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Executives

Douglas M. Steenland - President, Chief Executive Officer, Director

David M. Davis - Chief Financial Officer, Executive Vice President

J. Timothy Griffin - Executive Vice President - Marketing and Distribution

Richard B. Hirst - Senior Vice President - Corporate Affairs, General Counsel

Analysts

Gary Chase - Barclays Capital

William Greene - Morgan Stanley

Jamie Baker - J.P. Morgan Securities

Ray Neidl - Calyon Securities

Daniel MacKenzie - Credit Suisse

Bob McAdoo - Avondale Partners

[Bill Masserus - Bradpoint Capital]

Kevin Crissey - UBS Securities

Northwest Airlines Corporation (NWA) Q3 2008 Earnings Call October 22, 2008 11:00 AM ET

Operator

Welcome to the Northwest Airlines third quarter 2008 financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, October 22, 2008.

I would now like to turn the conference over to Andrew Lacko, Director of Investor Relations.

Andrew Lacko

Thank you for joining us today for Northwest Airlines third quarter 2008 financial results conference call. Joining me today on the call are Doug Steenland, our President and Chief Executive Officer, Dave Davis, our EVP and Chief Financial Officer, Tim Griffin, our EVP of Marketing and Distribution, and Ben Hirst, our SVP of Corporate Affairs and General Counsel.

On today’s call Doug will provide opening remarks followed by Dave who will review the quarter’s results and provide you with additional forward guidance. After our prepared comments we will open up the call for questions from the analyst community followed by questions from the media.

During the course of our remarks today, we may make forward-looking statements and you should understand that actual results might differ materially from those projected in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those forward-looking statements is contained in today’s earnings press release.

I’d also like to remind everyone that today’s call is being recorded and is also being webcast at ir.nwa.com. A replay of the call will be made available on this same site shortly after the call for approximately one week.

I would like now to turn the call over to Doug Steenland.

Douglas M. Steenland

This morning Northwest reported a net loss of $317 million for the third quarter of 2008. These reported results include a $410 million non-cash charge associated with marking-to-market Northwest’s out-of-period fuel hedges. Excluding this extraordinary charge, Northwest reported an adjusted net income of $93 million for the quarter and a pre-tax margin of 2.5% which was the highest among network carriers.

We are particularly pleased with these results given the unprecedented challenges posed by the record high fuel prices during the quarter. These results compare to the third quarter of 2007 when Northwest reported an adjusted net income of $232 million excluding out-of-period fuel hedges.

Northwest ended the quarter with unrestricted liquidity of $3.4 billion which is among the strongest liquidity positions in the industry. In a few moments Dave Davis will provide you with additional color on our third quarter financial performance, but first I’d like to point out a few highlights of the quarter.

I’ll start by commenting on Northwest’s exceptional operating performance in 2008. For the first nine months of the year Northwest has achieved 19 100% completion factor days worldwide and 29 100% completion factor days in North America. This outstanding performance has continued beyond September into October. Through the 20th of October we’ve had eight perfect system completion days and nine perfect North American completion factor days.

Further evidence of our strong operational performance is shown in the most recent DOT reporting data which measures industry performance through August. For the month of August Northwest was the industry leader among network carriers in on-time performance, fewest mishandled bags, fewest customer complaints, and highest completion factor.

Measured on a year-to-date basis Northwest ranked first in departure within zero performance, fewest mishandled bags and fewest customer complaints. Northwest also ranked second in completion factor and third in on-time performance. This high level of performance is continuing. In September our DOT A-14 on-time performance was 89.5% and it’s 91% month-to-date in October. North American completion factor was 99.5% in September and is 99.9% in October. Our DOT luggage handling performance in September was 2.2 mishandled bags per 1,000 passengers and October month-to-date is 1.8 mishandled bags per 1,000 passengers.

This stellar operational performance is the direct result of the hard work and dedication of our co-workers, and for that I say thank you to them for producing these outstanding results.

