達美航空 (DAL) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Delta Air Lines June Quarter Financial Results Conference Call.

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

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

I would now like to turn the conference over to Jill Greer, Vice President of Investor Relations.

Please go ahead, ma'am.

Thanks, Rochelle.

Good morning everyone, and thanks for joining us for our June quarter call.

Joining us in Atlanta today are CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Paul Jacobson.

Our entire leadership team is here in the room for the Q&A session.

Ed will open the call and give an overview of Delta's financial performance, Glen will then address the revenue environment, and Paul will conclude with a review of our cost performance and cash flow.

(Operator Instructions)

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 discuss non-GAAP financial measures.

All results exclude special items, unless otherwise noted.

We are also providing cost comparisons on a normalized basis as this better matches the retroactive expense we incurred in the fourth quarter 2016 from our pilot contract to the appropriate quarters of 2016.

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

And with that, I'll turn the call over to Ed.

Thank you, Jill, and good morning.

I appreciate everyone joining us on the call this morning.

Earlier today, we reported the June quarter pretax profit of $1.85 billion and earnings per share of $1.64, largely in line with consensus.

This was the best June quarter in Delta's history.

We generated an 18.4% operating margin, a 14% after-tax return on invested capital and returned $750 million to our shareholders.

We also grew our top line by 3% this quarter, the first year-on-year increase we've reported in 2 years.

And the quarter could have been even better.

We absorbed a $125 million pretax loss from the operational disruption following severe storms that hit Atlanta in early April.

While we can't control the weather, we can improve our recovery.

We've accelerated technology investments and implemented process improvements for the summer that incorporate what we learned from the April event.

In true Delta form, our people bounced back to deliver the strong operations we're known for.

For the first half of this year, we have had 129 days of no mainline cancels and 35 days without a system-wide cancelation.

This is an improvement of 8% and 13%, respectively, to last year and substantially better than our competition.

The great work of our people, supported by the continued investment in our business was evident in the results from the recent J.D. Power survey.

In that survey, Delta's customer satisfaction score improved 33 points to the highest level in our history and we narrowed the gap to first place to 7 points.

It's truly an honor to recognize our employees with $338 million accrued in profit sharing this quarter and $17 million in share rewards.

They are the very best in our business.

Looking ahead to the reminder of the year.

Our unit revenues are improving interacting in line with the plan we laid out at our December Investor Day.

The same is true for our nonfuel cost.

However, fuel prices are lower and this gives us increasing confidence in our ability to drive margin expansion in the back half of the year.

And while 2017 has been a financial transition year as pricing catches up to the rest of the cost growth we've seen, our performance is setting up well to achieve the lower end of the long-term targets that we updated in May.

Specifically, in each of the next 3 years, we're targeting operating margins in the range of 16% to 18%, EPS growth of 15% and $4.5 billion to $5.5 billion of free cash flow.

Our financial path forward focuses on 4 key themes: First, delivering top line and unit revenue growth.

We'll continue to invest in our network, our product and our partnerships for the future.

That's what drives our revenue and brand premium, as well as strong customer loyalty, to create a durable top line.

Glen will spend more time on this in a moment.

Second is maintaining measured and disciplined capacity growth.

Strong, financially healthy companies grow, and we believe keeping our capacity at or below GDP over time is the appropriate level to ensure we can deliver consistent net revenue growth.

This should allow us to balance capital investment, supply and demand and ensure the momentum in the business continues.

Third is driving cost productivity to keep our nonfuel cost growth below 2% over the long term.

This allows the bulk of the benefits of our commercial initiatives to fall to the bottom line, so we can deliver on the margin and cash flow targets.

And finally, being disciplined about our capital allocation.

Our goal is to invest roughly half of our operating cash flow back into the business with the other half being put towards achieving our balance sheet goals and targeted returns to our owners.

Paul will spend some time on both our cost and capital initiatives.

Operating our business with this long-term perspective has proven very beneficial for all of Delta's stakeholders.

It's allowed us to invest in our employees through wage increases each year since the Delta Northwest merger while paying more than $5 billion in profit sharing.

For our customers, we've invested $15 billion in capital projects in the last 5 years, including the replacement of nearly 25% of our total fleet, undertaken significant facility upgrades and enabled investments in new technologies.

And for our shareholders, we've returned over $8 billion since 2013 while reducing our debt by over $10 billion to create an investment-grade balance sheet.

And our stock has recently hit all-time highs with a market cap of over $40 billion.

Our work over the last decade has produced a durable foundation we intend to leverage in order to consistently produce strong and dependable earnings and cash flow growth through the business cycle.

I'm incredibly proud of the great work of our 80,000 people that has established Delta as one of the strongest airlines in the global industry and even more excited about the future ahead for our business as we continue to execute on our long-term plan.

And with that, I'll turn the call over to Glen and Paul to go through more details on the quarter.

