達美航空 (DAL) 2015 Q2 法說會逐字稿

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

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

(Operator Instructions)

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

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

Thanks, Lauren.

Good morning, everyone, and thanks for joining us.

Our CEO, Richard Anderson, is joining us remotely today; and Ed Bastian, our President, Paul Jacobson, our CFO, and the remainder of the leadership team is here in Atlanta today.

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

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

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

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

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

We'll also discuss non-GAAP financial measures.

All results exclude special items unless otherwise noted, and you can find the reconciliation of our non-GAAP measures on the Investor Relations page at IR.delta.com.

With that, I'll turn the call over to Richard.

Thank you, Jill.

This morning, we reported another record quarterly result.

We maintained our revenue base, despite an 18% decline in fuel prices, which allowed us to expand our pre-tax margin by 200 basis points, improving earnings per share by 22% year on year, and generated free cash flow of $1.6 billion in the quarter.

We also delivered a return on invested capital of 23.5% for the last 12 months.

We benefited from lower fuel expense in the quarter, despite a $600-million hedge loss.

Excluding the impact of hedges, our operating margin would have expanded nearly 700 basis points to more than 21%.

As of July 1, the fuel hedge headwind we have faced over the last six months is behind us, and we expect the fuel price we will pay in the second half to be in line with the industry.

Our strong cash generation continued, with $2.5 billion of operating cash flow and $1.6 billion of free cash flow for the quarter.

This allowed us to accelerate returns to our owners with $1 billion in dividends and share buybacks, while also reducing our adjusted net debt by another $250 million to $7.1 billion.

We continue to run the industry's best operation, by far.

In the June quarter, we delivered 99.8% completion factor, including 43 days with zero main line cancellations.

Our main line on-time rate improved 2 points to 85.3.

None of our global or national competitors are even close to this level of performance.

These outstanding results were made possible by the dedication of our employees, who work extremely hard every day to provide an industry-leading customer experience and outstanding returns to our owners.

Regarding the current environment, business conditions generally remain favorable.

Currency volatility continues to impact our international business, while domestic yields have been under pretty significant pressure.

Despite these headwinds, the result we reported this morning marks the best June quarter in our history.

We still have great momentum in the Business, and we expect to report record earnings again in the third quarter.

Specifically, we are forecasting EPS growth in 3Q of well over 30%, operating margins of 19% to 21%, and $1.9 billion of operating cash flow in the September quarter.

We will use that cash flow to reinvest in the Business, reduce our debt, return cash to our owners, all of which will be consistent with the capital deployment plan we provided to the marketplace last May.

Last week, we announced a strategic investment and goal that will play a key role in helping us achieve our long-term goals.

Ed will provide specifics, but I'd highlight that building out our Latin network is a major initiative for Delta.

Our stake and goal will further this effort as the largest domestic carrier in Brazil, and it will provide significant long-term upside in the region for Delta, particularly as we move toward Open Skies with Brazil.

When we couple our investment and goal with the significant investment we have in Aeromexico, we have the foundation for the strongest network in Latin America.

We have a long and successful history with our partner, Air France-KLM, that has allowed us to build a very profitable transAtlantic business.

That, coupled with our Virgin Atlantic investment, will allow us to continue to leverage that kind of model with new partners in other markets and regions of the world.

I also want to comment on our fourth-quarter capacity outlook.

Margin expansion is a key component of the long-term plan at Delta, and adjusting Delta's supply to meet market-based demand is necessary to drive margin growth and to hit our long-term financial targets.

We are currently benefiting from lower fuel prices.

We do not believe margin expansion driven largely by declining fuel prices is sustainable over the long term, and our plan assumes rising fuel prices over time.

Because of this, RASM growth is a necessary component of our business strategy over time, and we will unilaterally determine Delta's capacity at levels consistent with achieving our long-term goals.

Much like consumer retail, our store sales must be positive year over year over the long term.

For the fourth quarter, our domestic growth will be 2%.

As we announced last April, international capacity will be down 3.5% in 4Q.

This is a slightly larger change than we announced last April.

This reduction in international capacity is driven by currencies and economic weaknesses in certain countries around the world.

These actions will result in system capacity being consistent with last year's levels, and in line with current demand expectations, which we expect will get to unit revenue to be roughly flat by year end.

Lastly, regarding the recent pilot vote, we were disappointed our pilots turned down an agreement that would have improved upon their already industry-leading contract.

However, this outcome doesn't mark any change to the strong working relationship we have with our pilots, who are leaders in our operation and key stakeholders in the Enterprise.

We will continue to work together with them to find common solutions.

We've been doing this quite well for the last decade, and I have confidence that we'll continue to do so in the future.