Turning back to third quarter financial performance, Northwest earned almost $100 million despite a $688 million increase in year-over-year fuel costs excluding the impact of out-of-period fuel hedge losses.

In Q3 we were able to grow top line revenue by 12.4% and consolidated passenger revenue by 11.3%. Northwest’s unit passenger revenue performance or PRASM also continues to be very strong. During the quarter we grew domestic main line PRASM by 10.7% and consolidated PRASM by 8.1%. This impressive PRASM growth is the result of prudent capacity reductions implemented during the quarter and disciplined industry-wide fare actions.

In addition to PRASM growth, we continue to see strong ancillary revenue growth. Our first and second bag checked fees are performing exceptionally well. Based on the most recent data available the bag fee initiatives are generating an incremental $150 million to $200 million in additional revenues on an annualized basis.

Fuel continues to be Northwest’s single largest cost item while still at historically high levels. Recently the price of crude oil has fallen dramatically. Since reaching its peak in July, as of October 20 the price of crude oil has declined over $70 a barrel. I would also note that at least as of today the price of fuel has gone down to $68 a barrel as of this call. For every $1 per barrel reduction in the price of oil, Northwest’s fuel costs are lowered by approximately $40 million annually.

We’re also pleased with our unit cost performance. Main line ex fuel CASM fell by 1.1% during the quarter despite a 1.3% reduction in capacity.

The airline industry in general, and Northwest in particular, are well positioned to prosper despite the current economic uncertainties. The historic run-up in fuel prices earlier this year led to unprecedented industry capacity reductions that have recently been implemented. These reductions leave the industry well suited to deal with potential future demand softness. We believe that this is a unique situation because prior economic slowdowns not accompanied by capacity reductions of this magnitude were implemented in advance of the economic slowdown. These capacity reductions combined with significantly lower fuel prices create the conditions for sustained profitability.

Let me provide you an update on the status of our merger with Delta. On September 25 Northwest shareholders overwhelmingly voted in favor of the merger agreement with more than 98% of the shares voted supporting the transaction. Delta shareholders also approved the merger on that same day. On closing of the merger, which we expect to occur soon, the two carriers will begin to realize annual synergies now estimated at $2 billion by 2012. One-time integration costs are now estimated to be approximately $600 million spread over three years.

The combined carrier will have among the strongest balance sheets and liquidity positions in the industry. We continue to make significant progress in integration planning and expect a smooth transition to creating the new Delta.

Before I turn the call over to Dave Davis, I would like to note that this will likely be Northwest’s last earnings call as a stand-alone airline and I’d like to thank all of you for your interest and attention to Northwest over the years.

David M. Davis

As Doug mentioned earlier, Northwest today reported a third quarter 2008 net loss of $317 million or $1.20 per share. Excluding the $410 million charge associated with marking-to-market our fuel hedges, Northwest reported third quarter adjusted net income of $93 million or $0.35 per share. On a comparable basis for the third quarter of 2007, Northwest reported an adjusted net income of $232 million.

Let me start with a discussion of Northwest’s revenue performance. Operating revenues for the third quarter were $3.8 billion up 12.4% from last year. Consolidated passenger revenue increased by 11.3% and consolidated ASMs were up by 2.9% year-over-year. Northwest’ consolidated PRASM growth was 8.1%.

Moving to revenue performance by region, our year-over-year PRASM improvement was as follows: Domestic main line PRASM was up 10.7% on 9.9% fewer ASMs and domestic consolidated PRASM including regionals was up 10.9% on 1.7% fewer ASMs. Our strong third quarter domestic PRASM performance was largely a result of the capacity reductions implemented in early August as well as favorable industry fare actions.

Regional PRASM decreased by 4.1% on a year-over-year basis on 52.9% more ASMs. This PRASM decline resulted from the large increase in regional capacity during the quarter as the delivery of 76 regional jets continued. We expect to take the last of the 76-seaters in December.

Looking now at the international operation, our Pacific PRASM increased by 7.1% on 1.9% more ASMs. This performance was driven by strong yields and substantial increases in year-over-year fuel surcharges.

