達美航空 (DAL) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Delta Airlines March Quarter 2018 Financial Results Conference.

My name is Ebony, 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 Jill Greer, Vice President of Investor Relations.

Please go ahead, ma'am.

Thanks, Ebony.

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

Joining us today from Atlanta 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'll also discuss non-GAAP financial measures.

All results exclude special items, unless otherwise noted.

On January 1, Delta adopted several new accounting standards.

All prior year periods has been recast to reflect adoption of those new standards.

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

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

Thanks, Jill.

Good morning, everyone.

Thank you for joining us.

Earlier today, Delta reported a $676 million March quarter pretax profit and earnings per share of $0.74, beating consensus by $0.01.

Our $9.8 billion in revenues were a record for the March quarter, and we came in at the high end of our initial profit guidance as that strong revenue performance offset a $0.05 per share impact from severe weather.

We've just passed the 1-year anniversary of last year's Atlanta storm, an event that we leverage to improve our response and recovery to irregular operations.

So despite more impactful winter weather in the Northeast this year, we had 52 days in the quarter of 0 mainline cancellations.

We also had 19 days in the quarter without a single cancellation across the entire Delta system, which is better performance than the first quarter of a year ago.

More customers than ever are choosing Delta because of the great service our people provide and the reliability of the product that we deliver.

Not only are we seeing record numbers of passengers, we're also seeing solid improvements in our customer satisfaction scores.

We reached all-time high in Net Promoter Scores in each geographic region in 2017, and recorded a strong 44% rating domestically for the most recent month of February.

All these results are a credit to the dedication and determination of the Delta people.

Every day, they make a difference to our customers and they are truly our greatest competitive asset, and I want to thank them and say congratulations for starting the year with $183 million already made towards next year's profit sharing payment.

With our people and our culture as a foundation, we outlined a path to grow earnings in 2018 at our Investor Day in December, and we remain confident that we're on track to deliver the key elements of earnings improvement that we laid out at the start of this year: revenue-driven earnings growth, changing our cost trajectory and leveraging our international partnerships.

Growing our top line is a priority and we have good momentum.

In the first quarter, we delivered 8% top line growth and expect a similar result in the June quarter.

Not only are we sustaining a strong revenue premium to the industry, we're also diversifying our revenue base in driving double-digit gains from other sources, like cargo, loyalty revenue and Branded Fares.

And I was also very pleased to see our international revenues grow at a strong pace, led by 15% top line growth in the transatlantic.

Of equal priority is changing our cost trajectory.

Our nonfuel cost growth has been trending at unacceptably high rate.

We need to get that back to 0 to 2% this year.

This quarter, we saw a cost growth step down a couple of points from the December quarter and June will mark our third consecutive quarter of sequentially improving performance.

With nearly 50 aircraft still to be delivered this year, we look to our upgauging to drive lot of efficiency, not only this year, but well into the future.

Our One Delta project is another initiative that use the learnings from last year's Atlanta storm for how we can collaborate better across the business.

With better efficiency, there will be cost savings, and this is one way we'll continue to deliver a best-in-class place to work for our people, a leading product for our customers and top-tier investment for our shareholders.

So while we still have work to do, we're moving in the right direction and setting a solid foundation to consistently deliver on our cost targets.

Finally, leveraging our international partnerships.

While the core of our strength today is the domestic business, we realized our long-term marketplace is the world.

No one better connects the world than Delta.

And today, we offer more options than ever before, whether on our aircraft or via our international partners.

This quarter, we received final approval for our newest joint venture with Korean Air, which is expected to launch May 1, and we'll offer customers world-class travel benefits across one of the most comprehensive route networks in the transpacific market.

We're also working closely with Air France-KLM and Virgin Atlantic to finalize a single transatlantic JV by taking our most established relationships to a new level and creating our first multilateral joint venture, which will be the industry's largest and most profitable.

We can create even more value from these partnerships.

It was 10 years ago this week that we announced the Delta-Northwest merger, and the transformation of our company has been unprecedented.

We are financially stronger, enabling us to consistently deliver and invest in a high-quality experience for our customers, while still sharing success with our people.

We have started the year with solid momentum and we remain focused on revenue-driven earnings growth and the prudent deployment of our cash flows.

And we'll continue to leverage the strength of our culture, our industry-leading reliability, our unrivaled domestic network, our customer loyalty and brand and our investment-grade balance sheet to create long-term value for Delta's employees, our owners and the customers and communities that we serve.

We're off to a good start in 2018, and we look forward to maintaining that momentum over the balance of the year.

And with that, I'm happy to turn the call over to Glen.

Thank you, Ed.

Good morning, everyone.

We are seeing our strongest revenue momentum since 2014 driven by improvements in all geographic regions, strong corporate results and double-digit increases in loyalty revenue.

I'd like to thank the entire Delta team for the great service they provide to our customers each and every day, which is what truly drives these strong results.

Our March quarter revenue was the highest in our history with 8% top line growth, driven by strong demand across all entities and improving business and leisure yields.