Operating our Business with a long-term perspective has proven very beneficial for Delta's customers, employees, and shareowners.

We have been able to invest in our employees through wage increases, healthy profit sharing, and job growth.

For our customers, we run absolutely the best operation in the world.

We've improved our products, technologies, operations, and service with nearly $10 billion in capital investment in the last five years.

And for our owners, we've returned over $3 billion in the last two years, while improving the strength of our balance sheet with over $10 billion of debt reduction, and we've increased our market capitalization to over $30 billion.

We have a lot of upside in the Business.

We can do more in the future as we continue to execute on our plan the way we have consistently executed over the last decade.

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

Thank you.

Thanks, Richard.

Good morning, everyone.

Thanks for joining us today.

We delivered a record June quarter, with pre-tax income increasing 14% to $1.64 billion.

Our net income was slightly north of $1 billion, or $1.27 per share, $0.06 higher than consensus.

We expanded our operating margin 1.7 points to 16.8%, which is in line with our initial guidance range for the quarter of 16% to 18%.

I would like to thank Delta employees for their contributions to another record result, which we are pleased to recognize with an additional $411 million contribution to next year's profit-sharing payout.

We were able to grow our top line slightly, as a number of our revenue initiatives and non-passenger revenue sources helped offset a $160-million foreign exchange headwind.

Corporate demand remains solid, with volume growth of 3% in the quarter, though that was largely offset by fare pressure.

We continue to see good performance with our branded fares initiative.

Total merchandising revenues and fees grew by 11%, led by incremental first-class revenue growth of 17% and Comfort+ growth of nearly 30%.

We increased our paid first-class load factor to 57%, up 8 points year over year on a base of 7% more first-class seats.

Our enhanced agreement with American Express produced an incremental $60 million in revenue this quarter.

Our partnership with AMEX remains strong.

Despite these improvements, the strong dollar and lower fuel surcharges remain headwinds for our international business, while softer yields in certain domestic markets resulted in revenues that fell short of our initial expectations.

For the June quarter, passenger unit revenues declined 4.6%, with 2.5 points attributable to currency and lower surcharges, and the remainder attributable to lower domestic yields.

This yield weakness domestically was limited to a small group of markets.

In fact, three markets accounted for 50% of the overall domestic yield weakness.

Despite these pressures, we are able to expand our domestic revenue premium to the industry, which now stands at 115% year to date.

Margins did expand across all our domestic hubs in the quarter, and excluding the effect of our fuel hedge losses, achieved a 23% domestic margin, up 800 basis points relative to last year.

Relative to some of our growth initiatives, Seattle performed well, absorbing 35% higher capacity while maintaining RASM levels.

We were also pleased with the performance of our JFK long-haul markets, especially the LAX and San Francisco transcons, and we announced late last month that we'll be adding additional and upgraded service as United exits JFK.

In the transAtlantic, unit revenues declined 11.5%, with over 6 points of impact from currency and fuel surcharges.

We faced a tough comp in the region this quarter, as transAtlantic unit revenue improved by more than 7 points last year.

In core European markets, we saw improved US point-of-sale demand, but this was more than offset by reduced point-of-sale demand in Europe and the effect of the weaker euro.

While we continue to face headwinds in Africa, the Middle East, and Russia, we are seeing some positive signs in places like Johannesburg.

We continue to make capacity adjustments in these challenging markets, including the suspension of service to Moscow for the upcoming winter season.

We are pleased with the performance of our two transAtlantic joint ventures this quarter, as these relationships with Air France-KLM and Virgin Atlantic saw margins expand once again, despite continued currency pressure.

We're using the success of these joint ventures as the model, as we deepen our partnerships with carriers in other parts of the world.

In Latin America, unit revenues were down 8 points on 8% higher capacity.

The decline was driven by currency and pressure from last year's Venezuelan capacity reductions.

This quarter marks the last of our high single-digit growth in Latin America, as we've largely finished building out that portion of our network.

Going forward, our capacity growth in the region will return to levels more consistent with the system average.

Our partners, GOL and Aeromexico, contributed $25 million in incremental revenue this quarter, and we are taking advantage of the opportunity to expand upon these relationships.

As Richard highlighted, we'll be increasing our equity investment in GOL by up to $56 million as part of larger rights offering, which will result in Delta potentially increasing our position up to 9%.

At the same time, we'll be guaranteeing $300 million of unsecured debt to be entered into by GOL.

That guarantee will be secured by GOL's interest in SMILES, the company's publicly traded loyalty program.

This will raise GOL's cash position to a level that ensures the carrier will have ample liquidity in a difficult economic environment in Brazil.