Thanks, Ed, and good morning, everyone.

This quarter, we produced a record total revenue of just under $11 billion, an increase of nearly $350 million or 3% over last year with solid improvements across passenger, cargo and other revenue.

This result includes a $115 million revenue headwind from the April storm disruption.

I want to add my thanks to the Delta people for their focus every day on taking great care of our customers.

That is what sits Delta apart from the industry.

Our initiatives to give customers a more efficient global network, an innovative experience and more choice through segmentation are driving continued revenue growth and premiums to the industry which now stand at 110% through the first half.

Before I go through our future opportunities with these initiatives, let me quickly highlight the details of the June quarter.

Passenger revenues increased 3% or $260 million driven by improvements in business yields and our commercial initiatives with $100 million of this increase from Branded Fares.

Cargo sales were up 11% in the first year-on-year improvement in 10 quarters.

Kudos to the Cargo team for delivering this very strong result.

Other revenue grew 4%, ex refinery, driven by a strong 8% improvement in loyalty, partially offset by lower MRO revenues.

Our partnership with American Express produced $70 million of incremental value this quarter, and we are on pace to deliver $300 million of incremental value in 2017, including another record year for card acquisitions.

This tremendous demand for our co-brand card is a testament to the strength of our brand and great partnership with American Express.

Turning to unit revenues.

The improvement in passenger revenue equated to a present growth of 2.5%, including 1 point of pressure from the April storms.

We saw particular strength in business yields, which improved 3 points versus the March quarter and drove our result to the high-end of our initial guidance.

Corporate revenues turned positive in mid-April as volumes increased year-over-year and yields continued to improve sequentially.

Our recent survey of travel managers confirms this momentum with 83% projecting their spend will be maintained or increased for the remainder of 2017.

That's up 2 points from last year's survey.

Our domestic entities saw the greatest benefit from the business yield improvement.

Domestic unit revenues increased 3% versus last year, up 4 points sequentially, with 2/3 of the entity now realizing positive unit revenue growth.

We expect that to expand to 75% of our domestic network in the third quarter.

Our PRASM result, combined with the 2% higher capacity, produced 4% domestic revenue growth for the quarter.

After 2 years of underperformance, we believe we can keep these revenues growing at/or above GDP due to 2 factors.

First, business fares, while improving, remain well below historical levels.

Second, we expect Branded Fares will deliver an incremental $1 billion in revenue through 2019.

With domestic accounting for roughly 2/3 of our revenue base, this type of performance is key to driving further top line revenue growth.

Turning to Latin America.

We realized positive unit revenue growth of 11%, our fourth consecutive quarter of positive PRASM for the region.

Brazil was again the out-performer with RASM up nearly 15%, driven by a stronger rail, solid business demand and our partnership with GOL.

In the Pacific, our unit revenues declined 2%, a slight improvement over last quarter.

Tokyo saw revenue improvements in Haneda and Narita on both load factor and yield versus the quarter, while China RASM declined 2% on a 2-point improvement sequentially.

Strong business traffic offset softness in leisure demand driven by industry capacity increases.

We are excited to have signed a JV agreement with Korean which provides our customers with an industry-leading intra-Asia network and connectivity to over 80 destinations beyond Seoul.

And finally, in the trans-Atlantic, unit revenues declined 2%, including 1.5 points of currency pressure.

RASM in the quarter was bolstered by a focus on U.S. point-of-sale, which stood at 70% this quarter, 4 points above last year.

We also saw strength in business cabin, which offset pressure on leisure yields from high industry capacity levels.

The U.K. was a bright spot, achieving a 7% unit revenue growth, and we see this strength continuing throughout the summer.

To summarize, we are very pleased with a healthy demand environment and progress we've made on our commercial strategy.

This drove our first positive RASM results since late 2014 and a solid 2.7% improvement in TRASM.

And with 3 consecutive months of positive RASM, and that's actually 4, we're going to hold Ed to his deal and we will no longer be reporting our monthly revenue results.

Looking ahead to the third quarter, we expect PRASM to be up in the 2.5% to 4.5% range.

As for capacity, we are forecasting growth of about 2% in the third quarter, that includes 0.5 point from last year's technology outage and 1 point from stage length.

Peaks in the third quarter will be up approximately 1%.

As we think about what's going to drive our commercial performance going forward, I break our initiatives into 3 broad categories.

First, creating a more global and efficient network.

Making sure we not only have the right overall level of capacity but also, we're putting the right number of seats in the right aircraft at the right places.

Our domestic growth is being driven by a multi-year up-gauging initiative, which is producing over 70% of our incremental seats this year.

In 2017, we will continue to add more A321s and 737-900s to replace older narrowbodies and take out additional 50-seat regional jets.

With larger aircraft, we can offer more premium products supporting our revenue strategy, while being more cost efficient.

Internationally, we're refocused on reorienting our network around our partners' hubs.

