shareholders.

As our net debt goes down and our free cash flow includes, our Board is quite focused on meeting ROIC goals while continuously improving our shareholder capital returns. We have shown our commitment to return capital to our owners.

In our initial capital deployment plan announced less than 18 months ago, we envisioned returning approximately $350 million per year. We will return more than $1 billion this year and have already completed more than 15% of our $2 billion share repurchase authorization in the first 4 months. We will update our share repurchase progress at our December Investor Day.

To reiterate, we are on the long-term path to consistently deliver top-quality results and to be the best in the global airline industry. In closing, while we are consistently producing record profitability, we know there is more work ahead.

For the fourth quarter, we expect 10% to 12% operating margins and a full-year pretax profit comfortably above $4 billion. We have the right foundation in place, a clear direction where we want to take this Company over the long term, and 80,000 Delta employees who are the very best in the industry.

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

Thanks, Richard. Good morning, everyone. Thanks for joining us today.

For the September quarter, we reported a $1.64 billion pretax profit, which was a $431 million improvement year-over-year. Our net income was $1 billion, or $1.20 per share.

Our results this quarter would not have been possible without the contributions made by the entire Delta team. I am pleased to say that we've set aside $384 million in profit-sharing for the results this quarter, bringing us to a total of $823 million accrued so far this year. And we expect to pay out $1 billion total for 2014, our highest profit-sharing ever, representing about 15% of pay.

Turning to the specifics for the quarter, we grew our top line by 7% on a 3% increase in capacity. Our corporate revenues increased 6% compared to last year, with continuing double-digit gains from the financial services and automotive sectors, and high single-digit gains in the banking and media sectors.

Our merchandising and ancillary initiatives continue to exceed expectations and generated $290 million of revenues for the quarter, with more than 20% revenue growth in the paid first-class upsell and Economy Comfort products. Our first-class upsell initiative helped push paid first-class load factors up more than 6 points to 44%.

Looking at unit revenues, our passenger RASM increased 2.4%, with yields up 1.9%. The domestic entity was our top performer, with 5% unit revenue improvements on 2% higher capacity.

We continue to see solid results in New York. LaGuardia's performance outpaced the domestic entity with 10% unit revenue growth; and the transcon saw RASM gains despite 20% capacity growth.

Our Atlanta domestic unit revenues were up 8%, driven by near double-digit yield improvements in both the local business and leisure segments. Seattle's domestic performance has significantly exceeded our expectations, as unit revenues increased 6% on a 25% increase in capacity, driving margin improvements year-over-year. Our decision to shift capacity out of Cincinnati and Memphis to build out the Seattle hub is producing solid results.

In the trans-Atlantic our unit revenues were flat, with a 4% increase in capacity despite 1.5 points of RASM pressure from events affecting Moscow, Tel Aviv, and West Africa. Our joint venture with Virgin Atlantic is doing well, with a 4% RASM gain and a 17% increase in profitability on a combined 7% increase in capacity.

Turning to the Pacific, the yen weakness contributed to unit revenue underperformance, as unit revenues were down 2% on flat capacity. Yen revenues declined $20 million, net of hedges. We are addressing this performance with our Pacific restructuring.

Finally, in the Latin entity our unit entities were down 5% on more than 15% higher capacity, as we continue to invest in this part of our network. While we have relatively small exposure to Venezuela and Argentina, those two markets accounted for half of the unit revenue decline in the Latin entity.

In addition, the entity faced headwinds from the World Cup this summer, especially in Brazil. We are now seeing good recovery in this demand.

Aeromexico contributed more than 20% of the traffic into our key Mexican markets, and GOL contributed nearly 30% of the traffic from the US to Brazil. Combined, this traffic generated $40 million of incremental revenues for the quarter. Our investments in these two carriers are proving to be beneficial.

Now, looking ahead to the December quarter, the overall revenue environment remains solid and we expect to produce a zero to 2% unit revenue gain which, combined with a significant decline in fuel prices, will lead to continued margin expansion. There will be some noise between the individual months due to the timing of the Thanksgiving holiday, with the Sunday Thanksgiving return traffic, which is our largest revenue day of the year, shifting back into November this year.