Corporate revenue is also showing acceleration across all regions, up 7% in the quarter.

With domestic fares up 2.8% year-over-year, we have now recovered 1/4 of the decline in domestic average corporate fares versus the peak in 2014.

We are confident these trends will continue.

Our most recent travel survey, which concluded on March 16, noted that 86% of travel managers expected their spend to be maintained or increased in 2Q and beyond.

Our revenue momentum is evident across all parts of Delta.

Progress sales were up 23%, our best first quarter performance since 2015, and other revenues grew 13%, ex refinery, driven by a strong 14% improvement in our loyalty.

Turning to unit revenues.

TRASM was up 5% with all entities, again, posting positive year-over-year TRASM growth.

[Both in] bookings for February and March showed strong momentum.

As a result, we saw accelerating unit revenue performance each month throughout the quarter.

Domestic passenger revenue was up a strong 7% on a 4% capacity growth.

The domestic entity delivered its fourth consecutive quarter of year-over-year improvement, with PRASM up 2.5%.

All domestic hubs demonstrated unit revenue improvements with the exception of Seattle, where RASM was flat on a 20% capacity increase during the weakest quarter of the year.

Business yields improved by 6 points in the quarter reflecting -- inflecting to positive in mid-February.

We are maintaining a record domestic revenue premium to the industry, despite absorbing the industry's highest increase in stage length and gauge.

Internationally, we saw improving trends with unit revenues up 7.6%, outpacing the domestic entity for the third consecutive quarter.

Transatlantic unit revenues increased 12% on strong Business Class bookings in a 5-point currency tailwind.

Strong business cabin performance, a robust summer demand outlook and currency tailwinds are expected to continue to drive positive trends for the entity into the next quarter.

In addition, we expect to see continued strength through our Comfort+ product, which we saw an increase of more than 40% in the first quarter versus 2017.

Our payload for a -- in Comfort+ now exceeds 50%.

In close coordination with our JV partners, we are launching several new markets this summer that connect the strengths of our networks and we are seeing encouraging forward bookings.

In our Latin region, unit revenues grew 6%, the seventh consecutive quarter of positive unit revenues for the entity, driven by a strong demand trends across much of the portfolio and continued Alliance integration.

Caribbean performance is encouraging as the region recovers from last year's hurricanes.

However, we are seeing challenges in Mexico as Open Skies drove increased capacity in business markets and travel advisories pressure demand to beach destinations.

In the Pacific, unit revenues were up 4% for the quarter on an 8% increase in stage length, the second quarter of unit revenue growth for the entity.

We are especially encouraged by the rate of improvement in this region.

We are currently seeing all Pacific markets with positive unit revenue momentum.

The pricing environment has improved year-over-year as industry capacity growth has moderated.

We are seeing strong demand in revenue performance for the Delta One suite and Premium Select as we continue to expand our A350 service across the region.

Based on current trends, we believe our momentum will continue to build through the year and allow us to produce positive unit revenues each quarter on increasingly tougher comps.

We expect June quarter TRASM to be up 3% to 5% on 3% to 4% higher capacity, which includes 1 point of stage length and 2 points of gauge increases.

I'd also remind you that for comparison purposes, last year's April storms reduced 2017 unit revenues and capacity by approximately 1 point each.

Longer term, we're focused on driving revenues and earnings growth through our network, our brand and customer experience and segmentation initiatives.

First, leveraging our domestic network.

The U.S. market drives much of Delta's earnings and margin strength today.

Through our upgauging, we can efficiently add capacity, notably in constrained airports and premium time channels, allowing us to further improve our domestic performance.

This year, over 70% of our domestic seat capacity growth is coming from upgauging.

Second is strengthening our brand and improving the customer experience.

We believe that strong customer satisfaction is directly tied to our sustained revenue premiums.

One of our major initiatives is to further improve the customer experience through our digital transformation.

By taking a customer-centric approach to this major technology investment, we can give our employees the data they need to deliver a more personalized level of service.

We're also leveraging our strong brand to drive solid gains through our loyalty program.

Last year, the Delta-American Express co-brand portfolio had record acquisitions, and we just had another record quarter.

Co-brand spend was up 14%, which helped drive $85 million of incremental value from our American Express agreement this quarter.

And we're on track to deliver $3.3 billion in total contribution for the full year.

And finally, we continue to expand our segmentation initiatives, offering customers more choices.

We have implemented technologies to make the purchase of various fare bundles and products easier for customers, and we work with our JV partners to align branded fare offerings across our partnerships.

This quarter, Virgin Atlantic launched a full range of segmented products, and we now offer an aligned Basic Economy product with both Virgin and Air France-KLM in the transatlantic.

We completed a similar effort with Aeromexico as they introduced a product akin to Delta's long-established Comfort+ in addition to introducing Basic Economy.

With our fleet upgauging contributing to an 11% increase in premium seats, we grew First Class upsell and Comfort+ revenues over 20% in the March quarter.