In Latin, we're moving quickly to implement our JV with Aeromexico, optimizing our schedules to maximize connecting opportunities for customers via hubs in Mexico City and Monterrey.

In the Pacific, between the Korean joint venture and our strong alliance with China Eastern, we have 2 partners with leading Asia hubs in Seoul and Shanghai, and soon, we'll be adding a hub in Beijing.

The combination of these partners and our widebody fleet initiatives will allow us to reduce our reliance on Tokyo Narita and enhance our profitability in the Pacific moving forward.

In the trans-Atlantic, almost 60% of our capacity this quarter was deployed in partner hubs where efficiency and connectivity drives superior margins.

We are also focused on increasing seasonal flying to better align capacity with demand, and to that end, we added 5 new seasonal routes for this summer and are encouraged by the solid margins we are producing.

The second broad group of initiatives is focused on providing an innovative customer experience, making sure that we're investing in products and services our customers value.

This, along with industry-leading reliability and the best people of -- in the industry is what drives higher Net Promoter Scores and ultimately leads to sustained revenue premiums.

On board, we're investing in reliable, high-speed WiFi, upgraded interiors, in-seat entertainment and improved food and snacks.

In our terminals, we have multiple projects across our system to bring the airport of our future to our customers today.

And we continue to lead the industry on innovative customer solutions like RFID backtracking, biometric self-service bag drop kiosk and biometric boarding passes.

We are focused on continuing to make our customers' flying experience better.

Finally, the third category is giving our customers more choice through better segmentation.

Branded Fares drove 40% of the improvement in passenger revenues this quarter as we expanded into more markets, improved our distribution and made products easier to buy.

We're adding more flexibility for customers to upgrade to Comfort+ and First Class with both cash and mile options post purchase.

We remain in the early stages unlocking the value of segmentation, and with 200 million costumers a year, you only need small improvements in this category to drive material top line revenue growth.

When we combine the building blocks we have in place across our network, with the unmatched style and service of the 80,000 Delta people worldwide, we are confident we can execute on our commercial initiatives.

This will drive value for our customers and our shareholders, not only in the back half of 2017 but into the future.

And now, I'm happy to turn the call over to Paul.

Thanks, Glen, and good morning, everyone.

Thank you for joining us today.

To echo Ed and Glen's comments let me begin by saying thanks to the Delta people worldwide for the great service they provide to our customers.

Their hard work has built a durable business model that is delivering consistent results.

For the June quarter, operating expenses increased roughly $65 million as lower fuel costs due to last year's hedge settlements offset investments in our people, our customer experience and our fleet.

These investments drove an increase in nonfuel CASM of 5.5%, which included about 1 point of pressure from the April operational disruption.

Moving into the back half of the year, we'll see CASM headwinds ease despite continued pressures from wage increases and higher depreciation.

First, we'll lap the technology outage, which drove about 0.5 point of CASM in last year's third quarter.

Second, our planned capacity growth for the year was weighted to the back half after keeping capacity flat in the first half of the year, which will benefit CASM.

Third, we'll annualize higher levels of product, maintenance and technology investments from the back half of 2016 such as enhanced snacks and additional meal services that were added last fall.

Finally, our upgauging initiatives will deliver benefits at a slightly faster pace as compared to the first half of the year due to our aircraft delivery schedule and into service.

This initiative is already delivering solid productivity savings, and in the first half of the year, we produced 1.6 higher domestic ASMs on 1% fewer departures.

As a result of these 4 factors, we expect unit cost growth in the September quarter to be up roughly 2% on a normalized basis, which puts us on the right trajectory to achieve our full year 2% to 3% nonfuel CASM growth.

Looking at fuel.

While market prices increased by 10% in the June quarter, Delta's all-in fuel price declined by 16% as we lap last year's early hedge settlements.

We realized a $6 million profit from the refinery despite a significant increase in the cost of RINs compliance.

While fuel prices continue to be volatile, rent prices remained below $50 a barrel and are roughly 15% below the highs of February.

For the third quarter, we're expecting year-over-year market fuel price to be slightly higher than last year due to some hedge settlements in the quarter and are currently forecasting our all-in fuel price in the range of $1.55 to $1.60 per gallon.

For the second quarter, we delivered an 18.4% operating margin, up 1 point versus last year's reported 17.4% margin.

We expect margin expansion in the back half of the year as the revenue recovery continues to gain traction, nonfuel cost pressures ease and fuel prices remain stable.

For the September quarter specifically, we expect our operating margin to be in the range of 18% to 20% compared to last year's normalized 17.6% and reported 19%.

Turning to the balance sheet and cash flow.

Our strong margins and profit performance resulted in $2.8 billion of operating cash flow in the quarter adjusted for the remaining $500 million in cash from the unsecured debt transaction we contributed to the pension plan in early April.