For the quarter, we expect approximately 3% capacity growth. This top-line revenue of about 5%, combined with lower fuel prices and other cost productivity, will help drive an estimated 10% to 12% operating margin for the quarter, which is a 200 to 300 basis point margin expansion and also represents a 300 to 400 basis point pretax margin expansion.

We are obviously most levered to the domestic system, with more than 60% of our revenue generated in that entity; and domestic continues to perform well. Our Thanksgiving advance unit revenues are up about 8%, and the Christmas-New Year's bookings look solid.

The biggest driver of our domestic profitability improvement over the last 2 years has been our upgauging initiative, which continues to drive higher unit revenues, lower unit cost, and expanded domestic margins. We still have considerable opportunity ahead in this area as we regauge the domestic airline.

Probably the biggest source of questions we currently get from investors is how we are managing the international entities in the current environment. Optimizing the international network is one of the best opportunities we have to continuing to improve margins and returns.

Capacity discipline is especially important to this effort and, to this end, our plan is to keep our international capacity growth relatively flat next year. In the trans-Atlantic, capacity levels have been recalibrated to the current demand environment.

Working with our JV partners, we lowered our growth plans to 1% to 3% for the winter, with a similar level of growth planned for 2015. While our overall trans-Atlantic capacity will modestly grow, we have very different approaches to capacity within the entity.

Our primary growth area is London. The Delta-Virgin Atlantic combined capacity into London is expected to increase 2.6% in the winter as growing demand is supported by our new joint venture. London Heathrow continues to be a bright spot, as we have seen our JV margins expand 270 basis points year-to-date.

For the remainder of Europe, we expect our capacity to increase just over 1 point, with our major focus continuing on optimizing capacity between Delta's US hubs and the Paris and Amsterdam hubs of Air France-KLM.

Offsetting this growth, however, are capacity reductions in the areas that continue to have demand volatility: Moscow, Tel Aviv, and West Africa. Through a combination of downgauging, reducing frequencies, and canceling service to Liberia, we have reduced our capacity by 20% in these affected markets, which is in line with current demand trends. And to put into context, these markets represent approximately 1% of our overall systemwide capacity.

Looking at our Latin network, we are now entering the latter stages of our investment, with double-digit capacity growth in the December and March quarters followed by low single-digit capacity changes from that point forward. This entity is absorbing our capacity investment quite well.

Excluding Venezuela, we are on track to produce unit revenue gains in the December quarter on 15% capacity growth. We expect Latin's performance to further improve in 2015 as we annualize our capacity adds and our relationships with Aeromexico and GOL mature.

By far the greatest potential that we have is with our Pacific restructuring. While there is still a lot of work to be done and the region continues to be pressure by a weakening yen, we have an aggressive strategy to improve our margins and returns. We have a three-pronged approach to restructuring the Pacific.

First, we are adjusting our capacity levels. Our Pacific capacity will decline in the high single digits next year, with a 25% to 30% reduction in our low-yielding intra-Asia flying.

Second, we are getting the gauge right regarding our aircraft in the market. We have retired the first four 747s this year, with the remainder set to exit the fleet over the next 2 to 3 years.

This year, we are backfilling a portion of this capacity with smaller-gauged aircraft moved from the trans-Atlantic. And as we take delivery of new Airbus 330s next year, this will help facilitate the retirement of the remaining 747s. The 747 retirement should improve our Pacific profitability by $100 million next year.

Finally, we are adjusting our hub structure. Narita remains a very important asset to our network. We are reducing our reliance on connecting traffic in Tokyo, and leveraging the size and scale of our domestic network through our Seattle hub as we introduce additional direct service from the US to Asia.

All of these initiatives are already in motion and will drive returns in the region over the next several years, consistent with our long-term financial goals. I'll conclude by simply stating that, not only do we have a lot of opportunity to generate additional value from our international network, but we also have a clear plan on how we are going to get there. We will continue to be disciplined with our capacity and focused on improving our margins and our returns.

With that, I will hand the call over to Paul to go through the details on our cost and cash flow performance.

Thank you, Ed. Good morning, everybody, and thank you for joining us today.

