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Delta Air Lines, Inc. (NYSE:DAL)

Q1 2009 Earnings Call

April 21, 2009 10:00 am ET

Executives

Jill Greer – Director of Investor Relations

Richard H. Anderson – Chief Executive Officer

Edward H. Bastian – President

Hank Halter – Chief Financial Officer

Glen W. Hauenstein – Executive VP, Network Planning & Revenue Management

John E. "Ned" Walker – Chief Communications Officer

Analysts

Michael Linenberg – Banc of America

Gary Chase – Barclays Capital

Helane Becker – Jesup & Lamont

Jamie Baker – J. P. Morgan

Hunter Keay – Stifel Nicolaus & Company

Michael Derchin – FTN Midwest Securities

William Green – Morgan Stanley

Kevin Crissey – UBS

Bob McAdoo - Avondale Partners

Media

Harry Weber – The Associated Press

James Pilcher – The Cincinnati Inquirer

Kelly Yamanouchi – Atlanta Journal

Ted Reed – TheStreet.com

John Crowley – Reuters

Mike Westerfield – Wall Street Journal

John Lomax - St Paul Pioneer Press

Mary Jane Credeur – Bloomberg News

Aaron Karp – Air Transport World

Andy Compart – Aviation Daily

Operator

Welcome to the Delta Airlines April 2009 quarter financial results conference call. (Operator Instructions) I would now like to turn the call over to Jill Greer, Director of Investor Relations for Delta Airlines.

Jill Greer

Thank you for joining us today to discuss Delta’s March quarter 2009 financial results. Joining us from Atlanta today are: Richard Anderson, Chief Executive Officer; Ed Bastian, Delta’s President; and Hank Halter, our Chief Financial Officer. Also joining us after the call during the Q&A session are Steve Gorman, our Chief Operating Officer; Glen Hauenstein, EVP of Network and Revenue Management; Mike Campbell, EVP of HR and Labor Relations; Ben Hirst, our General Counsel; Paul Jacobson, Senior Vice President and Treasurer; and Ned Walker, our Senior Vice President and Chief Communications Officer.

Richard will begin the call with a Delta and industry overview, Ed will then address our March 2009 quarter financial and revenue performance and give an update on merger integration. Hank will conclude with a review of Delta’s cost performance and liquidity.

We have allocated 25 minutes for executive comments. After their comments we have allocated 25 minutes for questions from the analysts, and we will then conclude the call with a 10-minute Q&A with the media. When we get to the Q&A I would like to request that you limit yourself to two questions. That should allow us to get as many questions in as possible during today’s call.

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 result to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta’s SEC filings.

We will also discuss certain non-GAAP financial measures and you can find the reconciliation of those non-GAAP measures on our investor relations website at www.Delta.com. With that, I’ll turn the call over to our Chief Executive Officer.

Richard H. Anderson

Good morning and thanks for joining us today.

This has been a challenging quarter for the global economy and Delta was certainly not immune. However, it is clear that Delta’s fundamental business strength is solid as we essentially broke even for the quarter, excluding fuel hedges and special items.

We achieved this in one of the worst economic recessions in our lifetime but before I get into the details I want to first thank the Delta team around the world for their work and dedication to running a great airline. While tough days still lie ahead, I have no doubt the people of Delta will get through these challenges with professionalism and unwavering commitment to delivering a first-rate travel experience to our customers.

We have recognized employees for their efforts with more than $10.0 million in shared rewards so far in 2009 for meeting operational performance goals and thanks to the team for some really great work.

For the quarter, Delta reported a net loss, excluding special items, of $693.0 million. These results were impacted by hedging decisions we made last year when crude was climbing to nearly $150 a barrel. What is critical to focus on is excluding special items and fuel hedge losses of $684.0 million, we had a break-even quarter.

We generated positive cash flow from operations of over $600.0 million during the quarter and our strong $5.0 billion liquidity balance was unchanged from the end of fourth quarter 2008. So we are in a sound position to deal with the current economic environment.

We’ve got a strong financial foundation, a diverse global network, unmatched benefits from the merger, and the best employees in the industry.

In the midst of challenging times it’s even more important that we’re running a solid operation. In February Delta and Northwest posted top-tier results in completion factor and on-time arrivals, as reported by the Department of Transportation. In fact, Delta had its best February completion factor performance on record at 99.1%. Northwest kept its performance at the top of the industry during the quarter and Delta improved its baggage results more than 20% year-over-year in the March quarter, so the investments we’ve been making in technology and processes are paying off for our customers.

I think the biggest question out there now is the revenue environment. We have seen some signs of stabilization as the revenue environment appears to have bottomed out, but it’s still a bit early to call and we expect to face significant headwinds throughout 2009.

In addition to our announcement last month to reduce international capacity 10%, starting in September, we’re taking further actions to increase revenue, reduce costs, and preserve liquidity. We continue to believe that unbundling our pricing is the right thing for our customers and our business.

To that end, Delta announced this morning that we will charge a $50 fee for a second checked bag on international flights. We are taking 40 to 50 aircraft out of the Delta fleet this year. This will include grounding all remaining B747 200 freighter aircraft at the end of this year. We are also reducing over 30 regional jets this year. We are also focused on aligning our staffing levels with reduced capacity. Our staff at the end of the quarter was down 6% compared to last year.

This will be even lower after the end of the summer travel season, with most of the 2,500 employees who participated in voluntary programs will have left the company, so we are staying ahead of the curve on capacity, adding new sources of revenue, and maintaining our best-in-class cost structure. The result is an industry-leading liquidity balance that will help us weather this economic storm.

In the midst of challenging times our merger with Northwest is even more important. It differentiates Delta from the rest of the industry. We’ve got an unmatched annual $2.0 billion synergy opportunity by combining the two companies.