At the end of the quarter, our adjusted net debt was $8.4 billion and our unfunded pension liability was $6.9 billion, together, a reduction of $1.4 billion versus year-end.

This is solid progress as we continue to strengthen our balance sheet.

We spent $1 billion on capital expenditures this quarter, of which nearly $500 million was related to new aircraft and the remainder for fleet mods, facility upgrades and technology improvements and initiatives.

For the September quarter, we again expect capital expenditures of approximately $1 billion, including $175 million to complete the purchase of 49% of Aeromexico.

During the June quarter, we generated $1.9 billion of free cash flow and used that to repurchase $600 million of shares and pay $150 million in dividends.

We also recently announced a 50% dividend increase, which will begin in the September quarter.

This is the fourth consecutive 50% increase to the dividends since we initiated it in 2013, and at yesterday's closing price, represents a 2.2% dividend yield.

With this increase, our annualized dividend will be $875 million, which demonstrates our conviction on the durability and sustainability of the Delta business model.

In closing, we believe we are on track to deliver top line growth and margin expansion in the back half of the year, while we continue to be prudent with our capital.

This will allow us to produce these durable earnings and cash flows and unlock additional value for our owners.

With that, I'd like to turn the call back over to Jill to begin the Q&A.

Thanks, Ed, Glen and Paul.

Rochelle, we're ready for Q&A with the analysts.

If you could give them instructions.

(Operator Instructions) And our first question will come from Dan McKenzie with Buckingham Research.

I guess, Paul, first question here is just on the stock buyback in the second quarter and the first quarter, I think you guys have bought back $800 million in shares but the share count was flat.

So this is kind of a housecleaning question.

I'm just wondering what drove the incremental buyback in the second quarter, if you could just help us understand what the share count is today.

Sure.

The share count as reported is a weighted average calculation and as we repurchased stock through the quarter, the weighted average was impacted by the fact that we had contributed $350 million of equity to the pension plan at the end of March.

So if you're looking for the benefit of the buyback, if you look to the quarter end shares outstanding, it was actually down about 12 million shares.

It was just a nuance with the weighted calculation due to the timing of that contribution.

Understood.

And then, I guess, a second follow-up question here for you, Glen.

I know that Delta has a number of initiatives in the back half of the year to, I think, to drive or improve revenue on that particular entity.

I'm just wondering if you can just remind us what those initiatives are and how you think they might contribute in the back half of the year relative to the first half?

Sure.

Great question.

We continue on the path, and really, it's not new initiatives.

It's doing the initiatives we've already announced in a better way and bringing them to a broader audience.

And just -- within this quarter, for example, we expanded the ability in post purchase, and that was in May, to actually buy a ticket and then say, if you're a business customer and you want to sit in a different cabin than you're allowed to by your company, then you can purchase that in a post-purchase transaction.

We've seen about an $80 million uptick for that on an annual run-rate basis.

Starting this month, or this past month in June, we now, for Elites are allowing them to use their miles to sit in the cabins they want, and we believe that will contribute another $50 million to $100 million on a run-rate basis as we continue to expand those types of programs.

And I think when you think about this, these are new and innovate programs that require a lot of programming because you have to distribute them through a lot of different means.

And our ability to continue to focus on bringing the products and services that we have in the market to a broader and broader audience is going to drive our ability to monetize our premium products more in the next year.

And next, we'll move on to Hunter Keay with Wolfe Research.

So you guys sound really -- you sound great.

Ed, obviously, you feel like you're sounding better and better about how things are going.

I know that you've said that the initial guide for this year on margin was down about 150 basis points, but is it safe to assume that now, the 16% to 18% margin target is in place for this year?

And maybe even a step further, might we be looking at -- putting aside this whole normalization stuff for a second, might we be looking at year-on-year margin expansion on reported margins from 2016 this year?

Is your question, Hunter, will we actually expand reported margins '17 over '16, essentially?

Yes.

Or if you don't want to answer that, or are you going to be in the 16% to 18% range this year?

Because I know you're further through the transition year and you originally said you're going to be down, but obviously, things are getting better by the day.

So I was just trying to sort of categorize how you're thinking about the full year.

Got it.

Yes, we are -- I think I said such in my prepared remarks that we're anticipating being in the low end of that 16% to 18% this year.

Oh, okay.

Sorry, I must have missed that.

Okay.

And let's talk about the -- for a second, the international investments you're making and how you see these evolving over the next 3 to 5 years.

Is this sort of -- sort of big picture question here, is this sort of a view on how you maybe see foreign ownership rules potentially being relaxed by other countries?

Maybe if you look at the success and stability of U.S. airlines here relative to the rest of the world, there might be some angle where foreign airlines, which are far more volatile businesses, might be interested in having maybe majority ownerships from some of the more strong U.S. airlines, Delta included.

Is this just merely a JV play?

Or is there something bigger picture down the road that you're thinking about cross-border consolidation that you're setting up for today?