Atlantic PRASM increased by 1.6% on a 22.4% increase in ASMs. Increased capacity in the Atlantic was largely driven by the annualization of new Trans-Atlantic service launched last year in conjunction with our joint venture partner KLM. Total joint venture PRASM was up 8% on a 13.6% increase in joint venture ASMs. We expect to lap ourselves on a year-over-year basis during the fourth quarter at which point our Atlantic capacity growth will moderate.

Turning to cargo. During the quarter cargo ton miles decreased by 24% but cargo revenue fell by only 5.2% or $11 million to $201 million. As a result cargo revenue per ton mile increased a very strong 25.2% for the quarter.

Moving now to costs. Third quarter operating expenses of $3.6 billion excluding the adjustments associated with marking-to-market out-of-period fuel hedges were up $673 million or 23% year-over-year as a result of a $688 million increase in fuel expense. Excluding fuel costs, operating expenses decreased by $15 million year-over-year. Our main line unit costs excluding fuel were down 1.1% versus last year which is favorable to our previous guidance. This favorable CASM performance on 1.3% fewer ASMs is evidence of Northwest’s continuing success in controlling costs.

Fuel continues to be Northwest’s largest cost representing 46% of the company’s third quarter operating expense. During the quarter excluding taxes and out-of-period fuel hedge losses, we paid an average of $3.79 per gallon for jet fuel which was a 79.8% increase versus last year. Northwest had previously hedge approximately 72% of its fuel exposure for the quarter.

Moving to the balance sheet. We ended the quarter with $3.4 billion in unrestricted liquidity which includes $261 million in a funded tax trust that was established in 2002. In addition, Northwest ended the quarter with $185 million in restricted cash. At quarter end we had provided $118 million in cash to counterparties to our fuel hedge agreements to meet threshold requirements for our agreements. Our quarter ending unrestricted liquidity was approximately 25% of trailing months revenue which continues to be the best among network carriers.

Capital expenditures during the quarter totaled $318 million. Aircraft cap ex was $291 million of which $214 million was offset by financing proceeds. Non-aircraft cap ex totaled $27 million during the quarter.

Northwest has taken delivery of 64 76-seat jets flown by [Compass & Masaba] out of the 72 that we ordered. Each was financed with attractively priced long-term debt financing. To date the airplanes are operating with economics that are consistent with or favorable to the originally projected benefits. We expect to take delivery of three more next week and the remaining five 76-seaters by year end. It’s important to note that Northwest has financing commitments in place for all aircraft on order including our 787s.

During the quarter we closed on a $183 million aircraft and spare engine financing transaction which is reflected in our ending cash balance and we continue to pursue other liquidity enhancing initiatives. Regarding the sale of the 14 aircraft previously announced, Northwest has signed commitments with deposits in place to sell the aircraft by year end. Net cash proceeds of the sales are expected to be more than $100 million which we expect to be included in our fourth quarter ending liquidity.

Additionally during the quarter Northwest successfully amended its existing bank credit facility by making various changes to the agreement that will allow it to remain in place after the merger with Delta is closed.

Our total debt at the end of the third quarter was $9.9 billion including a present value of off-balance sheet aircraft leases. Our net debt at the end of the quarter was $6.8 billion.

Northwest remains in full compliance with all of our financial covenants and has no holdbacks in place.

Turning now to guidance for the remainder of 2008. Regarding fourth quarter capacity we expect the following: Domestic main line to be down 18% to 19% while international will grow 2% to 3%. System main line capacity will be down 8.5% to 9.5%. Regionals will be up 50% to 55%. Domestic consolidated capacity will be down 7% to 8%. System consolidated capacity will be down 3% to 4%. Full-year capacity guidance is included in the tables attached to this morning’s press release.

Turning now to revenue. Given the industry’s unprecedented fourth quarter capacity cuts and recent unit revenue trends, we expect strong PRASM growth in Q4. If preliminary booking indicators continue to hold, we project double-digit fourth quarter domestic consolidated PRASM growth which is consistent with previous guidance.