It’s been a year since we announced the merger and the deeper we get into putting the airlines together, the more we see the merger really is a game changer. We built a tremendous amount of momentum through the integration of the two airlines. We are on track to receive a single operating certificate from the Federal Aviation Administration by the end of the year and we’ve out seniority integration and representation issues for many of our work groups. More than half the airports have rebranded and consolidated. We have employees in new uniforms and our domestic product is aligned. So really great progress.

So while it’s going to be a tough year, no airline is better positioned than Delta. We are focused on the fundamentals, running a great airline, making prudent decisions about capacity, costs, and capital, and accelerating our unmatched benefits from the merger so that we will be ready to take advantage of the upside when the economy turns around.

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

Edward H. Bastian

Good morning everybody. I will join Richard in thanking my Delta colleagues. We are in some pretty challenging economic times and on top of that we’re busy merging two companies into the worlds’ largest airline. The Delta people continue to step up to the challenge day after day. Thanks to all of you for your hard work and your dedication.

Turning to our financial results for the March quarter, excluding special items, Delta reported a net loss of $693.0 million, or $0.84 per share, on a base of 825.0 million fully diluted shares. This compares favorably to consensus estimates of a loss of $1.01.

As Richard mentioned, despite one of the worst economic backdrops on record, we would have reported break-even results for the quarter if we had fuel at market prices. This point is particularly relevant because we will largely be out of our legacy hedge positions by June.

On a GAAP basis we reported a net loss of $794.0 million in the March quarter, which includes special items of approximately $100.0 million. These special items consisted of a $50.0 million charge for severance related to the voluntary workforce reduction programs offered in January and $49.0 million in merger-related expenses.

We generated more than $600.0 million in operating cash flow and $100.0 million in positive free cash flow in the March quarter. Our operating cash flow allowed us to pay down over $500.0 million of debt in the quarter and make investments in the business while still retaining our unrestricted liquidity balance at a healthy $5.0 billion.

Unless otherwise noted as GAAP, all financial results and guidance we give today, including any comparisons to the prior-year periods, will be on a combined basis, which includes the results for Delta and Northwest for all periods.

Turning to revenue, our total operating revenue was down 15% year-over-year in the March quarter, which reflects the weak economic backdrop we’re in. Delta’s consolidated passenger RASM decreased by 12% with the yield down 9% and load factor down 3 points. This was slightly worse than our guidance of unit revenue down 10% as yields on close-in bookings did not pick up as we were expecting.

Domestic passenger RASM increased 11%. Domestic load factor was down less than 1% due to our capacity reductions. However, yields were under significant pressure due to aggressive sale activity.

Unit revenue on the international side was down 14% year-over-year with yields down 6%. Yields in the Transatlantic were significantly impacted by foreign exchange and a weaker fare and cabin mix. Our Pacific performance showed relative strength.

Revenue from other sources, which includes fees from unbundling our ticket pricing, offset some of the weakness on ticket revenue. As a result, total unit revenue was down 9% as compared to 12% per passenger unit revenue. Based on the ATA data we recently received for the March quarter, we continue to produce a unit revenue premium to the industry.

Revenues in our cargo business were down $146.0 million, or 44%, on a year-over-year basis with about half that decline due to freighter capacity reductions. The remainder was due to weakness in cargo volumes and [inaudible] due to the recession.

We announced this morning that we will be discontinuing dedicated freighter flying and will ground our fleet of 14 747 200 aircraft by the end of this year. Last year freighter flying cost us and we lost about $150.0 million so this is a positive decision for the long-term profitability of our cargo operation as we refocus our efforts on our belly business.

For the March quarter other net revenue was up 18% to approximately $900.0 million, driven by ancillary revenues. Baggage fees implemented in 2008 generated more than $160.0 million of revenue for the quarter. As Richard noted, we also announced today a $50 fee for second checked bag on international flights, which we expect to generate over $100.0 million on a run-rate basis, starting July 1.

Our strategy of unbundling products and services from the base ticket price clearly provides a valuable source of revenue and gives customers the opportunity to pay for only those services that are important to them.

In terms of our revenue outlook, while we have seen signs of stabilization in revenue trends, at the same time we haven’t seen any indications of improvement. Right now our May and June is shaping up to be similar to a combination of March and April. In short, things aren’t good but they’re also not getting worse.

Domestically our book load factors are down 2 points to 4 points year-over-year for May and June but we do expect stronger close-in build. Advance yields are lower, due to aggressive pricing, and a weaker mix in booking and cabin mix.

Also our year-over-year comps will be more challenged as we head into the summer as measure against the summer of 2008, given that was the peak of fuel surcharges and fuel-cost-driven fare increases.

Corporate travel trends continue to be soft but the pace of decline in business yields and bookings has definitely slowed. Our international book load factor is down 4 points to 6 points for May and June but we are expecting demand to build closer as we approach the summer travel period.

We have been an industry in addressing the deteriorating demand environment. Last month we announced a 10% international capacity reduction starting in September. I think it is important to note that we have no limitations or restrictions on our needs that we need to further reduce capacity.

While we have seen signs of stabilization, I think I would echo the comments of our peers that we’re not ready to call a bottom yet. We are more confident in the stabilizing trends we’ve seen on the domestic side. Internationally the year-over-year comps are tougher and we will have a better indication as we get into the peak of the summer travel season. So we will continue to monitor advance revenue trends and be prepared to make further adjustments to capacity as warranted.

In terms of capacity guidance, we expect our system capacity to be down 5% to 7% year-over-year in the June quarter with consolidated domestic capacity down 6% to 8% and our consolidated international capacity down 5% to 7%.