Our ongoing focus on cost performance was a significant contributor to our margin expansion this quarter. Total operating expenses increased by $320 million for the quarter, with almost half of that driven by higher profit-sharing expense.

We held our nonfuel unit costs flat for the quarter, marking the fifth consecutive quarter with ex-fuel CASM growth below 2%. This is further confirmation that our cost initiatives are delivering the benefits that we expected. And with the organization rallied behind this, we expect that trend to continue.

One of our larger cost initiatives this year is the domestic re-fleeting. During the quarter, we took delivery of 22 aircraft and retired a total of 34, including 24 50-seaters. This strategy is producing significant operating leverage, as we have generated 2% higher domestic capacity year-to-date on 4.5% fewer departures.

As we continue to retire 50-seaters and older mainline aircraft next year, we expect to see benefits in lower maintenance costs from a combination of avoided maintenance events and the ability to recycle parts from the retired fleet for use on the active fleet. This initiative drove $35 million of maintenance savings in the September quarter alone.

While the growth rate of our nonfuel unit costs in the December quarter should increase from recent levels, due to the timing of off-peak maintenance events, we still expect it to be less than 2% and in line with our long-term cost goals.

Moving on to fuel, our fuel expense for the quarter decreased by $23 million as lower market fuel prices and the refinery's improved profitability more than offset the increase in consumption from capacity growth. Our fuel price for the quarter was $2.90 per gallon, with the benefit of $63 million of hedge gains in the quarter, an equivalent level to last year despite lower market fuel prices.

The refinery made a $19 million profit for the quarter, which lowered our fuel price by $0.02 per gallon. The refinery's profit represents a $16 million improvement over this same period last year.

A key driver of the profitability was our domestic crude initiative, as we processed 100,000 barrels per day of domestic crude during the quarter. We are on pace to achieve our goal of averaging 70,000 barrels per day for the full year, which should increase to 100,000 barrels per day in 2015.

For the December quarter, we are expecting to pay $2.69 to $2.74 per gallon for fuel, including the refinery and hedge impacts. This includes the projected profit at the refinery of $20 million driven by widening crack spreads. The refinery team is running a great operation and continues to generate meaningful year-over-year improvements there.

At current crude prices, we will have approximately $100 million of hedge losses in the December quarter, while our 2015 hedge book is near breakeven with a solid amount of protection at current price levels. Even with these hedge losses, we have participated in 80% of the price decline since late June. With the expected December quarter losses, our hedges reduced our overall fuel costs by roughly $160 million for 2014.

Turning to cash, our strong cash generation continues to differentiate us from the industry. This quarter we generated $1.3 billion of operating cash flow and reinvested $411 million into the business, primarily related to fleet. In the fourth quarter, we expect to spend $800 million on capital expenditures, which will bring our total CapEx to approximately $2.3 billion for the year.

With another quarter of solid cash generation ahead of us, we are on track to produce $3.5 billion of free cash flow this year. We use that to continue to strengthen the balance sheet and return cash to shareholders, with our $910 million of free cash flow during the quarter.

Our adjusted net debt is down to $7.4 billion, which helped lower interest expense by $60 million versus last year. We have a clear line of sight to achieve our $5 billion adjusted net debt target in 2016.

During the September quarter, we also returned $325 million to shareholders through dividends and buybacks. We paid out $75 million in dividends, as we increased our dividend by 50% to $0.09 per share. In addition, we repurchased $250 million in shares during the quarter.

Once again, I want to thank the entire Delta team for another record-breaking quarter. Our performance this quarter and throughout this year shows what we can do when we all work together to drive change and deliver results. Congratulations to each of you on a great quarter. Jill?

Thanks, everyone. Before we move to the Q&A, I did want to take a minute and remind everybody about our December Investor Day. We will have more details out shortly; but for now, please mark your calendars for December 11.

So, Kelly Ann, if we could have the instructions of how to ask a question.

(Operator Instructions) Duane Pfennigwerth, Evercore.

Hi, good morning. Wonder, on your 2015 hedge book, if you could just give us a sense for how hedged you are and where the floors are on that.

And then just remind us. When we see the mark-to-market changes on your book, should we interpret those as cash changes, or is some of that non-cash until it is realized? Thanks.