Adjusted for these initiatives, GOL would have ended the second quarter with $1.1 billion in liquidity, 35% of their annual revenues.

We feel great about our long-term prospects with GOL, and are pleased to stand behind the company and the work Kakinoff and his team are doing to address these challenges.

As part of the transaction, we'll extend our exclusive commercial partnership with a target of getting to a joint venture with GOL as Open Skies with Brazil becomes effective later this year.

When combined with the joint venture that we have planned with Aeromexico, we will have immunized alliances in the two largest aviation markets in Latin America.

In the Pacific, the revenue environment remains challenging, with unit revenues down 8.5% on 4% lower capacity, and roughly 12 points of impact from FX and fuel surcharges.

Specifically, the yen revenue headwind in the quarter was $27 million, net of hedges.

As we had laid out previously, restructuring our Pacific network is one of our biggest opportunities for margin improvement going forward, and the early results of these efforts are positive.

As part of these efforts, we'll be reducing our winter capacity in the Pacific by 6% to 8%, including retiring six of the 747s, and canceling the loss-making Seattle-Haneda service.

Now, looking forward to the September quarter guidance, we expect the revenue environment across the system to remain under pressure, and we're forecasting total revenue to decline slightly from prior-year levels, with RASM down 4.5% to 6.5% on 3 points of higher capacity.

The quarter will be a bit choppy, with the July and September months posting better results than August.

However, we are expecting fuel expense to be $1 billion lower year over year, which will more than offset this revenue weakness to result in another record profit, with an operating margin of 19% to 21%, up more than 400 points year on year.

As Richard mentioned, the right balance of supply and demand in the Business is key to achieving positive unit revenues over the long term.

This is a fundamental component of our plan and the financial targets we outlined at our capital meeting in May.

Based on the current environment, we believe that our previously announced capacity plans are still the appropriate levels for this winter.

As such, we're planning for 2% growth domestically, and a 3.5% reduction internationally, which is a 50-basis-point further reduction from what we previously announced, which will result in overall system capacity being flat year over year in the fourth quarter.

We believe this plan is in line with current demand and GDP forecast, and it will allow us to get our unit revenue back on the right trajectory, with our goal to be flat by the end of the year.

Now I'll turn the call over to Paul to go through the details on cost and cash flows.

Thanks, Ed, and good morning, everyone.

Consistent cost execution continued again this quarter, and was a key contributor to the 160 basis points of operating margin expansion relative to last year.

Total operating expenses were $85 million lower, as the decline in fuel costs offset the investments we are making in our product, as well as $71 million in higher profit-sharing expense.

Non-fuel CASM declined just under 1 point on a 3.4% capacity increase.

This performance was slightly better than guidance, as a result of some favorability and one-time benefits that occurred during the close process.

This marks the eighth consecutive quarter of non-fuel CASM growth below 2%, and the sixth consecutive below 1%.

As is evident in this result, the entire Delta organization is highly focused on controlling cost.

Our updating progress, maintenance initiatives, and other productivity improvement efforts were the key drivers of this strong cost performance.

As an example, since 2010, in the domestic entity, we have increased capacity approximately 1.2% per year, but that's been on 13% total fewer departures and 9% total fewer aircraft over that time.

FX also benefited non-fuel CASM by about 1 point.

We expect non-fuel CASM to be flat in the September quarter, as our cost-reduction initiatives continue to keep our performance below our 2% growth target.

Moving on to fuel, our total fuel expense declined 16%, as lower market fuel prices more than offset higher consumption in our hedge losses.

Our all-in fuel price was $2.40 per gallon, down from $2.93 in the same period last year.

Hedge losses were a $0.58-per-gallon headwind in the quarter.

The refinery made a $90-million profit this quarter versus a $13-million profit the same period last year, driven by lower crude costs and improved mix of North American supply.

A continued favorable crack spread environment and increased throughput also contributed to the refinery's profit.

Over the last four quarters, the refinery has produced a cumulative profit of $300 million.

We expect that trend to continue to build in 3Q, with a projected profit of approximately $60 million.

With the recent sharp drop in fuel prices, we currently expect our September quarter fuel expense will be $1 billion lower year over year, net of roughly $200 million of hedge losses.

At $1.90 to $1.95 per gallon, our second-half fuel price will be 28% lower than what we paid in the first half of 2015, according to the current curve.

We expect this price will be in line with the industry average for the balance of the year.

For the remainder of the year, we are approximately 15% hedged against an increase in prices, with approximately 85% downside participation to Brent prices of $40 per barrel.

Overall, we continue to expect fuel costs to be an enormous tailwind, and provide a net benefit of more than $2 billion for Delta this year.