For the full year we expect system capacity to be down 6% to 8% with our consolidated domestic capacity down 8 points to 10 points and our consolidated international capacity 5 points to 7 points down.

In connection with our capacity reductions we are planning to remove 40 to 50 mainline aircraft from the Delta fleet, which includes the 747 freighters I mentioned earlier. On top of that we are also removing over 30 RJs.

As to the merger, we are pleased to say that the integration is moving faster than we had planned. During the March quarter we realized about $100.0 million in synergies and we are on track to generate at least $500.0 million in merger synergies this year.

As Richard said, we have rebranded a large number of our stations, including the top domestic Northwest hubs in Minneapolis, Detroit, Memphis, and we have painted 50 Northwest aircraft in the Delta livery.

We have also launched important initial cross-fleeting routes in key markets such as Honolulu, London, Paris, and Rome, interchanging Delta and Northwest metal and those cross-fleeting decisions are performing very, very well. In fact, the 747 we moved onto the Atlanta/Honolulu run had a 90%+ load factor its very first week.

We are on track to achieve a single operating certificate by the end of 2009. Speed is critical in the receipt of the SOC as it really starts to unlock the full value of the network and operational synergies.

We are also pulling in benefits quickly to our customers while we make this a seamless transition. All Northwest flights are now available for sale on Delta.com and customers can seamlessly merge points from Sky Miles and World Perks accounts. We are also on schedule to integrate the frequent flyer programs completely by the fourth quarter of this year.

So you can see the integration is progressing very well. We are focused on accelerating integration activities wherever we can ramp up as we get our synergies in more quickly. That will certainly help us to offset some of the revenue weakness we are experiencing from the recession.

With that I will turn the call over to Hank Halter.

Hank Halter

Reviewing Delta’s cost performance for the March quarter, total operating expenses, excluding special items, decreased $1.1 billion year-over-year with $874.0 million in lower fuel expense.

For the March quarter, mainline CASM, excluding fuel and special items, was $0.0776, an increase of 5% year-over-year. That 5% was better than our most recent guidance of up 8%, due in part to lower revenue-related expenses but also resulted from improving productivity across all of our divisions. Thanks to the entire Delta team for continuing to be vigilant of costs each and every day.

Excluding the impact of pension expenses, mainline non-fuel CASM was up only 2% despite a 7% reduction in mainline capacity.

Non-operating expenses were $96.0 million higher in March quarter this year versus last year, largely as a result of non-cash purchase accounting related to debt discount amortization.

We will continue to face some cost pressures in the June quarter from pension expense and from the timing of removing costs related to capacity reductions. As a result, we are expecting second quarter mainline non-fuel unit costs to be up 3% to 5% and that includes about 3 points of pension impact.

While we have some cost pressures from pensions and capacity reductions, the year-over-year GAAP in our mainline non-fuel CASM will narrow throughout the year as we remove more capacity-related costs. We have a solid track record of achieving our CASM targets and we will maintain that strong cost discipline.

With regard to fuel and hedging, we hedged 77% of our first quarter fuel consumption, resulting in a consolidated all-in price of $2.26 per gallon. Included in that fuel price is $684.0 million, or $0.71 per gallon, of hedging losses on settled contracts.

During the quarter we continued to our hedge portfolio albeit at a slower pace. The steepness of the forward curve and the hefty prices on options significantly increased the cost of hedging so we need to proceed cautiously in this environment.

In the June quarter we’ve hedged 75% of our anticipated consumption. Based on crude of $50 and a $10 refining cost spread, we expect our consolidate fuel cost per gallon to be $2.08 all-in and this includes a $0.45 per gallon impact from fuel hedge losses.

We expect cash collateral requirements on hedges to decline to approximately $100.0 million beyond the June quarter and based on the current forward curve our fuel hedging losses will be $0.18 per gallon in the third quarter and down to $0.03 per gallon in the fourth quarter.

In terms of earnings performance for the upcoming June quarter, we are expecting a positive operating margin in the 4% to 6% range as lower fuel prices and one of our seasonally-strong quarters offset the impact from the global recession, fuel hedge losses, and higher pension expense.

For the full year we still expect to be profitable as merger synergies, along with the benefits of lower fuel prices and capacity reductions offset the deterioration in revenue.

Our liquidity position remains strong during the March quarter. On March 31 we had $5.0 billion in unrestricted liquidity which includes $4.5 billion in cash and $500.0 million undrawn line of credit. These figures do not include $400.0 million in net hedge margin posted with counter-parties.

The key point on liquidity is that our unrestricted balance was unchanged during a very difficult quarter, while we continued to make debt payments and investments in our business. We generated positive cash flow from operations of over $600.0 million in the March quarter. With that, we were able to fund debt maturities, capital lease payments, and cash capex.

In the quarter we also took delivery of 11 aircraft and issued $500.0 million in aircraft debt. We sold 10 Boeing 757 aircraft and one DC9 aircraft during our March quarter.

For the end of the June quarter, we are targeting to grow our unrestricted liquidity balance to $5.6 billion. We have very manageable debt maturities and capital lease payments of approximately $400.0 million in the second quarter and net capex of $650.0 million with about $550.0 million of that for aircraft parts and modifications.

By the end of the June quarter we will have covered nearly two-thirds of our expected debt maturities and capex for the full year and grown our liquidity balance.

During the quarter we are taking delivery of 3 Boeing 777 and 2 CRJ 900s and have committed financing in place for those deliveries. And then beyond the June quarter we have only 3 aircraft deliveries remaining and already have financing commitments in place for those as well.

For 2009 we are targeting to grow our unrestricted liquidity and end the year with a balance between $6.0 billion and $6.5 billion.