Sure. Good morning, Duane. For 2015, we are hovering around 30% to 40% hedged at current levels. We have got significant downside participation even from these levels down.

But we manage the book on a day-to-day basis, so that can change over time. But we feel very good about where we are positioned for 2015.

You have to remember, for mark-to-market we do not use FAS 133. So for other carriers, in comparison, those changes go straight to equity. But those are largely non-cash.

For this quarter the bulk of it was the reversal of prior gains in the hedge book, and that is what has positioned us. So it tends to be a little bit noisy during these times, but it doesn't represent necessarily cash losses.

Okay, thanks. Then just had one on your -- it seems like you are making some changes around your basic Economy product. I wondered if you could talk a little bit about some of those changes.

Should we think about this as revenue initiatives in 2015, or is this unbundling effort a competitive response? Thanks for taking the questions.

I think you would look at basic Economy as we want to be best-in-class in every sector we serve. And if you think about airlines, we don't -- we're so large in terms of domestic capacity that we don't get the choice to really be a high-end brand, a medium brand, and a lower brand; so we have to create those brands within the master brand.

And when we compete against Spirit, of course, or other ultra-low-cost carriers, we always want to have the best product competing against them. So the products that we are introducing in basic Economy, you get the reliability of Delta, you get all the operational excellence of Delta, but you don't get some of the amenities that you don't need. And if you need those amenities, you can add them on later.

So I think what we want to have is an airline that is best-in-class for each consumer sector. And basic Economy is one of the things that will enable us to do that.

And in response to your question, it is a revenue strategy.

Thank you.

Dan McKenzie, Buckingham Research.

Yes, hey, good morning, guys. Regarding the $2 billion share repurchase program through 2016, with the stock obviously sub $35, do you guys need an authorization from your Board to accelerate the buyback if you wanted? Or in theory, could you put that whole $2 billion to work this year if you wanted?

Well, we do need to go back to our Board, and our Board is quite focused on two things, which is, one, return on invested capital and keeping that number high; and number two, driving continued improvement in the returns to our shareholders. We expect at our Investor Day to be in a position to update our investors, because it is incredibly accretive to the Company to buyback our stock at these multiples.

So as Paul reiterated, we are well ahead of where we said we would be last May, and you can expect that we would continue that kind of trajectory, particularly given the tremendous value that we can create for our owners by buying back our stock at these prices.

Okay, terrific. Then I guess for the -- my second question here. On growth to Europe, the headline news almost on a daily basis seems to be pretty negative: deflation, and Europe that risk of sliding into a recession. So it seems there is a fair amount of macro here.

As you look ahead to next year, what are the data points that you are looking at that give you confidence on the demand backdrop and the growth of 1% to 3%? It seems like your peers have reached a different conclusion. But anyways, I am just wondering if you can provide a little bit more perspective there.

Our growth in Europe this year was really in September. One of the issues that I think our investors need to understand is for the last few years we have been doing modification lines on our airplanes, whether or not it's satellite-TVs or whether or not it's flatbed seats. Those modification lines continue to end.

And what 2014 and 2015 is really about, getting better asset utilization on the existing asset base. So to the extent that we can see extending some of the US point-of-origin markets beyond August into September and early October, we will continue to do that.

And that is where really most of our growth (technical difficulty). It doesn't come from new markets or upgauge. It comes from really using the existing asset base slightly better. And it is mostly, for those markets, US point-of-origin, destination travel.

Okay, thanks, Glen. Appreciate it.

Michael Linenberg, Deutsche Bank.

Yes, hey. A couple questions here. Paul, given the pullback in WTI and Brent, we have also seen jet fuel prices come down, but crack spreads have actually gotten wider. I know you mentioned that as being a source of profitability for the refiner in the fourth quarter.

What is going on with crack? Why have they widened so much?

Good morning, Mike. Thanks for the question. You know what? This selloff has been a very Brent-driven selloff, where cracks tend to lag that. I think when you compound that with some of the supply-delivery issues in the Northeast, some refineries have come offline, putting temporary pressure on those crack spreads.