We are also well positioned to benefit if fuel remains at these levels through 2016.

Our already strong cash flow will continue to benefit from these lower fuel prices, which will allow us to return cash to our owners, while also further strengthening the balance sheet by paying down debt and funding our pension plans.

For the June quarter, we generated $2.5 billion of operating cash flow, net of $300 million in pension contributions.

At this point, we've made all of our planned 2015 contributions for a total of $1.2 billion.

We also reinvested $900 million back into the Business, primarily related to 737-900 and A330 deliveries, as we continue our long-term focus.

For the September quarter, we are projecting roughly $800 million in capital expenditures.

With the $1.6 billion of free cash flow we generated during the June quarter, we continued our path that we set out in May of increasing shareholder returns, with $72 million of dividends and $925 million of share repurchases during the quarter.

We completed all that remained under our $2-billion authorization from 2014 as we had planned.

We also opportunistically repurchased an additional $200 million under our new $5-billion authorization, as we took advantage of share price weakness during the quarter.

In addition, we repurchased another $50 million in just the first two weeks of July.

We expect to return nearly $2.5 billion to shareholders this year, consistent with our goal of returning at least 50% of free cash flow through dividends and buybacks.

Adjusted net debt at the end of the quarter was $7.1 billion, and our debt reduction lowered interest expense by nearly $50 million for the quarter relative to last year.

Our goal was to achieve and maintain $4 billion in adjusted net debt levels by 2017, and we are on track to do so.

The improvements in our balance sheet were recently recognized with a credit upgrade from Moody's, which now has Delta two notches away from investment grade, alongside the other agencies.

In closing, I'd like to thank the entire Delta team for another record-breaking quarter; in fact, our ninth consecutive.

We have the best employees in the industry, and our performance is driven by your contributions.

Thank you.

Jill?

Lauren, we're now ready for questions from the analysts, if you could give everybody instructions on how to get in the queue?

Thank you.

(Operator Instructions)

Our first question comes from Jamie Baker with JPMorgan.

Hi, good morning, team.

First question for Richard: I wouldn't expect you to comment on the legal merits of the DOJ's recent inquiry, but I am curious, in your mind, in a worst-case scenario if you can envision an outcome that would impair your current level of transparency?

You know, I don't really think I want to comment on any of that, Jamie.

Okay, all right.

But I think that we're going to always be transparent with our investors.

I don't think that there's any legal prohibition on being transparent, unilaterally that is, with our investors.

And if you think about the data that's available on airlines -- our schedules are public.

They're filed in OAG and ATPCO; and under DOT regulations we're required to file huge amounts of data with the government, in addition to all the public data that's made available through the GDS systems.

So, bottom line is we're going to continue to comply with the law, act unilaterally, and do our best to give our investors visibility into our Business.

Excellent, I appreciate it.

And a follow-up: Since you brought up the topic, Richard, of the pilots, rather than just rely on my contacts or trolling the message boards, what are the three or four biggest reasons, in your mind, that the TA was rejected by a fairly wide margin?

Was it noise around the sick leave issue, changes around JV flying and how Virgin got treated?

I'm just trying to get a sense for what portions of the drawing board you might need to return to, as opposed to just pay rates or something like that.

I think it's premature to do that.

The Delta master executive counsel is going to be meeting in a couple of weeks, and we really need to hear back from them.

I think the overarching story is that we have an incredible track record with them.

And if you think about it, we're still five months ahead of the amendable day.

So, bottom line is the relationship is still strong.

It's intact.

We have a decade history of being able to work well together, and we're still operating, on both sides, in that same spirit.

Got it.

I appreciate the answers, Richard, take care.

Safe travels.

Thank you.

Our next question comes from Michael Linenberg with Deutsche Bank.

Yes, hey, two questions here.

Ed, I want to go back to transAtlantic.

I think you talked about fuel surcharges and currency weakness accounting for like 6 points of the 11.5% decline, and then I know you also had a difficult comp.

What sort of component or -- as it relates to connecting flows and how that number builds up -- what are you seeing on just your connecting traffic to your partners, as we see a lot of capacity getting added into the marketplace?

Is that also driving that number down or putting pressure on the transAtlantic PRASM?

Mike, it's Glen.

Hi, Glen.

One of the things that our great relationship with Air France-KLM and now Virgin allows us to do is to contract during periods of lower economic growth, and route that traffic over the European hubs in Amsterdam, de Gaulle, and London.

So, what you see, for example, is, as we reduce our capacity into Russia because of the weakness in the demand to Russia, we expect to generate a significant or retain a significant amount of [that] over those hubs.

And so, as we work our way through this situation with a lower euro and the lower European demand, we actually would increase, we would expect to increase our connecting traffic over our European hubs.