In closing, while there have been indications that demand trends may be stabilizing, we are still expecting the balance of 2009 to be difficult. We are in the worst global recession of this generation and the revenue environment remains weak and uncertain.

Delta’s industry-leading cost structure, solid cash balance, and benefits from the merger, combined with the best employees in the industry, put us in a unique position to weather these tough economic times.

I want to sincerely thank the Delta team for all they do every day to make Delta the best airline to fly, the best place to work, and the best investment for our shareholders.

Jill Greer

We are now ready for questions from the analysts.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Linenberg – Banc of America.

Michael Linenberg – Banc of America

Two questions here. The $150.0 million that was the loss from the freighter operation last year, in the synergies for this year, the $500.0 million, or maybe it’s the synergies for 2010 since its year end 2009, does that include the benefits from shutting down the freighter operation or is that in addition to it?

Edward H. Bastian

In the $2.0 billion total synergy bucket we do have benefits from shutting the freighters down. I’m not sure the number is $150.0 million, that’s a little high. We do have some benefits in the current year as well, but the large synergy benefits will kick in next year.

Michael Linenberg – Banc of America

And just the freighter operation, if you can just remind me, the freighter operation today, it’s using combination—the frequencies that they use in and out of Japan and I think in some of the other markets where there are restrictions in place, those can be used by your passenger airplanes, right?

Edward H. Bastian

That’s right.

Michael Linenberg – Banc of America

And my second question just has to do with RASM. Ed, as you indicated for the March quarter, I believe, you were originally forecasting 10% and RASM came in down 12% and it had to do with the lack of close-in bookings really materializing later in the quarter. I know you indicated when we look in the June quarter that at this point you are anticipating, both domestic and international, you indicated that you thought that you would see a better performance in close-in bookings.

What’s behind that view? Is that more of a hunch or are you actually starting to see maybe things firm up to give you some confidence to make that statement.

Edward H. Bastian

The close-in booking came in, in March it was the yield on the close-in bookings that didn’t strengthen as we thought they might. The guidance we are projecting for May and June really is very comparable to the performance we saw in March and we’re seeing in April. So I’m not certain that we’re saying it’s going to improve as we look forward.

Operator

Your next question comes from Gary Chase – Barclays Capital.

Gary Chase – Barclays Capital

Just a quick clean-up question on that freighter issue. The $150.0 million was a loss generated. Can you just give a sense of what the revenue base from the dedicated as opposed to belly cargo business was?

Richard H. Anderson

This is very general but it’s about $400.0 million to $500.0 million as I recall.

Edward H. Bastian

We obviously have been winding them down over the course of the last six to nine months, so Richard is right, it’s in that $400.0 million to $500.0 million annual range.

Gary Chase – Barclays Capital

And the change in cost guidance, how much of that is your forecast for revenue-related costs coming down and how much of that should we think is more sustainable as we move into what hopefully will be a better revenue environment?

Hank Halter

That cost improvement that we had in the quarter relative to our guidance was, say about one-third of it was due to the revenue-related expenses, one-third was productivity across the divisions, and then I think another one-third is just acceleration of synergy opportunities. We are taking this opportunity in the company, as the recession is here, to look at every opportunity to accelerate and that’s one thing were able to do during the quarter and will continue to do going forward.

Gary Chase – Barclays Capital

And is that a reasonable way to think about the forward-looking change in guidance, too, for the full year?

Hank Halter

Yes, as you look forward, as we’ve talked about, we still have that pension pressure and that’s about 3 points each quarter but you will see the CASM performance improve each quarter, so quarter-over-quarter, and the acceleration will certainly benefit that. You’ll see our full year CASM guidance has improved slightly from the prior guidance we gave and that synergy acceleration and productivity across the company, it’s certainly helping us achieve that goal.

Gary Chase – Barclays Capital

Could you parse how, within the transatlantic business, how the revenue performance was and what I would call poor Europe versus some of the other flying that you are doing, say Johannesburg and things like that.

Glen W. Hauenstein

We have kind of—and I’m going to spin it a little bit differently—we have the coastal hubs, which are Atlanta and JFK which seem to be outperforming the interior hubs, into Europe. So really it’s a point of sale U.S. issue coming out of the mid-states that has really impacted us, and that’s the more discernable of the two.

Gary Chase – Barclays Capital

So it’s not really within the Atlantic business on the other side, it’s just on the U.S. side where it’s differentiated.

Glen W. Hauenstein

The differentiators are more based on the interior U.S. points underperforming the coastal gateways.

Operator

Your next question comes from Helane Becker – Jesup & Lamont.

Helane Becker – Jesup & Lamont

I just wanted to talk to you about some of the routes that are unique to Delta and their performance, for example, your Africa operations. Can you address how they’re shaping up relative to your expectations and relative to what you’re doing in terms of when you’re talking about capacity that’s coming out, can you be a little more specific about where those routes are?

Glen W. Hauenstein

Certainly I can tell you that Africa has been an impressive result so far year-to-date. We have a lot of new cities coming in Africa. We’re optimistic about the bookings. They look relatively solid.

And then what was your other question?

Helane Becker – Jesup & Lamont

You had talked about international capacity coming down in the second half of the year, more than you were already talking about, when you spoke to us the last time. So can you just saw where those differences are coming from?

Glen W. Hauenstein

We will make a public announcement here in the next month or so about where those capacity reductions will be hitting. We have publicly said by the fourth quarter we will be down 10% internationally versus previous guidance. The details of that will be forthcoming over the next six to eight weeks here.

Operator

Your next question comes from Jamie Baker – J. P. Morgan.

Jamie Baker – J. P. Morgan

I don’t want to beat the dead horse on the revenue language, but you know, Ed, when you talk about stabilization, it isn’t clear if you’re talking about year-on-year revenue declines or year-on-year RASM declines and obviously the reason it makes a difference is that if it’s only revenue that’s stabilizing, then RASM probably gets a little bit worse from here. I’m just not sure if this is what you’re what you’re necessarily hoping to convey.