Regarding the affect the current environment will have on industry demand, analysts have recently noted that during even the most severe historical economic downturns industry system-wide operating revenues have declined by no more than 1.2% on a year-over-year basis. If the current economic landscape were to yield a similar case scenario, the resulting decrease in revenues for an airline the size of Northwest would be approximately $150 million.

Offsetting that potential decline, the reduction in crude oil prices based on the forward curve as of October 20 from the full year 2008 average of $104 per barrel to the 2009 full year average of $78 per barrel would result in over $1 billion in reduced annual fuel costs.

Regarding cap ex. We expect full year 2008 aircraft capital spending to be approximately $1.2 billion with $890 million of this amount financed. Non-aircraft capital spending for the year is projected to be $150 million.

Regarding costs for the remainder of 2008. We expect fourth quarter main line CASM ex fuel to be up 4% to 5% on 8.5% to 9.5% fewer ASMs. For the full year main line CASM excluding fuel will be up 3% to 4% on a 2.5% to 3.5% reduction in main line ASMs. For those that model Northwest on a consolidated basis, we expect full year 2008 consolidated CASM ex fuel to be up 2% to 3% versus 2007.

Based on the forward fuel curve as of October 20, 2008 and excluding fuel taxes and mark-to-market adjustments related to fuel derivative contracts, our fourth quarter 2008 fuel price would be $2.99 per gallon and full year 2008 fuel prices would be $3.32 per gallon. For the remainder of the year we have hedged approximately 79% of our fourth quarter fuel requirements and 58% of our first quarter 2009 fuel requirements.

At fuel costs consistent with current forward prices, we anticipate being profitable in the fourth quarter.

With that we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

On the cost side, I wondered if you could just elaborate a little bit on what’s driving the ability to get CASM down and get costs out as capacity comes out? Is it sustainable and is it a function of fleet savings, and obviously fleet is going to save you on fuel, but clearly non-fuel as well? Is there enough there to be driving that process or is it something else?

David M. Davis

I think during the third quarter we were successful in a number of areas at taking operating costs out as we got smaller. On the salary side, on the maintenance front our costs were down significantly. As we get into periods of even greater capacity reduction like in the fourth quarter as our guidance suggests, we will see an uptick in CASM. Right now we’re projecting it to be 4% to 5%.

Douglas M. Steenland

I would note we had a number of programs in place to reduce headcount. We had targeted a reduction of 2,500 FTEs and we were successful in reaching those goals and realizing those cost savings concurrently with the headcount reduction, and I think that contributed to the good CASM performance that we saw.

Gary Chase - Barclays Capital

You noted the revenue number on the baggage side. Are the cost savings material there? Are they worth talking about or are they a rounding error? And presumably your driving behavior change with that in addition to revenue?

J. Timothy Griffin

About 40% of second bags have gone away. The cost savings associated with that is material but not nearly large in comparison to the revenue side. We’re seeing some of the same customer behavior with respect to the second bag as customers pack more prudently and it’s no longer a free good. That 40% reduction will roll through staffing models and the like which will generate cost savings on our end.

Gary Chase - Barclays Capital

Maybe this one for Tim. A number of us have written on this revenue topic and how bad it has to be. Yesterday it happened to be something out of the NBTA, some survey talking about how corporations are really tightening up. I’m wondering if you could just give us some perspective. Whenever there’s a recession at least our perception is that’s sort of what companies do. I’m’ wondering if you’re seeing any in terms of behavior change that strikes you as different than what you’ve seen in some of these prior recessions or does it seem consistent with what’s happened in the past?

J. Timothy Griffin

A couple of things. We haven’t seen anything extraordinary. I think bookings have surprised us perhaps a bit on the upside being a little more resilient than you might have expected given the general economic news. As we look out into Q4 on a reduced domestic schedule, our book load factor’s actually up a point and internationally we are up as well overall four or five points in the Pacific and actually down two or three points in the Atlantic, but a bit up overall. We’re watching diligently. I think that we have not seen anything extraordinary though.