Yes, but I'm wondering, Glen, are you seeing some displacement of that traffic to competitors, such as Emirates or Etihad or Qatar, as they continue to add more and more seats into the marketplace?

And I'm looking more like US into India, Middle East, Africa, because there is a decent amount of flow traffic between you and your partners.

Correct.

As we've stated in the past, we are not and we have not been the largest player in the US to India or the Indian subcontinent, but it is a significant long-term threat to us.

It's as much a missed opportunity.

We believe that under the right and fare circumstances, that we should be able to fly non-stop from the US into India.

Okay, great.

And then just a quick one: Monthly PRASM -- was June the last month, or are you going to continue to provide that?

We're going to continue to provide it for the time being.

Great.

Thanks, Ed.

Our next question comes from Duane Pfennigwerth with Evercore ISI.

Thanks, good morning.

Appreciate your commentary on the small number of markets that drove yield weakness in the US.

I wonder, one, did you comment on what you think domestic unit revenue will be in that third-quarter guidance?

And then, with respect to those weaker markets, are you detecting any firming, or how is your maybe forecasting approach change with respect to those smaller but weaker markets?

Duane, we did not disclose our domestic unit revenue expectations for the third quarter, but what I can tell you is that we have embedded within our third-quarter overall unit revenue guide the expectation that through the summer that domestic weakness is going to remain.

Okay, thanks.

And then, just on the branded fares, can you expand a little bit about what's driving that $56 million, and how you define whether or not that that's incremental?

Well, there are three really branded fares that we're talking about today, and one is basic economy, which is our Spirit-match fare, if you will, or our ultra low-cost carrier, which is a [b-count dented] product.

We have Comfort+, which we relaunched in the quarter with a few additional amenities, and we saw a huge uptick.

Now, we believe this is all incremental because the transaction is actually a post-purchase transaction.

So, you have to go in and buy the additional service upgrade after you purchased your ticket.

And so, we view that as fully incremental.

And then, first class upsell is really the amount of incremental seats that we've sold, net of the cost of the -- or the displacement of the coach fares that were upgraded from.

So, achieving a 57% paid load factor in first class is another stepping stone along our path.

I believe when we started, we told our investors that we thought this was a several-billion-dollar opportunity in total, with all four of these classes intact, or three of the classes intact in the main cabin.

And so, 70% is our long-term goal.

We're at 57% today, and we started at 13%.

So, we've made quite a bit of progress in the last several years on that front, and we're very pleased with the results in all of our product lines.

Okay, thanks very much.

Our next question comes from Julie Yates with Credit Suisse.

Good morning.

Thanks for taking my question.

First, just a clarification on commentary: It sounds like you're now saying the goal is to achieve flat unit revenues by the end of the year.

And I believe, at the risk of getting too granular here, that at a conference in June you cited that the Company would be on a path to get to positive unit revenue by the end of the year.

So, am I reading too much into that or is there a slight shift here?

There's no shift in that, Julie.

Our plan and their goal is to get there by the end of the year.

We would like to get to positive, but we have to get to flat before we get to positive, right?

Makes sense, okay.

And then just a quick one on buybacks: So, clearly the market is not ascribing the same value to fuel-driven earnings versus PRASM-driven earnings.

So, in a scenario where jet fuel stays below $2, and the market continues to undervalue your stock with a PE multiple sub-10 times, how do we think about the sustainability of the nearly $1 billion buyback we saw in the second quarter?

Julie, good morning, this is Paul.

Clearly, as we articulated back in June, we have taken the opportunity given these low prices to accelerate the buyback a little bit.

Part of our long-term goals is what we've talked about is returning at least 50% of cash to shareholders in a balanced fashion.

So, we don't have any comment on what our pace is going to be in the second half of the year, but we need to continue to make progress against all of our goals that we outlined in May.

Understood, thank you, Paul.

Our next question comes from David Fintzen with Barclays.

Hey, good morning, everyone.

Just on setting the supply and the demand, and getting that right into year end, can you just talk a little bit about what's embedded in your domestic demand assumption?

Is it that some of that weakness we've seen lately stabilizes, improves -- just how are you at least starting to think about the end of the year?

This is Glen again.

So, I think, as you look at where the weakness is, it is not in corporate demand.

It is in the yield that we are obtaining from corporate demand.

And so, as we continue to move forward, we don't talk about future pricing initiatives, we never have.

And so, but what I would say is, I think that corporate demand remains very, very strong, and very, very strong even out of these cities that have had this yield impact.

And how the industry reacts will determine how those three cities do.

Okay, appreciate that.