Edward H. Bastian

We’re largely talking about RASM.

Jamie Baker – J. P. Morgan

The liquidity guidance was diminished a bit. I realize it’s not an enormous amount. Anything behind the math there other than what’s being captured by the diminished margin patterns?

Edward H. Bastian

Are you talking about the end of the year liquidity?

Jamie Baker – J. P. Morgan

Yes, the $6.0 billion loss which I believe was revised down from $7.0 billion around the summer.

Edward H. Bastian

We’re estimating somewhere between $0.5 billion to $1.0 billion to be the revenue hit from we thought it would be the start of the year. So that’s accounting for the net liquidity reduction.

Operator

Your next question comes from Hunter Keay – Stifel Nicolaus & Company.

Hunter Keay – Stifel Nicolaus & Company

As to capacity, to follow-up on the previous question, I know more details are forthcoming, but the incremental capacity that you are taking out internationally, it’s also noted that your full year mainline capacity is still up in the same range, so should we just assume this is going to be maybe aircraft that might be deployed to domestic routes or is this going to be utilization thing or, I mean, what are some of the moving parts behind that number?

Richard H. Anderson

As we said, we’re not providing live details because we haven’t announced where the capacity is coming out. You should not assume you’re going to be seeing aircraft come back into the domestic system.

Hunter Keay – Stifel Nicolaus & Company

Would you care to—I think we can probably imply based on some of the other numbers you’ve already discussed—but maybe update the PRASM guidance that you provided in January of down 4%.

Richard H. Anderson

I’m not sure we’re in a position to update that now.

Operator

Your next question comes from Michael Derchin – FTN Midwest Securities.

Michael Derchin – FTN Midwest Securities

Your Pacific RASM was very impressive, down only 2.8%. I wonder if you could elaborate on that very good performance and whether you think that is sustainable for the balance of the year.

Glen W. Hauenstein

I think we are favorable impacted by foreign exchange to the tune of about 4 points to 6 points. In addition to that we had very strong performance on the Japanese beach markets. And we had taken a lot of capacity actions in the off season in the Transpacific as well as the interports. So I think a combination of all those actions resulted in some fairly good relative Pacific performance.

Richard H. Anderson

I would add one other point, which is one of the first things we did after the merger was really spend a lot of time on the strategy for the Pacific and taking the strength of the Delta network and hooking it to that Pacific network. And so you’re beginning to see a lot of that sort of pay off, of hooking the Delta network into the Northwest network, number one.

Number two, the hub in Narita becomes very valuable because overflies, particularly from Asian carriers, have significantly diminished. And so when you look at the utility that our network provides and the strength of combining the Delta network with the Northwest network, you see a dramatic improvement, and it’s some of the improvement that you will see over time that will continue as a result of the integration of the two airlines.

Glen W. Hauenstein

And I couldn’t agree more. To adjust expectations moving forward, we do have a lot of incremental capacity on the Transatlantic, hooking up those networks this summer, so that will probably, in the short run, have a little more downward pressure than we have had in the first quarter.

Operator

Your next question comes from William Green – Morgan Stanley.

William Green – Morgan Stanley

Glen, you mentioned the FX effect of 4 points to 6 points, you meant negative? On the currency on the international side.

Glen W. Hauenstein

This for a yen-based.

William Green – Morgan Stanley

What was the total international impact from currency changes?

Glen W. Hauenstein

In the Transatlantic it was minus 6 to 8, year-over-year. And in the Pacific it was plus 4 because most of our Transpacific is yen-based.

William Green – Morgan Stanley

Do you have a sense for how much the revenue is affected by the loss of fuel surcharges on the international side?

Glen W. Hauenstein

Do date, actually, surprisingly, the impact has not yet been realized in the Transatlantic because the tickets were the first quarter which were probably mostly ticketed before the rundown in fuel, and certainly before the rundown in the surcharges hadn’t impacted it yet. So when we look to the second quarter we have a couple of real hurdles to pass because, certainly in the Transatlantic, we will start to see the reduction in the fuel surcharges on a year-over-year basis as we get into the second and third quarters.

And that to me is going to be the big negative we have to overcome the comps.

William Green – Morgan Stanley

Is it just a transatlantic impact or is it all international has the fuel surcharge?

Glen W. Hauenstein

It’s all international but primarily Japan and the Transatlantic are the two big drivers there.

William Green – Morgan Stanley

On liquidity, do you have an unencumbered assets left and how much cash are you still to receive from Amex this year?

Richard H. Anderson

We don’t have any material unencumbered assets at this point. We received the full billion dollars from Amex in December and the run rate benefits of the new contract are $500.0 million a year. We receive that as spending occurs over the course of the year.

Operator

Your next question comes from Kevin Crissey – UBS.

Kevin Crissey – UBS

I wanted to ask about any potential changes you might make in your distribution strategy whether it be online or offline. Maybe some opportunities to save some commissions and foreign points of sales.

Richard H. Anderson

We have moved domestically share to Delta.com and we probably will get up to 37% to 38% of tickets issued on Delta.com, so we continue to push our direct to consumer channels and in fact, it actually makes for us to reduce our reservation fee, given the yields that we have from telephone sales. So that’s the first piece of the equation.

The second piece of the equation, across the Transatlantic, is the joint venture with Air France and KLM, and moving more away from general sales agents to the joint venture relationship with our partners in the Transpacific.

Third, I just think over time the industry has to evolve more to the model of other industries where people pay us for our content rather than us paying them to take out content. Because our content is very rich. And I think it’s going to continue to evolve as distribution costs decline and when you look at the value that we provide when we service a reservation versus online travel agencies and others, it’s really significant.