We are running near full capacity and expect to do so for most of the quarter. So I think when you combine it with temporary shutdowns and some of the supply disruptions, that's put a little bit of pressure on cracks.

Michael, now perhaps folks will better understand our refinery strategy.

Very good. My second question; and Richard, this is either for you or Ed. Look, Air France just went through -- I want to say the worst strike in I think two decades. They were running, I want to say 40% for two weeks.

It doesn't look like it's in your numbers in the trans-Atlantic, but I am sure it had an impact. Can you talk about what the impact was, or maybe how you were able, just working together, able to deal with it?

Well, remember that it's a big network and that there were opportunities over Amsterdam. And all of our flights ran really full.

So we had -- Glen talked about a little extra capacity in September. It happened to be at the perfect time, because we absorbed an enormous amount of that and actually had a pretty nice uplift in revenue.

Okay. Okay, very good. All right. Well, thank you.

Bank of America, Glenn Engel.

A couple questions. I guess by your guidance, other than Africa you were not seeing any Ebola effect.

We monitor it on a daily basis, and we have not seen any changes in the booking trends.

What type of currency headwinds are implied in your numbers in the fourth quarter?

Glenn, we are looking at, obviously, pressure on the yen. I think for the fourth quarter that number is in the $25 million to $30 million range of FX exposure.

But in the euro, it is both a revenue and an expense hit. So it will show up in lower RASM but lower CASM?

Yes, exactly.

And if I mark-to-market where interest rates are today, what type of headwinds can we expect in pension next year? And is there any plan to change the balance of profit-share versus wages for your workforce?

On the pension side, Glenn, I think we are looking at a potential balance sheet adjustment of around $1 billion, which is comparable; slightly less than what we took back last year. That is not going to have a material effect on pension expense next year with our funding strategy and the other changes.

And, Glenn, on your second question, our formula here Delta here works pretty well, as evidenced by the performance: our performance over the last several years and particularly in this quarter. So we are very careful about changing anything in that mix, given our success.

I just assumed at the start of this year you changed a little bit, and I was wondering whether there was more wage increases you would announce for early next year, whether that was going to be the same.

We have already made our wage increase announcement. We did it as part of our early profit-sharing payout.

Thank you very much.

Julie Yates, Credit Suisse.

Good morning. Thanks for taking my question. This is a question for Paul.

How should we think about 2015 non-fuel unit costs, taking into account the recent wage increase and if a pilot deal work to get done sooner than later? How comfortable do you feel you can still achieve the less than 2% growth in non-fuel CASM again after such strong cost performance over the last five quarters?

Sure. Good morning, Julie. Well, heading into 2015 is where we are developing our operating plan right now. We still have the benefit of further increases in operating leverage as we continue to refleet and upgauge the airline. So that is providing a lot of tailwind.

We do have some cost pressures in 2015. But we have those every year, so we feel confident about our ability to keep it below 2% again next year.

Okay, great. Then can you guys update us on the outstanding widebody RFP? Do you still expect to make a decision by the end of the year?

This is Richard. Yes. We are still working diligently on evaluating both the Airbus and Boeing option. They both have very strong, viable options, as do the engine manufacturers, Rolls-Royce and GE. And we are in the midst of a very heated competition to see which of those will bring to the table the best economics for our owners.

Remarkably, right now it is an interesting development in the widebody market. Because there are so many orders out there, the used market is really heating up, and the pricing for 10-year-old widebodies is about 30% of what you would otherwise pay.

So it is going to be a very interesting process, because the most important thing about this for us is not operating cost: it's ownership costs. I think that is how, candidly, the whole industry ought to focus on ownership costs.

Okay, thank you very much.

Jamie Baker, JPMorgan.

Hey, good morning, everybody. Richard, just as a follow-up on the aircraft question, has fuel's recent decline had any impact on the RFP negotiations or pricing, or how you even think about the new orders that reside in your pipeline at the moment?

No, we're relatively short-tail because -- and the problem with big airplane orders is escalation clauses and PDPs. You don't want to get way out in front of an order, or you end up giving up all the competitive economics of the fly-off.