The Branded Fare momentum, combined with future functionalities, such as post-purchase pay-with models, put us on pace to achieve our goal of $350 million of incremental revenue in 2018 and a target of $2.7 billion of total revenue by 2019.

With our employees' outstanding service, giving customers every reason to keep flying Delta, our commercial initiatives in place and strong revenue momentum building in all geographic entities, we feel we are well poised to deliver solid top line growth throughout 2018.

And with that, I'd like to turn it over to my good friend, Paul.

Thank you, Glen, and good morning, everyone.

Thank you for joining us.

As we have mentioned repeatedly, one of our top priorities this year is addressing our cost trajectory.

For the March quarter, total operating expenses increased $817 million, with half of that resulting from higher fuel prices and higher capacity and revenue-related costs.

Our nonfuel costs were up 3.9% for the March quarter on 2.7% higher capacity.

Over 2 points of this increase were driven by investments we made in our employees and higher depreciation expense due to accelerated aircraft retirements.

This cost inflation is a step down from what we saw in the December quarter, but it came in at the high end of our initial guidance due to about 1 point of pressure from weather and foreign exchange during the quarter.

As we move through the year, we'll continue to see increasing relief on cost as we annualize prior year investments and gain benefits from our upgauging and One Delta initiatives.

For the June quarter, we expect our nonfuel CASM to increase 1% to 3%.

With depreciation -- while depreciation pressure continues at a similar pace, we have now annualized last year's employee wage increases and also lapped the Atlanta storm, which combined, provide a 1.5.

tailwind to CASM for the quarter.

Then, as we move into the back half of the year, most of our incremental depreciation trails off after the third quarter, providing another 0.5 point of CASM relief.

From this path alone, we get a cost result in the back half of the year that we expect will be significantly better than our first half performance.

But that's not the whole story.

In addition to this, our fleet upgauging and One Delta initiatives can then really help bend the cost curve as we move throughout the year.

The delivery of over 60 aircraft this year, including the first deliveries of the C Series, will drive some of the greatest efficiency gains in Delta's history, with $100 million in expected nonfuel savings this year alone.

And our One Delta project, with its focus on cross-divisional efficiency, is expected to generate about $200 million in 2018 and $1 billion a year over the long term.

Through this effort, we're taking a more holistic view of the company.

One of the first projects we've undertaken looks at the way we build our network and coordinate our scheduling functions.

This project is focused on simplifying the process, enabling better communication between all divisions and ultimately allowing more efficient utilization of our aircraft and facilities.

This initiative is expected to generate $100 million of savings this year and $300 million at a full run rate.

It will also give us a platform to take our operational performance to the next level, while also driving a better outcome for our customers.

Another example of the type of efficiency we're targeting this year is the creation of a best-in-class transportation group within Delta Cargo to serve as the single source for all of Delta's logistic needs.

We've also identified opportunities to drive crew hotel scheduling and spend efficiencies.

These cargo and hotel initiatives are set to deliver about $30 million this year alone.

So we're making progress on our cost and we have line of sight to get within our 0 to 2% range for the year, but there's definitely work ahead to get to the lower end as we've said.

Looking at fuel.

Market prices have been volatile in the quarter with Brent trading anywhere between $62 and $70, and most recently hitting $72 per barrel.

Our total fuel expense increased $317 million in the quarter as market prices were 8% higher than December and 25% higher than prior year.

That pressure was partially offset by a $40 million contribution from our Monroe refinery.

It is also important to note that this is the first quarter that Delta wasn't impacted by our legacy fuel hedges, and that will continue for this year.

For the June quarter, we expect our all-in fuel price to be $2.07 to $2.12.

Non-operating expenses for the quarter were roughly flat to prior year.

Pension expense benefits, which now appear in the non-operating section, were offset by the seasonality of our 49% partner earnings.

For the full year, we expect non-operating expenses to be $200 million to $250 million lower than 2017, due primarily to pension expense savings benefits from our additional contributions and investment performance that we achieved last year.

For the June quarter, we expect earnings per share to be in the range of $1.80 to $2 per share, which equates to a pretax margin of 14% to 16%.

Turning to the balance sheet and cash flow.

We generated $1.3 billion of operating cash flow for the quarter, which allows for reinvestment in the business through $1.2 billion in CapEx, with $1 billion of that related to aircraft and aircraft modifications.

We continue to expect roughly $4 billion in capital spending for 2018, and we'll continue to target CapEx at 50% of our operating cash flow.

In the quarter, we generated $173 million of free cash flow and returned $542 million to shareholders through $325 million in share repurchases and $217 million in dividends.

In January, we completed our 2018 pension funding with a $500 million voluntary contribution.

Assuming current discount rates, our unfunded pension liability has improved by roughly $1 billion since the end of 2017, showing further benefit from last year's accelerated contribution.

This is just one example of the opportunities we have unlocked with our investment-grade balance sheet.