We're not angling to get in and control any of our foreign investors or vestees or partnerships.

What we've got here, Hunter, is, historically, through the JVs and the partnerships, they've been contractual commercial arrangements.

And what we have seen is our ability to drive value is much greater once you get inside the boardroom than it is through a pure contract in terms of aligning ownership and driving value in a consistent manner and being able to invest truly for the long-term together.

We've seen that in Aeromexico, which drove a higher-level investment.

We've seen that in GOL.

We've seen that in Virgin Atlantic, certainly.

And so I think over time, you might see us continue to go down that path.

But no, I don't think in our future, certainly not in the next 5 to 10 years, I don't see the foreign ownership rules changing dramatically.

And next, we'll move on to Helane Becker with Cowen & Company.

Ed, I know that there's this proposal in Congress to privatize, I guess, for lack of a better word, or separate out air traffic control, and I know Delta, in the past, has been opposed to it.

And I was just kind of wondering if you guys are going to try to be involved in what goes on so that your views are clearly expressed in the process and that what works best for you gets actually implemented?

Thanks, Helane.

Yes, there's been a lot of work that's being done in Washington around the ATC reform topic.

And yes, we are at the table.

We are working constructively with Chairman Shuster.

We're not philosophically opposed to privatization for privatization's sake.

What we want to do is make certain that we have the proper governance, transparency and cost efficiency to drive the reforms needed in the next air-traffic control system that gets modernized.

And we're in full support of the President's agenda to invest and modernize the systems.

And next, we'll move to Jamie Baker with JPMorgan.

Question for Glen, just a couple of demand-related issues.

First on the Atlantic.

After the summer peak, how profound a shift is there in point-of-sale?

I'm just wondering how the currency impact of that is potentially going to impact the trajectory of Atlantic RASM kind of going forward, in the second half?

Jamie, I think I'm pretty enthusiastic about how the first half of the year has shapen -- shaped up relative to the capacity levels that are in the trans-Atlantic, and what we've seen is really a higher demand in the business cabin on a year-over-year basis.

And it's not insignificant.

It's a relatively significant increase.

So we read a lot about the European business sector picking up and we're really seeing that in the travel to and from Europe.

So we have a couple of things that are developing that are positive for us.

The euro is at a multi-year high here.

We have business demand and a very, very solid position.

As you know, July and August are not very big business months in Europe, so we've been able to offset that with higher U.S. Point-of-sale.

But relatively encouraged that the trends that we see as we go into the fall, that those should be quite beneficial, higher euro, higher business demand as you get into more business-oriented months.

Okay, that helps.

And second, in terms of Basic Economy, I'm wondering, as your primary competitors roll out similar programs at a pretty rapid pace, has that had any impact on the returns that you're generating?

And also, has there been any change since the last quarter in terms of the, I guess, the percentage of your corporate accounts that [wall] those fares off from employees?

Well, I'm going to let Steve speak to the corporate sector and the other focus we have is not only to ensure that our customers are getting the right seats, but the corporations can sell up into Comfort+ and even First Class.

And I think that's where we're seeing a bit -- even more success as we move forward, and I'll turn the rest of the answer to Steve.

Yes, that's exactly right, Glen.

You're seeing the, at the individual level, the capability to be able to buy into the Comfort+ cabin, which that new functionality is increasing the corporate revenue base.

And we're also seeing more and more corporations, from a policy perspective, enable their traveler to also purchase those types of products.

So you're seeing it both at the individual level and at the policy level.

Next, we'll move on to Duane Pfennigwerth with Evercore ISI.

Maybe I missed it, but did you say what your expectation was for domestic unit revenue growth in the third quarter?

Duane, we don't typically get that level of forecasting detail.

Okay.

Fair to say that you expect a sequential improvement?

Yes.

And sorry for a modeling question, but I think there's a little investor confusion on the normalization of nonfuel CASM.

Can you talk about how much we should be adding to 3Q cost of last year to normalize?

And then correspondingly, how much should we be subtracting from 4Q costs of last year to normalize?

And is it clear that we should be thinking about 2% growth in the fourth quarter off of that lower cost base?

Duane, it's Paul.

What we've said is the normalization effect was about $130 million per quarter, so -- give or take.

So that if you assume that was all out there, you'd be left with about $125 million to $130 million of cost remaining in the fourth quarter.

Keep in mind that this doesn't really impact the second half conversation overall.

We're just trying to take out some of the volatility between those 2 quarters given the discrepancy in the retroactive piece.

So that implies CASM down sort of mid-singles in fourth quarter?

Yes -- no.

No.

No, no, no.

On a reported basis...

On an actual?

On actual basis, it would be down significantly because of the $475 million charge that we took in the 4Q last year.

And next we'll hear from Michael Linenberg with Deutsche Bank.

Just 2 questions related to the Pacific here for Glen.