And then just slightly bigger picture, if we're getting the kind of record earnings on lower fuel, lower RASM, does that start to change some of the return on investment on some of the density adds or the upgauging?

Does that mitigate some of the speed of upgauging regionals, et cetera?

Or is that still ahead in incremental opportunities?

Let me take this, Ed.

The upgauging strategy is an important -- continuing important part of our fleet strategy, because no matter what, operating the fleet more efficiently makes good sense from a margin standpoint.

And so, when we upgauge a 50 seater to a 76 seater, or a 76 seater to a 100 seater, and all the way up the line, we're still going to be able to operate a larger number of ASMs with a fewer number of shells in that kind of efficiency.

If you just think about it from a factory standpoint, we're running our factories much more efficiently, and you will always invest in efficiency in an industrial business.

Okay, appreciate that, thank you.

Our next question comes from Darryl Genovesi with UBS.

Hi, good morning, guys.

Paul, does the CASM ex-fuel guidance for the third quarter contemplate any deal with the pilots happens that actually impacts the third quarter?

We never -- Darryl, this is Ed.

We never project future labor deals in our cost guidance.

Okay.

And then on -- I guess on pension, discount rates seem to be up about 50 basis points year to date.

Could you guys just give us an update on where the pension expense and the deficit is projected at this point?

Sure, Darryl.

It's Paul.

The sensitivity on the underfunded pension plan is about $1.5 billion for every 50 basis points.

So, we would expect to see, obviously, some goodness on the liability.

The rate isn't as sensitive on expense; but as we continue to fund above the minimum contributions, we should see some expense (technical difficulty) here as well.

Thanks.

And then if I could just squeeze one last one in, on the American Express deal, you laid out at the Investor Day a plan to essentially double that revenue stream over the next four or five years.

Can you give us a sense of how much of that incremental revenue should drop through to earnings?

I would anticipate, and we haven't publicly disclosed what the deal or the margin performance in that is, but there's a high contribution margin associated with the improved AMEX economics.

Okay, great.

Thanks very much, guys.

Our next question comes from Andrew Didora with Bank of America.

Hi, good morning, everyone.

Thanks for taking my questions.

I guess, Ed, a housekeeping question: Are you able to disclose the cadence of domestic PRASM over the course of 2Q by month?

Domestic RASM by month?

I don't have that in front of me, but we've disclosed that already.

Okay, I just didn't know what it was for --

We did overall, not domestic.

We'll need to get back to you.

We don't have that in front of us.

Okay.

And then, Paul, in your prepared remarks, you had 15% hedged for the rest of the year.

Obviously, it remains lower than where you have been in the past.

How are you thinking about hedging, now that oil has stayed in this kind of $60-ish per barrel range now for a good part of the year?

Are you content remaining to float at these levels, or are you interested in layering on some more hedges as we go throughout the course of 2015?

Good morning, Andrew.

We haven't actually materially changed our hedge profile, really since February.

We've been kind of sitting back, watching the market.

There isn't really any urgency here.

We're not really changing a course of action, and we're content with where the book sits right now.

Got it.

Thank you.

Our next question comes from Helane Becker with Cowen and Company.

Thanks very much, operator.

Hi, guys, thanks for the time.

Did you say, and I missed the three cities that you were seeing weakness in, in the domestic market, and can you say if you didn't?

We did not say, but they are Chicago, Dallas and Orlando.

Great, okay, thank you.

And then my other question is: You guys do deliver a pretty amazing product to your customers out of some pretty tough markets in which to operate, like the northeast where you get a lot of thunderstorms and a lot of air traffic control issues and so on.

So, two questions, or an A and a B.

One, as you get bigger, especially in New York, how do you ensure that you continue to deliver that great operational performance?

And then, B is: Do your code share and JV partners deliver the same product?

And how do you ensure that your customers get the same product across all Delta coded flights?

Thanks.

Let me try to answer those.

As to the second point, without going into the specifics, because they're proprietary to Delta, we have very good programs to be certain that our products are consistent across our code share partners, both domestically and internationally.

And we have a pretty significant focus on that, and some firm-specific proprietary strategies and processes that actually have our connection carriers running better on a reliability basis than some of our main line competitors.

And I think, in New York and in Minneapolis and Detroit where you have really cold weather all the time, and Atlanta, we have just made a lot of investments, and I think have the leading management -- operations management team in the world for an airline.

And if you look at the performance of our operation, there is no airline even close to our size that performs at the kinds of levels.

I think Ed had described it well at an analyst conference a while back last year, and we're going to beat the record this year.

But last year we had, in the domestic system, I think 195 days where we didn't cancel a domestic flight.

I think American, United and Southwest together had 12.