And going forward, we expect to have more opportunity to continue transforming our balance sheet by refinancing from secured to unsecured debt, which will further increase our pool of unencumbered assets, while also reducing our interest cost.

We will also finance a portion of our LaGuardia redevelopment project using tax-exempt bonds, as we harness the value of our investment-grade rating and maintain control of the project from a construction and cost management perspective, which will yield long-term benefits for us in New York.

In closing, we delivered solid earnings for the first quarter, with expected strong revenues across our businesses, an improving cost trajectory and continued benefit from tax reform.

The outlook remains very positive and we are on track to drive significant earnings growth in 2018.

I also want to pass along my thanks to the entire Delta team for their hard work in these efforts.

And with that, I'll turn the call over back to Jill to begin the Q&A.

Great.

Thanks, everyone.

And Ebony, we are now ready for questions from the analysts if you could give instructions.

(Operator Instructions) And we will take our first question from Joseph DeNardi with Stifel.

Ed, if Marriott trades at 22x earnings because they have a business where they put their logo in front of a property and collect a cut of the revenue with no operating risk, Delta has arguably an even better business where you put your logo on a credit card and take a cut at the spend, your stock trades at 7x earnings.

My question is, do you think you're going to apply what you've learned informing these partnerships with foreign carriers in a way that better incentivizes both parties?

Can you apply that to solve the challenge airlines have faced in trying to separate the marketing company from the airline business, so the market can more appropriately value the 2?

Joe, we've had this discussion now for 1 year or 2. One of the things that I think is really important is that we aim to provide better transparency and disclosure around the basis and the foundation of your -- of some of your comments, looking into the loyalty arrangement and the profitability that it drives.

And hopefully, the marketplace is seeing that, that we've got a more sustainable and durable base revenue stream that's a bit, I wouldn't say disconnected, but it's not fully dependent upon the airline in and of itself.

Over time, if we are unable to get our valuation to where we think it needs to be, we're open to options and ideas, but I'd say it's premature to come to that conclusion at this point.

Our next question will come from Jamie Baker with JPMorgan.

Glen, a question on the domestic and without asking for market specificity.

What are your lowest-performing routes have in common?

Is it low-cost carrier overlap?

Is there a common trade in terms of gauge?

Or is it simply where capacity is up the most that your domestic RASM is weakest?

You mentioned Seattle in your prepared remarks.

Obviously, the system as a whole functioning well, but always curious where underperformance is more acute.

Any more color?

Underperformance in terms of revenue or P&L?

Preferably, P&L.

So I think we've talked about this before, is that generally, when we can get to gauge, and this is why our gauge story is so important to us, when we can get to the right operating gauge, we can compete in almost every sector, whether or not it's, again, a ULCC, whether or not it's up against legacy carriers.

And so that's why we're really focused on getting the right gauge aircraft into the airline.

Generally, where we tend to lose money is where we can't get to scale.

So the smaller equipment type in almost every class is the least profitable.

So I think that's why we're so excited about the plans to bring in higher gauge to Delta and drive almost all of our growth through that higher gauge because it's -- we think it's a much more robust and sustainable model.

Okay.

Perfect.

And the question for Ed, you have a narrative at one point that Delta should be valued more in line with its high-quality industrial transport peers.

And you seem to have deemphasized or I don't know, backed away from that messaging as of late.

Is that because you no longer believe it because it wasn't working or some other reason?

No.

We still believe that.

I think that we need to prove it.

And rather than -- I think we've made the point and I think the comparisons are clear to any of our owners.

There's, obviously, something within our -- the durability of our business framework that we need to continue to prove over time, and we're seeking to do that.

So I think the point was made and there's no reason to continue to beat that same drum.

Our next question will come from Hunter Keay with Wolfe Research.

So it looks like your passenger ticket revenue is 77% of your total revenues, which is down a little bit year-on-year.

How low can you get that number in the long term?

Do you think you can get that down to like 2/3?

Because I would presume the lower you can get that mix, the higher your earnings multiple would go.

Would you agree with that?

That's an interesting question, Hunter.

We don't necessarily look at it in that light.

We certainly are looking, as I said in my earlier comment to Joe, about diversifying our revenue streams.

But there's no question, our non-ticket-based revenues, and it's been for some time now, has been growing at a much faster clip than the ticket revenues.

And as we bring segmentation and more customized marketing to bear, you'll see those trends continue.

We've never set a target as to where that should be, though.

Okay.

And then just to clarify.

Are you still on track with 2018 EPS guidance range?

Yes, we are.

Yes, we are.

I know a number of people have been asking and talking about that over the course of the last few weeks.

We continue to still be -- expect to be in the range, and I think it's premature to conclude otherwise.

Our Q1 was on plan.

We expect the same largely in Q2 as well.

Revenues are strong and we're running ahead of plan.

Our nonfuel costs are up a little bit, but we still expect full year to be in the target range and the wild card is obviously fuel.