So we tend to build long-term models that put pretty high fuel prices in. Because I don't think -- if you take the last 10 years of fuel prices in the industry, there has been a lot of variability, but the line has been an upward sloping line. So we have used very conservative assumptions when we build our financial models to determine what to buy.

So from that standpoint, we aren't going to change our price per gallon assumption over the next 30 years as a result of the short-term changes in crude prices.

Okay; I appreciate that. Thanks, Richard.

My second question -- and, wow, I don't know who wants to take this one. Maybe Glen.

But I am curious about how you model for new routes and whether that has evolved at all over time, and in particular whether you consider earnings multiple destruction. I don't have the tools to say whether your next market from LA is going to earn a fully allocated profit. But I do have the ability to tell you that when you add capacity, particularly into OA hubs, it diminishes shareholder confidence; it suggests a lack of discipline; and in my opinion, it jeopardizes the likelihood of earning a multiple closer to that of high-quality industrial transport.

So I know it may be difficult to quantify, but do you ever stop before you announce a route and just ask, or maybe run it past others: What if this destroys tens of millions of dollars of shareholder value by robbing me of a better earnings multiple?

Gee, Jamie, it sounds like you asked and answered that question. (laughter)

Well, Glen, in fairness, I'm going to ask it of others this season. So this is not uniquely directed.

Look, I mean, I think you are in an area that is in some respects not appropriate for an earnings call. But I will just say this: Look at our results.

I don't think there is a more disciplined approach to the deployment of capital in this industry anywhere in the world. And we will continue to make the right unilateral decisions. And we appreciate that you have a different opinion.

And it is not necessarily mine, Glen -- or Richard. I am passing along the question that I have been asked here. But I appreciate your concise answer and we will leave it at that. That's fine. Thank you.

John Godyn, Morgan Stanley.

Hey, thank you for taking my question here. I wanted to follow up a little bit on some of the capacity commentary. First of all, we have certainly heard some criticisms; and Jamie reflected some of those on the competitive capacity adds.

But maybe enough airtime isn't spent on where you are cutting capacity. Because at the end of the day your aggregate capacity growth is still relatively disciplined. I was hoping the team could elaborate a bit on what is funding these growth initiatives in certain regions, like the trans-Atlantic, like in Seattle, and perhaps like in LA?

I think this is a great question, and I think what we continue to do is to scour the network and find underperforming assets and try and move them up the scale. So really to go back to the previous question and say -- what really happened in Seattle and Los Angeles? We increased capacity significantly on a year-over-year basis, and margins in both those hubs increased at the same time.

So what we were doing was trying to find the worst assets across the whole network, wherever they were, and redeploy them into better revenue potential opportunities. And that was really a key contributor to the improvement in the profitability of the airline.

So I understand the criticism; I understand the uncertainty of it. But the business continues to evolve, and it continues to evolve as the consolidation of the four major carriers continues.

I think in Los Angeles, you are going to have four large carriers. That is just the way it is going to be.

In Seattle, you will have two large carriers. That is the way it is going to be.

Got it. Then the guidance for next year, 2% ASM growth and the context being sub-GDP, it does feel like -- not that I am an economist per se, but it does feel like GDP expectations globally are being revised almost daily in the marketplace. I am just curious.

Do you feel like there is downside risk to that number if things get worse? Is that a number that is struck as recently as last week, or was that a planning process that occurred a month ago?

If you could just help put some boundaries around where capacity could go from here in the context of some of these global growth concerns, that would also be helpful.

Thanks, John. You have heard in the guidance we also said we expect our international capacity next year to be flat, so I think that clearly addresses the question you've raised with respect to some of the international economic concerns. Pacific, where we are having clearly the most -- highest level of capacity concentration, coming primarily from foreign flags, we are in the midst of a pretty significant restructuring of that capacity offering. We said Pacific will be down in the high single digits.

Next year in Europe, the majority of our capacity adds we are thinking will primarily be London, which is producing significant returns as part of the Virgin JV. And I think the bulk of the overall systemwide capacity add next year is going to be the domestic system, and it's going to be reflective of the upgauging initiatives that we are doing that is both margin accretive and very incredibly cost efficient.