And it just -- that same operating know-how and capability which is driving huge share and revenue shifts to Delta can continue to improve and will continue to improve because we're just about at scale in both JFK and Laguardia.

Okay.

So, as we think about that, it's really that you're making investments on the technology side or on the air -- I guess the air side technology-wise in an effort to really drive this improved performance.

Because you're also doing it with fewer air traffic controllers and a pretty big decline in the ATC system as well.

We are, but we also have employees that are all incredibly committed to making the airline run.

And in the end, there's no substitute for the power of the -- and the know-how of the employees.

But I would say it's a myriad of investments.

It's better planning tools; it's a lot of technology investment; it's core reliability investment; it's process investment in how we build our schedules.

I mean, it's a very long list of actions that we've taken over time, and investments that we've taken over time.

Great, thank you so much for that time.

I really appreciate it, Richard.

Helane, if I could jump in, I just want to clarify one.

Andrew from Merrill Lynch asked earlier about our domestic unit revenues by month.

Domestic unit revenue in April was flat.

Domestic unit revenue in May was down 3%, and in June it was also down 3%.

So, I just wanted to give that additional data.

Our next question comes from Tom Kim with Goldman Sachs.

Good morning.

Thanks for your time.

Glen, I just wanted to press a little bit on your comment on corporate demand.

How do I reconcile some of the industry commentary about weakness in close-in bookings with your comment that corporate demand remains really strong?

You know, I don't know where that weakness in close-in bookings came into play, and I apologize for not knowing when that comment was made.

But it really has not been a weakness in close-in bookings.

There's been a weakness in close-in yield, and there's a big difference in that.

If corporate was not traveling, that would be one or there was a demand weakness in terms of total load factor, that would lead you to one conclusion.

If there was a weakness in yield because of a change in pricing, that would lead you to a different conclusion.

So, I did want to clarify that because I have read it in several reports where people were talking about close-in demand deterioration, which is not what Delta has experienced.

But we have experienced close-in yield deterioration in several key business markets.

Okay, thanks for clarifying that.

And then, I just wanted to also ask you maybe a little bit of a longer-term question in nature with regards to ancillaries and your other revenue category.

This year looks like it's going to be a flat, if not a down year, for passenger revenue, but clearly you're seeing really good growth in contribution from other revenues.

And I'm just wondering -- we've had nearly two strong good years of growth.

Can you give us a sense of what 2016 growth rates should look like as we start to try to model something around something that's arguably a little bit more defensible or a little bit more resilient where we can hang our hat on with a little bit more certainty?

You know, I think we'll save that for our Investor Day later in the year.

But what is safe to say is, some of the products that are very, very popular with our customers are still very difficult to purchase from us.

And so, 2016 is about our ability to bring those to the market in a much more user-friendly environment, and continue to expand out the products and services we have.

So, we see a lot of continued upside through 2016, and I think we'll save the punch line for our next Investor Day.

Okay, fair enough.

Thanks a lot.

Our next question comes from Savi Syth with Raymond James.

Hi, good morning.

Two questions: The first is, on the third-quarter unit revenue guide, I was just wondering if you could provide a little bit more color on what you're expecting from an FX and fuel surcharge drag?

And then generally, if there is any expectation of trend change within the regions?

We're pulling out a little bit of the -- Gary, do you have that one?

Go ahead.

Surcharges are about 0.5 points.

Okay.

Gary, why don't you read --

Sorry.

Savi, you asked for the FX impact and the impact of surcharges.

The FX is about 3 points and the surcharge is about 0.5 points for the third quarter.

Okay.

And then, generally the trends in the -- especially in national regions, you're expecting a continuation of what you're seeing in the second quarter?

Yes, we are.

Okay.

And then just a second question on the -- in Brazil and Mexico, with Open Skies likely coming out here, and the potential to do a anti-trust immunized JV with your partners, just wondering, one, is there sufficient slots in this market to take advantage of an Open Skies situation?

And then also, what a ATI JV might contribute versus the type of partnership you have today with these partners?

Well, obviously, in the key markets in San Paolo, Mexico City, they're slot-constrained and this will take time to continue to build out the efficiencies.

But as we create the joint ventures and get our operations working together, we think there will be opportunities to certainly increase throughput there in the big markets.

And then, to me, more importantly, working throughout the domestic landscape in both markets.

What's the benefit of getting an ATI JV here?

I know in the transAtlantic you can just do a little bit more scheduling, and what can't you do today that you could do with that, and what kind of contribution can we think of?

Well, with ATI protection, we can go to the market together.

So, we can sell together, we schedule together, our international feed.

Today, we can't do that in those markets.

All right, thank you.

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

Our next question comes from Joseph Denardi with Stifel.