It's currently probably $5 or $6 a barrel ahead of plan at this point, but it's been bouncing all around over the course of the year-to-date.

It really depends in our ability to price it and the time lag required.

But it's only been at this $70 level here for a couple of weeks, so I'd say it's premature to conclude on a full year basis as to whether that's going to continue in place.

And we'll take our next question from Michael Linenberg with Deutsche Bank.

Actually, 2 questions here.

Ed, just on the running higher than planned and you had mentioned, I think, oil in the same sentence.

If we go back to December when you were guiding to 4% to 6% growth for the year, and you did reiterate that in this release, were you -- was your forecast at that time, was it at 8% top line growth in the March as well as June quarters?

Or is top line also running higher than planned and what you would see back in December?

Yes.

Top line is running higher than planned in December.

We -- I forget the exact planned number for Q1, but we're running a good healthy clip ahead of plan.

Okay.

Great.

And then just my second question to Paul.

In the non-op barrier where you're getting that $200 million to $250 million production due to lower pension expense, does some piece of that find its way into the interest expense line as well?

No.

It all sits in the other income line and non-op.

We'll move next to Helane Becker with Cowen.

Not sure who should answer this question, but when you think about your Net Promoter Score and the improvement you've seen over the bunch of years since the merger and so on, is it possible to get to a level of 100?

Helane, I'll take that.

No, it's not possible to get to a level of 100.

You would want to see the cost profile [that it would take to] get to 100.

Okay.

So that's not necessarily a goal.

Do you have like a goal in mind for that or you're happy where it is right now?

Well, our domestic Net Promoter Score is in the mid-40s range.

Internally, we would like to get that to 50 and then evaluate the cost benefits of continuing to increase it.

Our next question will come from Brandon Oglenski with Barclays.

Ed, not to beat a dead horse here, but I want to come back to Hunter's question on the guidance.

Because if we do hold the fuel constant here at $72 or $71, that would represent about 2 to 3 points of incremental costs relative to where you were guiding, and you're still talking about top line of 4% to 6%.

So I guess, the bigger long-term question here is, earnings are going to be roughly 5% or maybe slightly up this year but in a cyclically very strong environment and we're still down from a couple of years ago on an operating basis.

So what can you tell shareholders that you can change in the formula that can offset these fuel headwinds over time?

Well, I don't view fuel in the $70 range as a big headwind.

In fact, I think it creates a lot more discipline about the business and we've certainly proven the ability to make some very solid returns at this fuel price in the past.

If you were to assume the $70 price range were to hold for the balance of the year, I think that would require about 1 point of additional RASM, plus or minus, to cover it, and we'll see.

I think it's premature, as I said, to say $70 is the new normal.

We've -- the curve, as you know, is still backward-dated.

So if you were to take a market price, it's actually lower than that today.

And I do think there's a tremendous amount of revenue momentum that we're seeing, and I think the industry as a whole is needing to price for this.

This is not a unique Delta challenge, this is the industry, and that's why we've had good success.

But I guess, that's what investors are asking here.

What will drive that pricing upside?

And should we just assume that it's going to appear?

Pricing?

You're saying what would enable us to cover that cost of pricing?

Well, it's going to be several things.

First of all, it's going to be the strength of the economy.

It's going to be -- you have to look into what's driving the underlying reason why fuel is up.

It's going the strength of our branding, our product strategies.

Glen can add a little bit more on this, more color.

But we believe through our Branded Fares, our international partnerships are really paying off.

We've been investing for a number of years.

As you know, that's been the most challenged part of the business over the last 2 years and it's rebounding at a very strong clip.

Our transatlantic RASM was up 12% in the quarter.

So there's a lot of underlying strength on the top line, and we'll continue to see it over time.

Glen?

So if I could just add.

There's a huge correlation between airline revenues and fuel price, but it does take a little bit of time, both directions, up and down, before it's absorbed into the marketplace.

And so over the past few weeks, we've seen a fairly rapid run-up.

Under normal circumstances, with a growing economy, we would see that roll into fares, probably in the 90- to 120-day range, but it'd have to stay there.

And I think as it's fluctuating around, it's premature for us to start speculating as to how much of that would be captured in forward revenues.

We'll take our next question from Duane Pfennigwerth with Evercore ISI.

Paul, just wondered if you have any new thinking regarding hedging longer term?

And I know at one point you were studying the use of out-of-the-money call options.

I just wondered, given this backwardation into '19 if you're studying that anymore?

Look, we're always taking a look at trying to make sure we're managing risk in the business.

We have no plans to add any hedges at this time and we'll continue to look at it.

But again, I think we're pretty happy with where we sit right now.

We're driving a lot of efficiencies in the business in which we buy fuel and that's creating a nice sustainable advantage competitively, and we feel good about where we sit in the fuel line.

And then just for my second.

Broadly, how you're thinking about the buyback.

Maybe you could just remind us on where you are with the existing authorization.

And with this very generous free cash flow, how you're thinking about growing the buyback this year.

Sure, Duane.