So look, unit revenue has been running down in that region, better, obviously, in the June quarter than the March quarter, so we're seeing the sequential improvement, but still on a sizable capacity decline, 10%, 11%.

How much of what's impacting that -- is it demand or is it structural?

Or is it you're transitioning from the 74s to smaller wide-bodies?

At what point do we get to positive territory there?

What are you seeing in that market?

That's a great question, and I'd say that we're very excited about our 2018 results in the Pacific.

This is the last real year of a multi-year transition, and thanks to our Pacific team and Ed's direction, we've got what we need in place now with the Korean joint venture to really produce a competitive and an improving Pacific operation over the next couple of years.

So it was -- when you think about the merger with Northwest, 100% of our capacity was routed through Tokyo Narita at the time of the merger.

And now, as you think forward, we have a very diversified portfolio, we have multiple hubs, and we're really at the endpoints of the restructuring and looking forward to a very much improved 2018 in the Pacific.

Great.

And then Glen, just you referenced the Beijing hub in your opening remarks.

When -- presumably that's the new airport.

When does that come online?

2019.

And next, we'll move on to Andrew Didora with Bank of America.

Just one question for Glen.

Obviously, 3Q will be 4 quarters in a row of accelerating PRASM.

I know comps do get a lot tougher in 4Q, so maybe that streak could be broken.

But is there anything you're seeing in your bookings or corporate demand right now that would result in PRASM not being positive in 4Q?

Nothing that would indicate that now.

And next, we'll move on to Darryl Genovesi with UBS.

Glen, you started selling premium cabin fares, I think, for travel in the fall.

Based on what you've seen so far, does this basically look like your expectations based on your experience with Air France, et cetera?

We're very excited about that cabin, and that cabin will be expanding.

And yes, we -- the fares are where we think they were in the business case and the demand is very strong for the initial.

Remember, we really don't have very many seats available on that category on Delta; of course, we do on Air France and KLM, and really, one of the big advantages for all the programming work that's gone into being just able to sell that fare is we can better display our partners' offerings today and be able to offer Comfort+ and Premium Select in most markets now.

Okay.

And then you had provided a longer-term forecast for Branded Fares at one of your Investor Days.

It sounded like you picked up about $100 million or so this quarter, about $400 million on an annual run-rate basis.

First of all, are those the right numbers?

And then secondly, with the roll out of premium economy and the adoption of basic economy by some of your peers, would you expect that, that Branded Fares revenue growth accelerates or decelerates or holds steady from here and just a basic outlook on where that goes?

I think what we've said is we believe we're in the early stages of optimizing that because, when you bring in new products and services to market, you have so many things you have to figure out through distributions, through pricing, through customer adoption.

And these products are very young in the longer scheme of how airlines have sold tickets.

And we believe there are multiple years of continued upside opportunity for us that will accelerate at a different rate than base passenger revenues.

And next, we'll move on to Savi Syth with Raymond James.

Glen, maybe a question for you.

As you continue to compete on products, and you've been ahead of your competition on operational reliability and things like that, and you're seeing them starting to catch up, as you continue to improve the products, does at any point, Delta's kind of older fleet start to hinder the competitive advantage?

Or is this going to mix the new versus mid-life, something that can continue and not something that holds back from a customer appreciation standpoint?

Savi, this is Ed.

It's a good question.

It's interesting, we -- while we do see the competition improving, which we think is a good thing, we continue to improve as well.

So we're not -- the bar continues to get higher.

And one of the things that will drive continued improvement at Delta is the investment that we are making in new fleet over the next 2 years.

We've replaced 25% of our total fleet over the last 5 years.

We'll probably replace another 20% to 25% of our fleet in just the next 3 years coming as we retire the MD-88s by 2020, and we start to reduce the reliance on some of our older fleet types, the 747 is going out this year as well.

So I think that is certainly something that we anticipate not just from a reliability perspective, but the financial performance of the new aircraft, we're bringing in the 321s, the 73-9s, are at/or above expectations and they will be a big source of additional margin contribution for us into the future.

That's helpful.

So -- but I'm assuming that, that sticks to, still, that you're going to be able to do that while investing 50% of your free cash flow -- or your operating cash flow, which is around the current level of CapEx, is that right?

That's right.

That's great.

And then if I might just ask a quick modeling question.

Is it the refinery, is there kind of any change in outlook on the contribution there?

It's Paul.

I think that we had said previously that the refinery was expected to be about $100 million for the year.

That's probably down slightly based on the environmental compliance.

I think we've got about $30 million to date.

I would say it's probably going to be down slightly from that $100 million, but we're still expecting it to be profitable for the rest of the year.

And next, we'll move on to Rajeev Lalwani with Morgan Stanley.

Ed, I just wanted to come back to some of the comments you were making on growth and margins.

You've obviously done a good job bringing margins to within targeted levels.