So continued focus, and we have a number of synergies that will also come from combining the GDS and OTA agreements between Northwest and Delta.

Kevin Crissey – UBS

How far away might we be from that world where you get paid for content and when you speak of that are you referring to GDSs and OTAs as well. Gerard mentioned that as well.

Richard H. Anderson

I think OTAs for sure. You know, the travel management firms, the large travel management firms, provide a pretty valuable service to our corporate customers. And while I think over time the GDS model will also change, and the cost per booking will continue to decline, because all the contracts the carriers are under right now were negotiated a few years back and we won’t be up for renewal for a few years, but I think the travel management firms have an important long-term role to play for large corporations in terms of managing their total travel and keeping up with their employees around the world, but the GDS costs will continue to decline and ultimately the online travel agencies should pay for the content the way they do for hotels.

Kevin Crissey – UBS

And if you did 37% to 38% of your tickets on Delta.com, how much would have gone through an OTA?

Richard H. Anderson

I didn’t understand the question.

Kevin Crissey – UBS

I think you mentioned 37% to 38% are purchased through Delta.com, how many would have come from Expedia, Priceline or other OTAs?

Richard H. Anderson

Comparable to less than that. About the 30% range I think.

Hank Halter

It’s a little less than that. We can have Jill get back to you on the exact number.

Operator

Your next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Could you just kind of educate us on the differences in the structure of your Pacific network versus United’s, because you’ve obviously had some pretty good results where United is saying today that they cut 16% of their capacity out of the Pacific and still had PRASM down 16%. What structurally is different between your kind of a network versus theirs? What works for you versus not for them?

Glen W. Hauenstein

There are a couple of main issues. One is that United has done a lot of over-fly so they’re flying from the U.S. beyond their historical presence in Narita. They’ve really decreased their reliance on Narita over the years, where the historical Northwest operator has continued to rely heavily on Japan point of sale and the Narita hub.

That includes the beach markets, the resort destinations in Micronesia, where Northwest is a very, very large player, and Hawaii. And those sectors have performed relatively well. United is not a big player, if they play at all, in many of those markets.

So I think they didn’t have anything offsetting and I don’t know what they are—I don’t want to comment on what their currency is because I’m not that familiar with it but we are heavily end-based in the first quarter. We were good exchange for a yen as well.

Richard H. Anderson

We operate a classic hub in Tokyo and all points in the U.S. connect to all of the major cities in Asia with the minimum connect time of probably an hour and a half. And so when you look at the options in an environment where a lot of people have pulled out point-to-point capacity over the transpac—and remember, point-to-point capacity over the transpac is very expensive because unlike Europe, it takes two airplanes. You can’t do over and back in a 24-hour period.

So when you fly San Francisco/Singapore non-stop or San Francisco/Hong Kong non-stop, it takes two 777’s, whereas we operate a classic hub so we get the indivisibilities of operating a hub and the ability to very efficiently take traffic and passengers from all over the U.S., bring them to Tokyo, and then redistribute them on the network south and west of Tokyo.

Bob McAdoo - Avondale Partners

Do you still have Euro bodies operating on the other side of Tokyo?

Richard H. Anderson

Yes.

Bob McAdoo - Avondale Partners

One last thing, relative to the Pacific. Did you announce that you are going to go U.S./Australia soon and what does that in terms of in this economic environment as a thing to start because when you hear what Quantas and people are stumbling around with in terms of their kind of numbers, is that still something that sounds attractive in today’s environment?

Glen W. Hauenstein

If we were sitting back here and knew what the global environment was going to be last October or what it’s going to be next October, we would have a crystal ball.

Strategically we are the only alliance partner, so Star has access to Australia, One World has access to Australia, and Sky Team was the only one without access to Australia and we historically had booked over 200 passengers a day on Delta and Northwest interlining to Quantas. So the demand is there and I think it’s the same as Heathrow, if you’re the incumbent carrier this is a disaster, if you’re the non-incumbent carrier, this is an opportunity.

And the question is long run as being the world’s largest carrier and having the extensive route network that we have, do we want to have outlet to Australia? The answer is clearly yes. Did we pick the best global economic time to start? The answer is clearly no. So there is good news/bad on there and I think we’re comfortable with the decision but we’ll be looking at the demand.

The demand for July, which is the first month we operate, is relatively strong. We are booked already, well over 30% of capacity. So I think we’ll run relatively full. And the question is, the offering in the off season, before we get back into the winter peak, which is the U.S. point of sale origin peak.

Bob McAdoo - Avondale Partners

And what kind of an airplane is this?

Glen W. Hauenstein

777.

Jill Greer

That’s going to wrap up the analyst portion of our call. I would now like to turn the call over to Ned Walker.

John E. "Ned" Walker

We are ready to begin the Q&A session with the media at this point. Once again, if you could please review the process for queuing in to ask a question, and what I would like to ask with the media is if you could ask one question with a quick follow-up, we should be able to address everybody’s questions during this process.

Media

Operator

Your first media question comes from Harry Weber – The Associated Press.

Harry Weber – The Associated Press

Two very quick questions. One on staffing. Do you anticipate any more job cuts in light of the international capacity cuts?

And fees for travelers, you’re imposing a new fee. First, second checked bag on an international flights. Are there any other types of fees that you all are considering.

Richard H. Anderson

On the first point, with respect to staffing, we have worked really hard to avoid any involuntary furloughs of any of our front-line employees and that’s our goal and as we said in the script, we have 2,500 people who are taking voluntary reductions, and we have a whole host of other voluntary programs, company convenience leaves, special slip leaves, and insourcing of work. So our goal is to—because we think the way for us to contribute to the economy and getting Americans back flying again is to preserve as many jobs as we can. That’s the first point.