That's very helpful. Just last one on --

And John, last point I would like to add to that is, obviously we are expecting we've got a long ways to go here, and these deployment decisions are our current thinking; but as we get into the year we also have the ability to make alterations on a relatively quick time frame given the capital efficiency of our fleet.

Great. I just want to follow up on one of the things you mentioned, which is upgauging. As we think about the 2% capacity growth for next year, can you give us a sense of what the seat count growth and fleet growth underlying that is?

We have certainly seen departures and seats underperform ASMs meaningfully. It does feel like maybe the trend is even more conservative than 2% would suggest.

I agree with that. We are going to update you at the December Investor Day. The fleet count will be down next year, but we will give you the ins and outs. Because you are right; there are some moving pieces to that picture.

Great. Thanks a lot, guys.

Savi Syth, Raymond James.

Hey, good morning. On the US dollar strengthening, I was just wondering if you could provide -- I know you provided a little bit on the trans-Atlantic side, but just how much of your international sales are US point-of-sale versus international?

At an aggregate level, about 60% is US-based.

60% of international sales is US-based?

Yes.

Okay, got it. Then just from an ancillary revenue standpoint, it's been great performance here, a lot of it coming from Economy upsale and things like that. As we look into 2015, what kind of items can we think of as driving ancillary revenue growth?

I think that we have a lot of new initiatives, which we will be talking about in the marketplace over the next 2 to 3 months probably, give you an update at Investor Day. But we are extremely excited about being able to allow customers to really customize their travel experience on Delta.

Got it. All right, thank you.

Thomas Kim, Goldman Sachs.

Thanks. I have a couple questions on pricing. First off, can you walk us through the PRASM guidance? I am wondering to what extent the low end of the guidance is being conservative; or does this in fact maybe reflect some risk with regard to erosion in pricing power? Whether it is in the US, which seems unlikely, but I know I certainly would appreciate color there; or maybe further deterioration in Asia, which is obviously reflected in some of the capacity decisions; or maybe even LatAm.

So if you can just help us understand the lower end of the guidance, that would be very helpful. Thank you.

Tom, I think you answered a lot of your question. We gave you our best view as we are sitting today, and I think the strength of the forward environment in the domestic system is where the bulk of our upside opportunity sits.

Let me just add for everybody on the call, we will not discuss pricing and we will not discuss capacity among competitors on these calls today or in the future, because it is not appropriate. And it is not appropriate for the analyst community to be engaging in what forward capacity and pricing decisions are at Delta.

Okay. Can I ask a broader question, just with regard to how you see the industry, thinking about how their revenue environment might change or adjust with the change in the cost environment? One would -- fuel in particular, this is one where we have seen historically, where prices or revenues have generally moved directionally in line with where oil price has gone. And I am wondering, just given the strength of the domestic market, could we in the market or the investment community be underestimating the potential impact of how much lower fuel price should really benefit profitability as we look out to the fourth quarter, but importantly out into 2015?

Let me just answer it generally. We can't speak on behalf of the industry. We can only speak on behalf of Delta, and that is all we will speak on behalf of.

But when you think about where fuel prices are today versus where they were just a few weeks ago, it is in excess of $1 billion of cost of goods sold improvement. So overall, the fuel price reductions we have seen in the marketplace are a huge opportunity going forward.

That's great. Thank you very much.

Kelly Ann, we're going to have time for one more call from the analysts.

David Fintzen, Barclays.

Hey, good morning, everyone. Hopefully this is on the right side of, Richard, your commentary on capacity. I am just curious, though. Fuel is obviously -- I get the commentary on how you do fleet versus long-term fuel prices.

But I am curious. How should we be thinking about tactical moves or utilization flying in off-peaks, when fuel is whipping around like this? I presume we have to obviously have a view.

Is that similar to fleet, where you're not taking it into account? Or should we start thinking differently about what you might do in the first quarter if fuel stays here?

Well, I mean, we are going to -- as we said, we will update our 2015 capacity plan, for Delta only, at the December Investor Day. But just broadly, we are driven by profitability and return on invested capital. And what that means is that when we make fleet planning decisions, we include ownership costs; and we include ownership costs even in our short-term planning.