So we -- as we've talked about throughout the quarter, we're on track with the new $5 billion authorization, which was launched last year.

We've completed about $1 billion of that and expect to complete that by the middle part of 2020, in line with the plans that we talked about last year.

We will take our next question from Jack Atkins with Stephens.

A couple of revenue questions for me.

First, on business fares domestically.

With business confidence at cycle highs, what really needs to happen, either from a macro perspective or from a company-specific perspective to really get that remaining 75% of the loss corporate fares back into the revenue line?

We're working on that every day and the dynamics competitively, domestically, have changed a lot over the last couple of years.

And -- but we don't see any real impediment to be able to get back there over time.

And so every day, we're working to get those up and it's at a market level, it's at a understanding our customers better level.

And I think we've shown in the first quarter, anyway, what I would consider to be some industry-leading results in terms of our ability to capture that and we see that momentum continuing into the second quarter.

Okay.

Great.

And then, Glen, just following up on your comments earlier on the cargo side of the business.

Clearly, global airfreight -- the global airfreight market is quite strong and continues to be strong driven by global trade and e-commerce demand.

Your cargo revenues jumped nicely in the quarter, up 24%.

How much more opportunity is there for you on the cargo side?

Because it just seems to me like a belly space could be seeing increasing load factors globally, just given that main deck freighter capacity is officially sold out globally at this point.

We're still a couple hundred million dollars below with our peak and Cargo was just a few years ago.

So I think there is continued momentum if we can, again, get back to those historic levels.

If I can just add to that, Glen.

I think the Cargo team is doing a fantastic job.

And where we have upside is to align the reliability and the quality of the airline into the Cargo operation.

They've done a great job of getting that, improving customer service and driving the premiums that we should expect with the type of reliability the operation can drive.

Good point.

Our next question will come from Savi Syth with Raymond James.

I think, Glen, last time -- last quarter on the call, based on current -- the trends at that time, you'd expected Atlantic and LatAm to be the best and then maybe domestic and Pacific class.

So I'm just kind of curious, given the spend is -- the kind of the way that it came out this quarter, is that a function of domestic being weaker than you had thought at that point or maybe Pacific performing better?

And also just to follow on this, what are some of the biggest drivers of the Pacific improvement?

Well, Pacific has been a great surprise as we've moved through the year, and my hats off to our Pacific team who is really doing a great job managing very robust business demand.

I think when you think back, the Brexit and whether or not you thought Brexit would cause more or less business demand to the U.K., I think most of us would have prognosticated that Brexit would be -- present a challenge for business traffic to the U.K. In reality, business traffic to the U.K. has never been stronger, and so as we think about a lot of what's going on in the press.

We are apprehensive and monitoring very closely how business travel is going back and forth to China, but all we've seen is continued improvements and continued strength in that.

So China, Japan, South Korea, all showing incredible strength.

Just to follow on that.

Is the kind of the partnership with Korean is -- so we should kind of expect some kind of increased momentum as that kind of gets solidified into the network.

Is that fair?

Yes.

We have had, as we've mentioned in earlier calls, a multiyear restructuring of our international Pacific capacity away from our hub in Tokyo and towards nonstop flying into the major points in China.

Now we'll continue to refocus using Korea as our main distribution platform for secondary and third-tier cities in Asia.

And we're off to a great start with our existing services, and we'll be building on that over the next years.

We'll move next to Darryl Genovesi with UBS Financial.

It looks like your capacity guidance for the second quarter, combined with what you did in the first, is trending towards the top end of the range for the year, even a little bit above.

Should we expect a deceleration in the second half?

So we said 3 for the year.

We're at a little bit over that for this quarter, with 1 point of the attributed to the year-over-year storm impact.

Okay.

And then when we -- I think the last couple of times that you guys have spoken, you have alluded to CASM being towards the -- or that you hope that CASM will be closer to the lower end of the range.

Paul, your commentary today sounded like it had a slightly different tone.

Do you still think that you can get into the lower half of that range this year?

Yes.

I think that is still our target, our goal and our expectation.

I think what we were trying to do on the call today is give the market a progress update on the initiatives that we've talked about through the year.

But we still feel good about hitting those full year targets.

Okay.

And then just one quick bookkeeping one.

On the non-op, the $200 million to $250 million decline, is that a change?

Or was that fully contemplated in the original guidance and you're just disclosing it for the first time?

It was fully contemplated in our original plan.

Next, we will move to Rajeev Lalwani with Morgan Stanley.

Glen, a question for you.

Can you just talk about your expectations around domestic and international as the year progresses in terms of the spread between the 2. I guess, I'm just trying to figure out whether domestic have the opportunity to catch up to international or if international could be coming in?

So I think that domestic represents such a huge revenue pool for us.

To imagine that domestic would move like the transatlantic and be up 12% is a little bit of a stretch.

But we see solid progression through the year, and I think that's what we're working on is to continue that momentum.

As you know, last year was our first year -- our first quarter of year-over-year positive revenue momentum.