With that occurring, what's the approach going to be on capacity relative to the cap that you put in place for '17 and beyond?

Obviously, as we look at schedules beyond 3Q, it seems like you're going to maybe move above that 1% level, but your thoughts would be great.

Sure, Rajeev.

We're still operating with the plan we have in place for 2017, which is the overall 1% growth for the year.

I know there's -- out in the schedules, there's a little more capacity in the back-end of the year that's going to continue to be refined as we get closer, and you'll see some of that schedule firm up and some reductions take place.

But we're -- the plan is at 1%, and that continues to be our goal for the year.

And then when we get to the end of the year, as we look at where our margins will be and what we'll be anticipate being, as I said earlier, at the low end of the 16% to 18% long-term margin guidance, we'll evaluate the 2018 capacity schedule.

Great.

And then Glen, a question for you.

On the international front, there appears to be a bit more stability on the pricing front and your comments going forward sort of support that as well.

Does that maybe change your growth priority, to move from domestic to international?

Or is domestic still where the focus will be?

We see more of the opportunities remaining in domestic for the short term and we'll continue to evaluate the trends.

The stability in the international marketplace is -- other than Latin, which has actually been the most stable -- is a relatively new phenomenon, and so we're going to monitor that.

And as Ed said, as we look at what we achieved in 2017, that will help guide what we set our objectives to be for 2018.

And next, we'll move to Joseph DeNardi with Stifel.

Glen, thanks for the color regarding the AmEx contribution and the card acquisitions.

I guess, the question is you guys provide the expectation that AmEx is going to contribute $4 billion by 2021.

Problem with that chart is no one knows what that means, what to do with it because it's quantified as value or contribution.

So can you convert that to sort of EBIT number or cash?

I think it's pretty obvious that, that value there is being lost that's being currently communicated.

Joe, it's Paul.

I'll take a shot at that, too.

I mean, keep in mind that when we talk about that value, we are talking about it in a cash context.

The noise comes about from how frequent flyer miles are recognized through the P&L where there's a piece that gets to come through now and a piece that has to be deferred over time.

That value is split between predominantly revenue from the sale of miles to third parties, but also some in the cost side through efficiencies that we're able to get as a sizable partner.

So I think we've taken the point and we continue to look at ways to talk about that and disclose that a little bit more clearly in a balanced way, but the value is cash value.

Joe, this is Ed.

Joe, if I could chime in one other thing.

Yes, I think the points you've been raising over the last year are good ones.

And we need to continue to find better ways to communicate the sources of value that we drive.

While we have to respect the confidentiality of our agreements with American Express, we can do a better job of laying out some of the value that we are creating and the sustainability of that value.

So this coming Investor Day that we'll have in December, we're going to do a -- we're going to take a shot at that, and hopefully, that will give us a good opportunity to get the message out a little more clear.

That's great.

So Paul, just to clarify, that $4 billion, that's an expectation that AmEx is contributing $4 billion in cash by 2021?

Well, it's across all the programs.

But yes, annually.

Joe, this is Ed.

Just -- that assumes volume growth, that assumes again -- I mean, there's a lot of stuff in there.

It's not a contractual agreement.

There's a lot of assumptions that go into making that up.

So assuming we hit our plan and AmEx hits their plan and that is what we're on a good path towards, that would be the end result.

Okay, that's helpful.

Yes.

And also just to add, Joe, keep in mind, too, that, that's both on the revenue and the cost line.

It's not all coming through sales.

Okay, okay.

I guess, the second question is the co-brand card market is getting quite a bit more competitive and it feels like over the past few years, the strategy at airlines is to effectively devalue the currencies.

So it require -- you need more miles to buy a ticket.

That's obviously beneficial to the economics of the program for the airline, but it doesn't make the currency demanded more by consumers.

So how do you balance that conflict, Ed, between trying to structure the program to really maximize demand for that currency relative to what it means for the airlines?

This is Glen, and let me take a stab on that, and maybe Ed would like to close if I leave any holes in the answer is I think the way that we look at this is the card acquisitions continue to achieve record results without significant change to the program.

And I think there's been a lot of talk at other carriers who have announced fare increases, but we have been in a dynamic pricing environment now for multiple years.

And I think that's one of the successes of our card in the marketplace, is that there are incredible value propositions for customers out there who acquire and use our cards and we have no intention to degrade the total value proposition.

We may adjust on the margin, the valuation of peak seats versus off-peak seats or particular days versus -- but the value that we're creating seems to be greater and greater.

And I think that's being recognized in the marketplace by really one would think that the market was probably saturated with airline revenue cards, that we have posted 3 acquisition record years in a row and we're on track to produce another this year.

So consumers are enjoying the products and services that we buy, and they're continuing to apply at record numbers.

And our team has done a great job and we have lots of innovation space coming in that space in the last half of the year.

And Joe, this is Ed.