The feedback we’re getting from some corporations, some are being watchful, some are trading down a bit. I think that’s reflected in our economics. Some have told us that they’re having a kind of year issue as they take higher prices during the year than they had budgeted so that might heal itself in a new budget year. Relative to the broad economic news, I think we’re pleased with our bookings and our RASM outlook.

Operator

Our next question comes from William Greene - Morgan Stanley.

William Greene - Morgan Stanley

I’m wondering if you could talk a little bit about the competitive landscape at your hubs. You’ve always done a good job at sort of protecting them and we’ve seen one new inroad to many. But given the RASM growth that you’re discussing, how high does it get before you’re going to see a lot more incursion into the hubs do you think?

J. Timothy Griffin

Fares change quickly and can be changed quickly. I don’t think that many competitors make entries into an area based on RASM performance that they’re seeing from others because those conditions can change fairly quickly. Southwest will enter Minneapolis Midway this March. It’s a market we know well and a competitor we know well. There have been various competitors in the Midway Minneapolis market over time so I think we have a good feel for the market size at various prices to both Midway and O’Hare.

Our costs are largely competitive with Southwest now and actually at $68 fuel I think we calculated the other day we have a little bit of a fuel advantage, which will be the first time in an awfully long while. We’ll have quite a product for our customers. We’ll have 10 or more trips to both Midway and O’Hare at competitive prices and featuring dual class aircraft. I think we’ll have a great product for our customers and we’d like to hold onto them all.

David M. Davis

I think we’ll also continue to benefit from in essence the Heartland market that we have built up over time and just the nature of the density of those markets make them less susceptible to new entrants coming in and the type of things that other carriers might see when they operate into more commodity like denser city fares that just by the nature of geography we tend to not find ourselves in domestically.

William Greene - Morgan Stanley

On the hedging, are you adding to your hedge positions today? And if you closed out what you have on the books, what would you have to pay?

David M. Davis

The answer is we have not been adding to our hedging positions in any meaningful way over I would say the last three to four weeks as fuel has sort of steadily come down. We’re in a bit of a holding pattern here till we see some stabilization.

Let me give you a couple cash numbers to sort of answer the second part of your question. I talked about at the end of the quarter what our unrestricted liquidity was and how much cash we had posted with counterparties. Let me give you those numbers as of yesterday. As of yesterday we had a bit over $400 million posted with our fuel counterparties but our unrestricted liquidity remained at about $3.2 billion despite the increase in cash posted with our fuel counterparties. The answer is if we settled all the hedges today, they would essentially keep the $400 million or so that we have posted plus there would be an additional outflow of maybe $50 million to $60 million or so to cover some credit lines that we have with fuel counterparties.

Operator

Our next question comes from Jamie Baker - J.P. Morgan.

Jamie Baker - J.P. Morgan

Tim, I’m not sure if you got a chance to listen to the United Airlines call. They went into quite a bit of detail on what’s happening with supply and demand in the Asian market. The September ATA stats for the Pacific were a bit discouraging. I was just hoping we could hear Northwest’s take on this particular geography.

J. Timothy Griffin

I did not hear their call. I got some highlights though and I saw that they had mentioned that. I think we’re feeling a little more bullish about our Pacific. Our Pacific is a bit different than theirs in composition. Yen is very strong at 100. That’s helpful in our resort economics as you well know. Bookings are strong in the [T-PAC] as I mentioned up 4% or 5% year-over-year and we’re looking for positive RASM. Same commentary on caution. We’ve always been careful monitors of what’s ahead of us but we’ve kind of redoubled our efforts looking to see if those trends were to change. That’s what we’re seeing as of today.

Operator

Our next question comes from Ray Neidl - Calyon Securities.

Ray Neidl - Calyon Securities

Just to follow up on Jamie’s question, you’re the big guy in Asia right now. Are there any areas of Asia that you see weaker than others, say China or India or whatever?

