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Executives

Jill Greer - Director, Investor Relations

Richard H. Anderson - Chief Executive Officer, Director

Edward H. Bastian - President; Chief Executive Officer of NWA

Hank Halter - Chief Financial Officer, Senior Vice President

Glen Hauenstein - Executive Vice President of Network and Revenue Management

Ned Walker - Chief Communications Officer

Michael Campbell - Executive Vice President of Human Resources and Labor Relations

Analysts

Mike Linenberg - Banc of America Merrill Lynch

Jamie Baker - JP Morgan Chase

Duane Pfennigwerth - Raymond James

Hunter Keay - Stifel, Nicolaus & Company

William Greene - Morgan Stanley

Gary Chase - Barclays Capital

Kevin Crissey - UBS

Helane Becker - Jesup & Lamont

Media

Martin Mulane - Minnesota Public Radio

Mary Jane Credeur - Bloomberg News

Harry Weber - Associated Press

Kelly Yamanouchi - Atlanta Journal-Constitution

John Wellesie - Media

Paul Beebe - Salt Lake Tribune

Delta Airlines (DAL) Q2 2009 Earnings Call July 22, 2009 10:00 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the Delta Airlines June 2009 quarter financial results conference call. My name is Cynthia and I will be your coordinator. (Operator Instructions) I would now like to turn the call over to Jill Greer, Director of Investor Relations for Delta Airlines.

Jill Greer

Thanks, Cindy and good morning, everyone. Thanks for joining us to discuss Delta's June quarter financial results. Joining us from Atlanta today are CEO Richard Anderson; Ed Bastian, Delta's President; and Hank Halter, our Chief Financial Officer. Also joining us during the Q&A session will be Steve Gorman, our Chief Operating Officer; Glen Hauenstein, EVP of Network and Revenue Management; Michael Campbell, EVP of HR and Labor Relations; Paul Jacobsen, our Treasurer; and Ned Walker, Senior Vice President and Chief Communications Officer.

Richard will begin the call with a Delta and industry overview. Ed will then address our June quarter financial and revenue performance and give an update on the merger. Hank will conclude with Delta's cost performance and liquidity. We have allocated about 25 minutes for executive comments and after their comments, we’ve allocated 25 minutes for questions from the analysts. We will then conclude the call with a 10-minute Q&A for 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 to as many questions as possible during the 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 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.

Unless otherwise noted as GAAP, all financial results and guidance we give today, including comparison to prior year period, will be on a combined basis, including results for Delta and Northwest for all periods. We will also discuss certain non-GAAP financial measures. Operating expense and unit cost results exclude special items unless otherwise noted.

You can find the reconciliation of non-GAAP measures on our investor relations website at Delta.com.

And with that, I will turn the call over to our Chief Executive Officer, Richard Anderson.

Richard H. Anderson

Thank you, Jill. Good morning, everybody and thanks for joining us today. Over the last year, the airline industry has faced its toughest environment since deregulation, as the global recession and volatile oil prices have significantly impacted all airlines.

Industry passenger revenues are down more than 20% so far this year and jet fuel prices have risen almost 20% since the beginning of the year and continue to be volatile. This year has been and will remain challenging for the industry as we do not see any meaningful recovery in 2009. Despite this environment, Delta is the best positioned of the network carriers with the best margins of our peers, a strong cash position, superior network, leading cost structure, important benefits from consolidation and the best employees and I want to thank all Delta people worldwide for their continued efforts during these difficult times.

Excluding merger related expenses, Delta reported a net loss of $199 million for the quarter. These results include $390 million in fuel hedge losses, decisions we took in the summer of 2008, so excluding those losses and the merger costs, we would have made a $191 million net profit in the June quarter. This is an important point because it shows the underlying strength of the core enterprise. While not at a level we should achieve during the June quarter, these results reflect our focus on right-sizing capacity, cost discipline, and liquidity preservation and demonstrates our ability to continue to adapt our business model to match the difficult economy.

Our merger continues to pay significant benefits that are unique to Delta and quite important in this difficult period.

On a 7% capacity reduction, our consolidated unit costs excluding fuel were up only 2% due entirely to higher pension costs. We generated $834 million in operating cash flow, which allowed us to pay down debt, invest in the merger integration to unlock synergies, and grow our liquidity balance this quarter to $5.4 billion.

We expect capacity to be down for the full year 79% and we will extract all of the related costs as we have successfully done so each time we have pulled capacity the last couple of years.

But similar to the rest of the industry, Delta is experience significant pressure on revenues and we do not expect to be profitable this year. In light of this unprecedented decline in revenue, we will continue to do what it takes to adapt our business to the weak revenue environment. More than any of our competitors, we have shown that Delta will creatively take bold actions, such as the acquisition of Northwest, our full joint venture with AFKL, our unique expansion to Africa, or our shut-down of the freighter business across the Pacific, all of which are taken in a determined march to ensure our success.

As we recalibrate our strategy, much of what we are doing will continue. We will maintain high levels of liquidity. We have repeatedly been the first mover in the industry in capacity management and we will continue to right-size capacity while pulling out all of the related direct and indirect costs. Our large fleet of owned and depreciated aircraft give us unmatched flexibility. We will leverage our JV with AFKL, grow our revenues and third-party revenues. We will capitalize on the unprecedented flexibility that the merger provides. Our merger produced over $100 million of tangible benefits in the quarter and we are on track to hit our synergy targets for the year.