On the second point, I think Ben Hirst, our general counsel, would prefer that I not talk about any future ideas about where fees would go in the industry. We are very careful about being certain we comply with the Department of Justice and Department of Transportation rules on those sorts of matters.

Operator

Your next question comes from James Pilcher – The Cincinnati Inquirer.

James Pilcher – The Cincinnati Inquirer

Can you give me any specifics on how the new fare system is operating here.

And as a follow-up, can you also talk about how the process is going with the new regional handling subsidiary between Comair and Mesaba and how that whole transition is going? With the announcement today that you’re going to cut 30 RJs, how does that impact the local CVG hub?

Richard H. Anderson

I can address the issue on the ground-handling subsidiary. You know, the purpose behind pulling our ground-handling subsidiary was to continue to maintain separate operations at each carrier, that to have consistency in our customer experience across all of the Delta Connection carriers. And that work is well under way and it’s going well.

As we look out at the regional carrier reductions, those reductions, given the size of the fleet, will probably have minimal impact on staffing across the airports in the regional carrier network. Because we operate a fairly large fleet, it will have a minimal impact in terms of staffing and the extent to which it does have any impact will once again work to mitigate that as best we can with our regional carrier partners.

Glen W. Hauenstein

We have been very, very pleased with the response from the people in Cincinnati and northern Kentucky to the lower fare structures that we put in place there a little over a month ago now. And so we are continuing to hope that people continue to use that service and we are able to keep those similar structures in place.

Of course, fares change so they will migrate up and down, depending on the demand in the market, but in general we’re very, very happy with the response that we’ve gotten to the lower fare structures in Cincinatti.

James Pilcher – The Cincinnati Inquirer

Do you have an specificity around that in terms of traffic increase percentages or anything like that?

And as a follow-up on the RHS situation, any light into the Mesa law suit and where that might stand at this point, because that has implications here in Cincinatti.

Glen W. Hauenstein

Well, I can’t talk to the second point but I will say the we have seen that the local Cincinnati enplanement base is up double digits now versus where we were pre-restructuring.

James Pilcher – The Cincinnati Inquirer

And that’s a percentage double digits?

Glen W. Hauenstein

Yes.

Richard H. Anderson

Though we appreciate the support of our good customer base in Cincinnati, we will not be commenting on the pending litigation with Mesa.

Operator

Your next question comes from Kelly Yamanouchi – Atlanta Journal.

Kelly Yamanouchi – Atlanta Journal

What other aircraft will you be removing from the fleet to get to that total here?

Richard H. Anderson

Well, we have a combination of aircraft that we are looking at. Some 757’s, MD88’s. We are looking at, obviously, the regional jets we’ve already talked about and the dedicated freighters.

Kelly Yamanouchi – Atlanta Journal

On the 757’s and MD88’s, is that part of those fleets or are there any aircraft types as a whole that you’re looking to pull out?

Richard H. Anderson

No, we are not exiting any whole categories of aircraft types.

Kelly Yamanouchi – Atlanta Journal

And then, with the pullout of the freighter operations from the available spots in Asia, will you be adding passenger flights to Asia or shifting things, and will you be shifting any international routes to Atlanta or JFK because of the under-performance of the interior cities, or will you just be discontinuing or pulling down capacity from some of those interior cities?

Richard H. Anderson

No, we’re going to retain the slots that we have in Narita. They are valuable slots and valuable positions and we will be reallocating that capacity.

Kelly Yamanouchi – Atlanta Journal

And to Europe and Asia, from the interior cities?

Richard H. Anderson

No significant shift, no. We announced we’re going to be actually reducing some international capacity in the fourth quarter.

Operator

Your next question comes from Ted Reed – TheStreet.com.

Ted Reed – TheStreet.com

Kelly basically asked my question, but when you take the freighters out at Narita do you have to operate to preserve the route authority?

Richard H. Anderson

Yes, you do have, I believe it’s an 80% requirement but given the opportunities that we have in the combination passenger/cargo business, we will have a good ability to utilize those slots. Already we’ve added Salt Lake City to Tokyo, we’ve added four additional flights from Atlanta to Tokyo, and we’ve added JFK to Tokyo, and we’ve added an additional spoke from Tokyo to Ho Chi Men City. So there are plenty of opportunities.

And the freighters have been gradually pulled down and we’ve been reallocating those slots to much better opportunities in terms of revenues and profits.

Ted Reed – TheStreet.com

There are just slots at Narita then. You can use them either for U.S. routes or for routes elsewhere in Asia?

Richard H. Anderson

Right. The slots don’t have any particular destination tied to them. You can use the slots for passenger or freighter or for operations within Asia or outside of Asia.

Ted Reed – TheStreet.com

Are there any specific question regarding the route authorities. Do you have route authorities that you have to use for any specific destination?

Richard H. Anderson

I don’t understand. Do you mean in the Pacific?

Ted Reed – TheStreet.com

Yes, in some of these markets you have to have authority to fly into these countries, so it’s not just a slot, it’s also the bilateral . . .

Richard H. Anderson

Right, but we have the authorities. We by and large have the authorities.

Operator

Your next question comes from John Crowley – Reuters.

John Crowley – Reuters

Back to the 757’s and 88’s, does that bring you up to that 50 count, or would those bring you above 50?

Edward H. Bastian

They are part of the 50.

John Crowley – Reuters

When you talk about a year-end profit, are we talking about a profit in the fourth quarter, are you talking about a profit for the full year?

Edward H. Bastian

Full year.

Operator

Your next question comes from Mike Westerfield – Wall Street Journal.