So keeping that trajectory going over an ever-increasing base is our goal, and we think it's very achievable.

Okay.

And just a quick one for you.

Obviously, very committed to hitting the earnings numbers for the year, and you seem on track.

Would capacity, at all, be a lever for you to maybe get there assuming that the pricing environment is in good shape?

You zoned out there.

Is your question, will capacity changes help keep us in our full year guidance range?

Yes, that's right.

Or is it something you would consider assuming that the pricing environment is holding, obviously.

We're comfortable with our capacity for the year.

We're generally within the range that we gave at the start of the year, with respect to guidance.

There are changes over the course of the year.

Some of the international strengths certainly cause you to think there's a little more you can do there.

But fundamentally, no, we're -- our capacity is what it is.

And those kinds of changes, they could be seasoned over a much longer period of time, you can't -- we can't adjust them on the dime.

Our next question will come from Dan McKenzie with Buckingham Research.

Glen, with respect to the plan for overall full year growth of 2% to 3%, what's the growth in premium seats for the year and if you have it for the back half of the year?

My thought is just given the upgauging this year, the premium seats are probably up more than 2% to 3%.

And I guess, I'm just trying to peel back the onion on how the premium seats sort of tie into RASM and how the average fair premium for these seats, what kind of average premium these seats might garner versus an average fare cost of system?

Yes.

That's really one of the backbone, if you will, of our commercial strategy, is to continue to increase the number of premium seats we have in the marketplace using the upgauging strategy as the main vehicle for that.

So we will have double-digit increases throughout the year in terms of premium seats in the marketplace.

And the premiums that we get on that, depending on the product, range from 10% to 2x the average coach fare.

So that's really a key driver for us and I think one of the reasons we were able to post what I would consider to be superior revenue numbers for the first quarter.

There we go.

And then, Paul, with respect to the 50 aircraft that are yet to be delivered this year.

What's the philosophy on aircraft financing at this point?

And where would that leave net adjusted debt at year-end?

And I guess, where I'm going with that is, as you think about your pool of capital to return to shareholders, obviously, I heard you loud and clear on the $5 billion buy.

[Technical Difficulty]

I think we lost the caller.

Dan, are you there?

Yes, sorry.

I'm not sure -- Paul, can you hear me?

We can hear you now.

Okay.

Great.

Sorry about that.

My second question was for Paul.

And it's just with respect to the 50 aircraft yet to be delivered this year, I was just wondering what the philosophy is on aircraft financing and where that might leave net adjusted debt at the end of the year.

Sure, Dan.

Sorry, about the technical difficulty.

Yes.

We continued to lease some of our deliveries, but we're predominantly paying aircraft with cash, improving our unencumbered asset base and continuing to provide cushion and flexibility for the future.

The leased aircraft portfolio, as we've discussed, is getting back into our targeted range of 20% to 25% of the fleet.

It had gotten as low as 7% or 8% during the peak of our delevering.

We want that for long-term future flexibility, residual value management, et cetera.

And on the debt point, we're very comfortable with our -- where our debt sits today.

We are comfortably in all the investment-grade metrics that we target and we'll continue to monitor that as we go forward, so no material change to our plans or significant desire to increase or decrease debt materially.

Our next question will come from David Vernon with Bernstein.

This is Leo Vazquez, on behalf of David.

So we've had Alitalia and EasyJet holding talks.

Could you comment on the potential impact for the Sky Team and codeshare plans?

Unfortunately, we cannot.

Our final question from the analysts will come from Susan Donofrio with Macquarie Bank.

My question is on your new Branded Fares across the Atlantic.

I'm just wondering how we should be thinking about it as far as whether you think it's going to further drive top line growth that would have happened anyway from strong demand or should we view it as more of a defensive strategy across the Atlantic against new competition?

I think that people like to categorize our products and services as defensive or offensive or -- but really, what we're trying to do is to we're trying to give customers what they want to buy from us.

And if you think about the evolution of airlines, because of the way we distributed tickets historically, we weren't really able to provide more customized products and services to individual purchasers.

They were based on 2 or 3 classes of service and distribution through monolithic GDSes, which a ticket was a ticket was a ticket, and so this is really just a natural evolution of us trying to provide best-in-class services no matter what your travel needs are.

So if you're able to pack your suitcase in an overhead bag, why would we charge you for handling baggage?

And so I think it allows us to provide a variety of products and services starting from a very basic customer who's willing to forego some of more historic attributes of that coach ticket in order to get a lower fare, all the way up to our very premium services where we have the finest champagnes and the flatbed seats with direct aisle access and the Delta One suites.

So we're really excited about this change in Delta's ability to sell to our customers, and we think that it's been well accepted by the marketplace and that customers are finding value in at.

Great.

And then just as a follow-up, I noticed that your transatlantic partners are calling their Branded Fares different names.

Would we expect, as you further integrate your transatlantic JV, that you'll start having a little bit more standardization of some of the fare products?