The only other thing I'd add to Glen's remarks are from an AmEx perspective, I know that we are the leading growth vehicle in their co-brand portfolios by a large margin, and the partnership continues to be in a really great place.

We issued more free tickets this year than any time in our history and I think program's in a really solid position.

Next, we'll hear from David Vernon with Bernstein.

I wanted to see if you could comment a little bit about the C Series and how that will be implemented in the network, whether it's going to be put into upgauging existing sort of regional routes or whether you're also going to be putting aircraft in the market that maybe you don't serve on a direct basis today?

The answer is a little bit of both.

For high demand 76-seat, long-range RJ markets, we're going to -- that will probably be the first selection.

That will free the 2 class RJs to replace 50-seat airplanes that are continuing to exit the fleet.

And then we'll certainly have a few new markets next year.

We don't have a lot of new airplanes -- net new airplanes coming.

But having 100-seat long-range jet does open up some new market opportunities that we don't have today.

And as we think about maybe the first rollout, should we be expecting it to be a more stock controlled airport where you can leverage that upgauge benefit with -- at a relatively high fare, or should we think the newer markets will be at the front-end of the rollout?

Well the first one's going to go to New York.

I won't tell you where it's going to go, but it will start in New York.

Makes perfect sense.

Thanks, Dave.

That's going to conclude the analyst portion of the call, and I'm happy to turn the call over to Ned Walker, our Chief Communications Officer.

Thanks very much, Jill, and good morning.

Rochelle, would you please review the process that members of the media can use to ask a question.

(Operator Instructions)

(Operator Instructions) And our first question, we'll hear it from Ted Reed with The Street.

You guys know there's been a lot of controversy over the Qatar Airways CEO's comments about U.S. flight attendants and U.S. airlines.

Do you have any reaction to those comments?

Ted, this is Ed.

I was appalled to hear Akbar's comments about our people.

I'm told he has apologized, but I think that's woefully inadequate.

I think it goes -- there's a consistent theme there that he continues to want to skirt the rules and play by his own rules, and I'm glad the employees, not just the Delta, but of all the U.S. carriers, spoke with one large voice to say that it's unacceptable, inappropriate.

We have the best flight attendants in the world at Delta and I'm very proud of them.

Okay.

Second question for Glen briefly.

You said that the European business yields are up.

Are the leisure yields being affected by the explosion in low fare carriers to trans-Atlantic?

That's what we said in the comments, is that the strength in business demand has offset most of the leisure yield weakness.

And next, we'll move on to Michael Sasso with Bloomberg News.

Can you just -- I heard someone say that there's, I think, a new policy of allowing Elites to use miles to pick their cabin.

Can you just expand on that?

And is this the first -- or the quarter that, that's taking effect?

That's a very exciting new program, and as we think about new ways for people to use their miles, we really don't want them to save them forever.

We want them to control their own travel experience and find value in them today as opposed to just storing them away.

And so for our highest Elites, we now offer that program.

It's limited to reservations only now, but we're planning to bring that to the other distribution channels.

And when we say continuing to expand all of our products and services to as many distribution networks as possible, I think that's indicative of how we see the value that we're going to create through these products and services expand over the next few years by bringing them to broader and broader audiences and allowing people to control their own travel experience.

And so on a more broad perspective, we're actually excited about using miles for all ancillary revenues, not just for seat products, but for things like unaccompanied minor fees or pets in cabin and really make that currency come more and more alive to our customer base.

And one just follow up on an unrelated topic.

There was a report out of India 1 week or 2 ago about Delta being interested in Jet Airways kind of investment.

Were those reports accurate?

Mike, this is Ed.

You know, we don't comment on speculations.

And next, we'll hear from Alana Wise with Reuters.

So I wanted to ask quickly about the Boeing-Bombardier spat that's going, and I was curious to know what impact by the decision by the ITC to impose tariffs on the C Series have on your order from Bombardier?

And as a follow-up, has Boeing's antidumping petition delayed or had any other impact on potential conversions of Delta 50-seat series options to affirm orders?

Well we can't comment on the dispute that's going on between Bombardier and Boeing.

We'll let that play out.

But what I can tell you is that we have no -- we do not intend to slow down any of the deliveries that we have planned for the C Series.

We'll be taking our first this coming spring and we look forward to taking that aircraft.

And beyond that, I'll let -- see how the dispute between those 2 parties comes together.

Okay.

Right now, we don't have anybody else in the queue for the media, so we'll pause a second to see if anybody wants to do a follow up second.

So we'll pause just for a second.

And if not, I want to say thank you, Ed, Glen, Paul, Steve and Jill.

That concludes the June Quarter 2017 Earnings Call.

We'll be back in October for the 3Q earnings call.

Appreciate everybody's time today and hope everyone has a pleasant day.

Thanks so much.

And that will conclude today's call.

We thank you for your participation.