Mike Westerfield – Wall Street Journal

I wanted to ask about the European commission, coming out a few days ago, looking into Sky Team cooperation. Are you expecting Delta to have make any concessions to Brussels, given that those probes are continuing?

Richard H. Anderson

Actually I think the announcement that came out was pertaining to the other two alliances. But it is fairly routine for the European Commission to look at these sorts of arrangements that are negotiated under the bilateral agreements among the U.S. and the European Union countries.

Mike Westerfield – Wall Street Journal

And does that mean—are you expecting any—I think you’re a little bit further along on the process, are you expecting to have to make any concessions? It seems like Brussels is, rather going away, is ratcheting up its scrutiny.

Richard H. Anderson

Well, it think the best way to answer the question is we’ve been through pretty rigorous review in the EU of first getting approval for our transatlantic joint venture last summer, so it was about a year ago, or about ten months ago.

And then second, the Northwest/Delta merger included an analysis by the European Union, including our alliance relationships with Air France/KLM. So we’ve been through a lot of scrutiny on both sides of the ocean with respect to the competitive aspects of our merger in our joint venture.

Operator

Your next question comes from John Lomax - St Paul Pioneer Press.

John Lomax - St Paul Pioneer Press

With the 747’s you’re parking on the freighters, does that mean that the freighter operations, the hangars at MSP and Anchorage, is that shutting down?

Richard H. Anderson

Well, the hangars in Minneapolis/St. Paul are used for maintenance of the whole fleet so there won’t be any real material change there. And the facility in Anchorage, we will eliminate. We will no longer have a need for a hangar in Anchorage, so we’ll be working through, as we shut down the facility, rationalize as we shut down that operation, which lost a lot of money before the merger, we will look at rationalizing those facilities across the network, where we have freighter-specific facilities.

John Lomax - St Paul Pioneer Press

And at the headquarters in union Northwest have all the people been notified what’s happening with their jobs, whether their positions are being eliminated or they’re moving to Atlanta? Is all that in the works now?

Richard H. Anderson

We are largely complete, yes.

Operator

Your next question comes from Mary Jane Credeur – Bloomberg News.

Mary Jane Credeur – Bloomberg News

It appears that the airlines just completed their first domestic fare increase in nine, ten months or so, since summer of last year and should we be reading into that that it’s an indication that bookings domestically might be looking a little bit better?

Glen W. Hauenstein

Well, we are moving into peak season here and the advanced bookings, you know, we have been running relatively full airplanes even through the shoulder season so we are hopeful that those trends continue and what has been historically missing here have been the business travelers and we’re hoping that they come back soon and the economy starts to recover and we should be well positioned as that occurs because the planes are already relatively full.

Mary Jane Credeur – Bloomberg News

And speaking of business travel, can you tell us a little more what we should see sequentially on yields going into Q2, especially on the international premium side?

Edward H. Bastian

No, we didn’t give a specific revenue guidance and I don’t think it would be wise to start at this point.

Mary Jane Credeur – Bloomberg News

Can you say anything about sequentially though? Will it be much worse, better, about the same?

Edward H. Bastian

Well, what we said on the call was that the comps are going to be more challenging, particularly on the transatlantic, the international side, than they were in the first quarter because of the considerable amount of the fuel-driven surcharges went into effect in the spring and summer of last year as fuel was reaching record levels, so the comps will be more difficult to manage.

Obviously as we get into stronger travel periods we would expect yields to improve accordingly but with respect to any individual guidance I would shy away from saying that.

Operator

Your next question comes from Aaron Karp – Air Transport World.

Aaron Karp – Air Transport World

Do you have any idea what you are going to do with the freighters? Are you planning to sell them and what sort of value do you think they will have?

Edward H. Bastian

We will be looking to market them. I don’t know that there is a tremendous amount of value in those aircraft.

Aaron Karp – Air Transport World

And how many slots at Narita were you using for the freighter services?

Edward H. Bastian

We’ve been drawing down the freighters over the last 12 months so while there are 14 dedicated freighters in the fleet at the present time we are only operating 7 of them.

Aaron Karp – Air Transport World

And is this sort of a conclusion reached that it’s just untenable to operate all cargo flights?

Edward H. Bastian

It was that conclusion on a small amount of capacity in a difficult economic time, yes.

Operator

Your final question comes from Andy Compart – Aviation Daily.

Andy Compart – Aviation Daily

I just wanted to clarify something you talked about, ultimately you think online travel agencies should pay for their content. Can you give some sort of time line as to how soon you expect or want that to happen and how would that come about?

Richard H. Anderson

No, we don’t have any specific time line. The earlier question was about how we would see it structured as we move forward sort of long term and we don’t have any time line or any specific plans but ultimately we would like to see our distribution model be more like the completely unregulated distribution that’s used in other consumer businesses.

Andy Compart – Aviation Daily

And could you give some more explanation of your decision making behind the international bag fee? Because obviously there was a reason airlines decided they didn’t want to do that at first and just applied it domestically. What’s your thought process for adding it to international flights?

Richard H. Anderson

I think there is a degree of consistency between our domestic product and our international product. Frankly, there is a fairly considerable amount of cost we occur as we transit, but I think the larger opportunity here is the unbundling of the ticket pricing that we have been working as an industry through over the course of the last year and a half.

Andy Compart – Aviation Daily

Do you expect to apply more of those fees to international flights?

Richard H. Anderson

We can’t comment on pricing, forward pricing decisions.

John E. "Ned" Walker

Thank you very much and we appreciate your time today. That will conclude the first quarter earnings call for 2009 and we’ll go ahead and see you in about three months.

Operator

This concludes today’s conference call.

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Source: Delta Air Lines, Inc. Q1 2009 Earnings Call Transcript
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