J. Timothy Griffin

China has been weak. It largely started in the Olympics and visa issues which have been slow in sorting out. You’ve seen that various carriers have delayed entry into China because of that. I don’t think our long-term view has changed. I think the current economic environment will need to sort out a little bit but I think the lack of additional supply being added in the market was appropriate for what we’re seeing.

Ray Neidl - Calyon Securities

Your regional operations, both expenses and revenues, are shooting up rapidly. Could you just go over a little bit of what’s happening in your regional sector and if this will be reversed or curtailed once the merger with Delta takes place?

J. Timothy Griffin

Those numbers are really being driven by the massive introduction of the 76-seaters which I think mentioned in the script really will wind down this year. There’ll still be a fairly meaningful annualization of that next year but no new regional lift coming in. As I think Dave mentioned, the 76-seaters have performed extraordinarily well both economically and from a customer preference point of view.

Ray Neidl - Calyon Securities

Credit card holdbacks. Any problems there? I know Delta said that they’re all set to go even after the merger. Are you experiencing any problems in that area right now?

David M. Davis

None.

Ray Neidl - Calyon Securities

If this is our last call, it’s been great working with you.

Operator

Our next question comes from Daniel MacKenzie - Credit Suisse.

Daniel MacKenzie - Credit Suisse

My first question would be for Tim or for Dave. With respect to the capacity cuts I believe Northwest was targeting the reduction of 14 757s and 33 DC-9s. Where were we in the third quarter and how many more are there to eliminate as we look into the fourth quarter?

David M. Davis

As of the end of the third quarter I believe the 14 757s and 320s were out. As regards the DC-9 fleet, I don’t have the end of third quarter number in front of me but there will be additional reductions in the size of the DC-9 fleet during the quarter. Actually as I look at it here, between the end of the third quarter and the end of the year an additional five DC-9 will be coming out of the fleet.

Daniel MacKenzie - Credit Suisse

Tim, one observation about Southwest is that at least in Detroit it has not grown aggressively so Northwest has been able to escape the growth of Southwest with Southwest just maintaining 3% to 4% market share in Detroit. As far as I can remember at least going back to 1994, and I know you’re a long-time student of the industry, what has Northwest done differently to protect its market share from Southwest?

J. Timothy Griffin

I don’t know if we’ve really done anything differently. We obviously analyze markets and market sizes at various prices and understand that markets expand if a carrier has a different pricing philosophy.

I think we may have been early on in determining where that new equilibrium was going to be and face up to the new reality and get your supply where it ought to be to be able to accommodate your passengers and the quantity of people who are going to demand your product at those prices. I think that’s a philosophy that we’ve stuck to. And ultimately in most head-to-head competitive situations the carrier with the preferred product and kind of the higher ground on origin traffic will prevail.

Operator

Our next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

A question or so on the fuel hedges. Could you talk a little about the structure of them and do you have floors in some of these hedges that in effect will cause you to have to pay out money as oil prices come down?

J. Timothy Griffin

Yes. We essentially have fuel hedges in a variety of different instruments. We have collars on crude oil, collars on heating oil, we have some swaps in place on jet fuel. The detail on the hedge portfolio will be in our 10Q which will be out either today or tomorrow. In answer to your question about the floors, the answer is yes the hedges are essentially under water but as I commented on before, essentially the cash requirement to satisfy those hedges is already basically been posted with the counterparties and our liquidity as of yesterday was $3.2 billion unrestricted. That excludes the cash that’s been posted with the counterparties already. So in essence we sort of prepaid for the underwater nature of some of the fuel hedges.

Bob McAdoo - Avondale Partners

I guess I really wasn’t so worried about your liquidity as much as trying to have some thoughts about how much is your fuel coming down, what percent of your fuel is not coming down as the price of crude comes down?

J. Timothy Griffin

Here’s the way I look at it. We have essentially a little over $400 million posted as cash to satisfy the underwater nature of the fuel hedges. Those are essentially paid for. So going forward we should participate fully in the changes in the fuel prices. We’ll be buying fuel at essentially spot prices going forward.