Thanks, good morning.

Ed, sorry to harp on the PRASM here, but just the walk from 3Q to 4Q, I get the sense that there's some skepticism about the flat 4Q.

So, is it just a function of the surcharges and FX comps get easier in 4Q, and then you get the benefit of lower capacity?

Is that all you guys are planning for, to get to flat in fourth quarter?

Well, to be specific, we said by year end.

So, we didn't say by fourth quarter.

And, yes, there will be a considerable amount of capacity, reallocations, particularly in the international arena.

We will lap the effects, the big effects of the unit revenues hit that will largely come the fourth quarter on FX.

And our goal is to get the -- as we're heading into 2016 on a positive trajectory.

Okay.

And then, Glen, on the basic economy product, can you just walk me through how broadly that's deployed across the network at this point, and whether that's contributing to any of the yield weakness you're seeing domestically?

Absolutely.

It's not contributing to the yield weakness because it's a very restricted product that really isn't purchased by most of our corporate clients.

So, as a matter of fact, many of the corporate agreements we have exclude that as the lowest fare in the marketplace.

So, what we've seen is a very high upsell rate from that, once people see what that fare is and what it offers, that they're actually not purchasing that.

So, through Delta.com when you look at that fare and then you're presented with other options, 65% of the customers opt out of that fare.

And so, we actually think that's yield-accretive for part leisure, and really not very applicable for business travelers.

Okay.

So, as you see more people opt out of it, does that result in you guys reducing the capacity that you're allocating to basic economy?

No, when I say opt out of that fare, that means they're purchasing a higher fare on that flight.

So, if the -- and let's just give an example of this.

If the lowest fare from Detroit to Orlando was $59, and that was a match of an existing Spirit fare, it was presented on Delta.com that $59 gets you a product that is without a seat assignment.

Most people are opting not to take that fare, but to take the next higher fare, which is essentially an added on price.

Okay, thank you.

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

And I will now turn the call over to Kevin Shinkle, our Chief Communications Officer.

Thanks, Jill.

We have a limited amount of time for media, so we can take as many questions as possible.

Please keep them brief, and limit yourself to one follow-up.

And with that, we'll go to our first call.

Our first question comes from Susan Carey with Wall Street Journal.

Good morning.

Could you all tell us a little bit more about your plans for Skymark?

Sure, Susan, this is Ed.

We are discussing with the creditors of Skymark the opportunity to invest as part of their rehabilitation and reconstruction process.

We've long been fairly public about our interest in having a local domestic Japanese partner.

This is an opportunity essentially to create that.

But I think it's premature to speculate as to the odds of success or where this is going to go, given there's a lot of unique attributes to the Japanese rehabilitation process that are being explored, and we have a -- we are in the discussion phase.

Thank you.

Let me just follow up with one more.

What's going to happen to the airplane order for the 737-900s and the Embraer 190s as a result of this pilot rejection?

Those orders will be cancelled.

That's Richard speaking?

Yes.

Okay, thank you.

(Operator Instructions)

Our next question comes from Dominic Gates with Seattle Times.

Hi.

Wanted to ask first: You've had a very heavy growth year in Seattle, 35% year on year.

Are you expecting the same level of growth to continue?

What's your projection?

We couldn't hear that question.

Could you speak up?

Sorry, I'll switch to a handset.

Are you expecting to maintain the same level of growth out of Seattle in Sea-Tac as you've had in the past year?

We have said that our growth will start to meter down a bit, but we still are projecting future growth at Sea-Tac, yes.

Do you have a number on that?

We have not given a number, no.

Could I just follow up?

Longer terms transPacific strategy -- could you just talk about where you see that going and about your fleet replacement plans there?

We think that the Pacific continues to be a bright spot in terms of global economic development, and Seattle, of course, is our best-positioned US hub.

We're very enthusiastic about the results to date in Seattle.

And today, as of last month, we are connecting over 700 people a day in Sea-Tac from our domestic system to our international network.

And that's why it's very important for us to continue to work with the city to ensure that we have adequate facilities to be able to create a world-class connecting opportunity in the city of Seattle.

So, we're very enthusiastic about the potential in the future, and we're committed to working with the community to make sure that that facility is a world-class experience for our connecting customers.

Our next question comes from Jeffrey Dastin with Reuters.

Thank you very much for your time.

Would a deal with Skymark make strengthening Delta's relationship with Korean Air less important, or would the two complement each other?

We're not going to speculate on future transactions, Jeffrey.

Okay, thank you very much.

Well, if there are no other calls, I think we will conclude -- or no other questions -- we'll conclude this call.

Thank you very much.

This concludes today's conference.

Thank you for your participation.