So the bottom line is we want that 19% return on invested capital on a consistent basis. And in order for us to do that, we have got to be very adroit at deploying our capital to make sure we get a return, or the maximum return, every quarter.

Okay, all right. That helps quite a bit. I think the rest of mine have been asked already, so I will stop there. Thank you.

That is going to conclude the analyst portion of the call. Before we turn it over to the media portion, I do want to say that there were a sizable number of analysts that didn't get on the call, and we will follow up with each of you directly off-line. With that, I will hand it over to Kevin Shinkle.

Hi, this is Kevin Shinkle, the Chief Communications Officer. Thanks to the reporters who are on the call. I would like to say that we have about 10 minutes, so if you can keep it to one question and a brief follow-up, it would be great.

So with that, I will turn it over to Kelly Ann for a repeat of instructions.

(Operator Instructions) David Koenig, The Associated Press.

I think, Richard, you can answer this. Curious what you think about the CDC's decision to let that second nurse fly on that Frontier flight less than 21 days after her possible exposure to Ebola. I heard the comments earlier about your bookings; but what do you think of that decision?

Well, I think Dr. Frieden was very clear in stating that the CDC made a mistake. I think what is worth noting is you really can't catch Ebola on an airplane, and the screening techniques that the government has put in place are going to detect folks coming from the risk areas in Africa, in advance of entering the United States. So I think that Dr. Frieden has done a good job answering that question.

So does that mean you have confidence that the government is going to get this right?

Yes.

Okay. Thanks.

Thomson Reuters, Jeffrey Dastin.

Thank you and good morning. What additional steps might Delta take to convince investors that Ebola will not impact the airline's future performance?

Yes, hi. This is Gil West. Well, first, I would just point out, this isn't the first communicable disease that we have faced as an airline or an industry, and we are well versed at managing these type of events, ensuring the safety of our customers and crews. We have got a corporate safety and security staff that is in continuous dialog with the CDC and the World Health Organization, and we adhere to all their recommendations.

I would just point out the virus, as I am sure you know, is extremely difficult to transmit. A person has to have symptoms to be contagious.

As Richard pointed out, there are CDC screening protocols in place, in and out of all of the West African countries, as well as into the US and the EU, to prevent a person with symptoms from flying. We have also got well-established hygienic cleaning procedures and use disinfectants prior to every flight.

And then the CDC -- and they continue to point out that there is virtually no risk to all air travelers no matter where you are traveling.

Thank you. And if I may ask a brief follow-up, has Delta taken any steps to protect itself against employees that potentially could sue the Company as Ebola spreads?

On the employee side, yes. We have got -- I mean if I understood your question, when we're talking about employees, we have ongoing dialog with our flight crews, and awareness and educational campaigns, as well as provisioning the aircraft with preventative kits in case they do encounter anything unusual.

Thank you.

Mike Sasso, Bloomberg News.

Yes, good morning. I just had a question. Are you seeing any reticence by pilots or flight attendants to fly certain routes? I am thinking West Africa.

I did hear something about speculation that maybe high senior pilots are bidding off of those routes. Are you seeing any of that from any of your ranks of employees?

Yes, hi. This is Joanne Smith, and the answer is no. We are not seeing any pilots or flight attendants who are bidding off. It's a very flexible bidding system and certainly the opportunity for swapping trips is there. But we are not seeing any issues specific to this [cause] for Africa.

Linda Loyd, The Philadelphia Inquirer.

Thank you for taking my question. You mentioned that the refinery made a $19 million profit in the third quarter, and then you referred to a $20 million profit. I just didn't hear whether you said that was for the fourth quarter or the year. I just wasn't sure what you said.

Hey, Linda; this is Paul Jacobson. That was guidance for the fourth quarter. So we produced a $19 million profit in the third quarter, and we anticipate approximately a $20 million profit for the fourth quarter.

The team up there is doing a fabulous job of running the plant and keeping it up and operational.

So do you expect the refinery to be profitable for the entire year 2014?

It will be close for the entire -- for the full year 2014, yes.

Close to profitable?

Yes.

Okay. All right, thank you.

Okay, with that, that concludes our call for today. Thank you very much.

Again, that will conclude today's conference. Thank you all for joining us.