David M. Davis

From a timeframe perspective that covers Q4 and the hedges that we have throughout ’09 so that $400 million would need to be spread over that period of time to reflect what at least if you took the snapshot today the underwater position would be. That obviously is subject to change depending on whether fuel continues to decline or whether fuel continues to go back up. Obviously as an airline and as an industry we have been tremendously benefited by the very significant decline that we’ve seen, and if fuel continues to decline, we will be benefited even further.

Operator

Our next question comes from [Bill Masserus - Bradpoint Capital].

[Bill Masserus - Bradpoint Capital]

Dave, I wonder if you could give us some details on the $183 million financing; which aircraft that might have been? You also indicated there were additional fundraising activities. Are those strictly aircraft and maybe the associated spare parts? Any color that you could provide there would be very helpful just in terms of adding to the liquidity coffers in what is a very uncertain operating environment.

David M. Davis

Without going into a lot of detail, the $183 million was basically a private transaction we entered into and there was a number of unencumbered aircraft throughout the fleet and unencumbered engines that we pledged as collateral against the $183 million.

The additional financing that we’re working on would essentially involve pledging additional collateral, some of which is aircraft, some of which is spare engine, some of which is real estate and a variety of other unencumbered assets. We’re in the process of working through that additional financing now.

[Bill Masserus - Bradpoint Capital]

In these private transactions, are these on newer generation aircraft, are they on Airbus or Boeing aircraft, again any details you could provide would be very helpful?

David M. Davis

I think the answer to your question is essentially yes to all of them. We have a mixture of some newer generation aircraft, some that are a bit older like the 75s, spare engines, so it runs the gambit.

[Bill Masserus - Bradpoint Capital]

On the funded tax trust, that seems to be something that I guess as far as your press release is relatively new. I’m just wondering, where was that previously? I’m just curious.

David M. Davis

The answer is that that’s not new. We have essentially had a tax trust fully funded since I believe 2002 actually. It shows up in restricted cash. On a going forward basis, we are essentially not fully funding that tax trust so unrestricted cash will build over the course of the next eight weeks.

[Bill Masserus - Bradpoint Capital]

And you would expect that to remain unrestricted cash, obviously after the merger? Would that be correct?

David M. Davis

That is correct.

Douglas M. Steenland

Given the very significant decline in fuel prices and the anticipated synergies that we expect the merger to produce, it made no sense to keep that trust anymore and it’s basically being unwound and will be in the same position on an apples-to-apples basis as the rest of the industry. It’s really an anomaly that runs all the way back to 2002 and we never really dealt with it. Given the favorable developments in the business, now is the time to deal with it.

[Bill Masserus - Bradpoint Capital]

The number of unencumbered aircraft which you could take out of service if the current operating environment were to get a little bit worse? This would be over and above the already announced capacity reductions.

David M. Davis

I don’t have a precise number for you on that. As I said, we are in the process of working on additional liquidity initiatives that may encumber some unencumbered aircraft. That process is still ongoing now so I don’t want to give a precise number.

[Bill Masserus - Bradpoint Capital]

Can you give a general sense? Is it 20, 40 aircraft? Again without being really specific but just to give us a general sense as to your flexibility?

David M. Davis

Here’s the issue. Our DC-9s essentially have been largely unencumbered. We’re in the process of potentially encumbering some of them. I don’t want to get more specific than that.

I think we have time for one more call from the analyst community before we move into the media portion of the call.

Operator

Our last question comes from Kevin Crissey - UBS Securities.

Kevin Crissey - UBS Securities

Can you tell me what the foreign exchange and the fuel surcharge impact is on cargo and passenger revenue as kind of currently and as you see it going forward?

David M. Davis

I actually don’t have the details on the foreign exchange impact in front of me. I can have Andrew follow up with me after the call and he can get it for you.

[End of analyst portion of call]

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