I think that the first thing, which was so great to do, is to get the alignment on what those products are.

And well, I think, over the next 5 years, we would like to see more convergence with our partners on the products and services, absolutely.

Does that involve them being bioidentical, if you will?

Probably not.

They'll all have nuances in it.

But I think what we launched with the Air France-KLM and what we've launched with the Virgin is a -- and what we've launched with Aeromexico is a great step forward.

Although the nomenclature in the languages sometimes are different, the value proposition and the tickets are identical, and that's really a big step forward for us.

Thanks, Susan.

Thanks, everyone.

That is going to wrap up the analyst portion of the call.

And now I will turn it over to Ned.

Okay.

Thanks very much, Jill.

Ebony, we're ready to begin the media call.

If you don't mind, would you please review the process for asking a question.

(Operator Instructions) Ebony?

(Operator Instructions) We will take our first question with Alana Wise from Reuters.

So there were some mention earlier about business traffic to the U.K., and it just made me a little bit curious about whether or not Delta is preparing for the possibility of a slowdown as the effects of Brexit begin to take effect later.

And are there concerns that changes to current U.S.-U.

K. Open Skies to have a negative effect on Delta's transatlantic business?

Sure.

We monitor this on almost a daily basis.

And of course, we react to changes in demand profile as quickly as it can.

And we're looking out as far as we can see right now, and we see no trail off in business demand for the U.K. at all.

As a matter of fact, it's very robust right now.

But if indeed it does change, we will react to it, of course.

As far as the Open Skies agreement, we think that these will -- that there will be no real significant change in the way we operate to the U.K. or to Europe or from any of the changes of Brexit.

Our next question will come from Michael Sasso with Bloomberg News.

You may have seen news out this morning, that the owner of British Airways, IAG, has taken a stake in Norwegian and may bid for the entire thing.

I wonder if you can just comment, one, about how you see that affecting capacity or just the market across the Atlantic?

And the bigger question is, do you see anyone else, potentially Delta or anyone else, buying a share or potentially all of Norwegian?

Michael, this is Ed.

I don't know what British Airways plans are.

I think you're probably better off asking them.

And no, we don't have any plans to invest in Norwegian.

We'll move next to Doug Cameron with Wall Street Journal.

A quick couple for me.

Just on Norwegian, Ed, do you still oppose their -- the granting of the licenses by DOT?

You're, obviously, vocal in your opposition and there still have been lingering calls from some of the unions.

Do you think those transatlantic licenses for the U.K. and Irish units should be revoked?

Doug, we haven't engaged on that topic in some time, so I wouldn't be in a position to respond to that at this moment.

But you did engage in it for 3 years.

Yes, we did.

And I think we've moved on.

You've moved on.

Very good.

Okay.

And just a quick one.

You talked about the AmEx side, the card revenue, et cetera.

If you were to pick 2 or 3 of the, shall we say, non-operating, non-flying revenues, where do you expect or would you hope to see most growth going forward in the medium term?

Well, I think the AmEx relationship is -- which has been growing at a double-digit clip, will continue to grow at a double-digit clip, which is significantly outside the run rate of the core airline business, so I think that's a significant improvement.

Our cargo and MRO businesses are also doing very well, especially with the introduction of the geared turbofan into our fleet.

And I think that's -- those are easily double-digit growth businesses for us, certainly, over the next number of years.

And then the Branded Fares initiatives, as we continue to segment and merchandise the products better, we'll grow at a faster clip than ticketed revenues, which is what we mentioned on the call.

I don't know how much more is out there, but I think there is a considerable improvement potential.

And I think those are more durable base of revenues, all of those that I mentioned going forward which adds to our overall foundation in terms of the strength and sustainability of the business model we've created.

We'll move next to the Ted Reed with Forbes.

I guess my question is for Glen.

There are some reporting that -- I know your international growth particularly -- particularly transatlantic is great, but there's some reporting that leisure traffic from Europe and elsewhere is weak.

Can you just comment on that?

We don't see that.

We see record travel between the U.S. and Europe in both directions for [peak] summer of '18.

So I'd say, we are selecting traffic from the U.S. over traffic from Europe because the fares are higher out of the U.S. than they are out of Europe.

They have been historically higher for the last 20 years and that trend continues.

So I think to the extent we can favor U.S. origin traffic in peak, we do.

But the total traffic to Europe, we think, will be record-breaking this year.

Our final question will come from Edward Russell with Flightglobal.

I was wondering if you could provide any more detail on the number C Series and when the first aircraft will arrive this year?

Well, our plan is to take the first C Series by the end of the year and probably induct it into the service at the start of 2019.

And do you know how many you plan to take this year?

In calendar 2018?

It's just a handful in the fourth quarter.

Okay.

We appreciate everyone's time.

And Ed, Glen, Paul, thank you very much.

This will conclude the 2018 March quarter earnings call, and we'll be back in July.

Thanks, everyone.

Again, ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may now disconnect.