With revenue declines of this magnitude, we also need to continue to take a hard look at our entire business, reexamine our network fleet and overhead cost structure top to bottom. We may face some tough choices but we are prepared to continue to take the actions necessary to ensure Delta's long-term success.

In conclusion, we will power our way through an exceedingly difficult period for the industry and the world economy. We are pleased to have completed the merger when we did. We will continue to produce significant synergies while maintaining strict capacity discipline, best costs, and best liquidity. Moreover, unlike our competitors, we have the scale and flexibility to exercise costs and capacity discipline while preserving the underlying franchise.

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

Edward H. Bastian

Thanks, Richard. Before I discuss our quarterly results, I want to thank the Delta employees worldwide for the great job they do every day. When times are tough, as they are now for the entire industry, it can be easy to lose focus and become distracted. That hasn’t happened here at Delta. We are running a solid operation, aggressively moving forward on the integration and prudently managing our cost and cash flows.

Turning to our results for the June quarter, excluding the merger related expenses, Delta reported a net loss of $199 million, or $0.24 per share, on a base of 827 million fully diluted shares. This compares favorably to consensus of a $0.29 per share loss.

On a GAAP basis, we reported a net loss of $257 million in the June quarter, which includes $58 million in merger related expenses. Despite the challenging revenue environment, we strengthened our balance sheet during the quarter. We generated operating cash flow of $834 million and free cash flow of more than $500 million, which enables us to pay down $400 million in debt, fund our cash CapEx expenditures, and grow our liquidity balance.

Shifting to revenue, the impact of the global recession was evident as Delta's total operating revenue for the June quarter was down $2.1 billion, or 23% on a year-over-year basis. We estimate that the H1N1 virus impacted revenue by $125 million to $150 million during the quarter.

Our consolidated passenger RASM decreased 20% year over year with yield down 19% and load factors down about one point.

Domestically, our passenger unit revenue was down 17%, entirely driven by yield pressure. While there were a couple of fare increases in June, we faced a lot of sale activity and a very weak pricing environment for most of the quarter.

Our unit revenue on the international side was down 25% year over year, with the yields down 23% and load factor down 2 points. While transatlantic loads were on par with last year, our yields were considerably weaker.

In addition to economic weakness, our Pacific unit revenue was also significantly impacted by the H1N1 virus, predominantly on our point of sale Asian traffic. Our Latin operations were also impacted by H1N1 but to a much lesser extent.

Based on ATA data received year-to-date through June, Delta continues to produce a unit revenue premium to the industry.

Revenue in our cargo business was down $200 million, or 54% year over year in the second quarter. This decline reflects both lower volumes in yield, our freighter capacity was 50% lower than last year as we moved towards discontinuing our dedicated freighter flying by the end of this year.

For the June quarter, other net revenue was up $123 million or 15% to more than $900 million as baggage fees, other administrative fees, and revenue from the improved terms of our AMEX agreement helped mitigate some of the weakness we’ve seen in ticket revenue.

As a result, our total unit revenue, excluding cargo and MRO, was down 16% as compared to 20% per passenger unit revenue.

Last week, we increased fees for the first and second check bags to $20 and $30 respectively when bags are checked in our airport lobbies. We expect that change to generate an incremental $125 million in revenue annually.

With regard to our outlook on revenue, our domestic bookings for the third quarter are running one to two points behind last year but we expect that gap to close, similar to what we have seen over the last couple of months.

The domestic yield environment is still quite weak, with advanced yields down about 17% to 20% from last year. There had been several successful fare increases recently and we are hopeful this means the industry is regaining some pricing traction in the domestic market.

Internationally, our advanced bookings are about a point ahead of last year but yields remain under significant pressure, down in the mid-20% range. We expect to see the lingering effects from H1N1 in Asia well into the fourth quarter for an estimated full-year impact on revenue of roughly $250 million.

While trends have not deteriorated over the course of the last few months, we do not yet see any signs of a meaningful recovery in our forward-looking bookings.

As we announced last month, starting in September we are taking a net 10 points of capacity out of the consolidated system on a year-over-year basis, with the reductions weighted heavily towards the international network. We are pulling 20% of the capacity out of the Transatlantic and 12% out of the Pacific. We’re taking the necessary actions to right-size capacity to demand while still seeking opportunities to selectively expand our network through growth markets as we look to hook up our newly merged network.

In terms of capacity guidance for the September quarter, we expect system capacity to be down 5% year over year with consolidated domestic capacity down three to four points and consolidated international capacity down six to seven points.

For the full year, we expect system capacity to be down between seven and nine points with consolidated domestic capacity down eight to 10 points and our consolidated international capacity down seven to nine points.

Turning to the merger, we are pleased with the progress our teams are making. We are on track with our integration and we have realized more than $100 million in net synergy benefits in the current quarter. We delivered, as Richard said, a key milestone in the second quarter with the expanded Air France [inaudible] joint venture. The JV creates a truly unmatched franchise with an estimated $12 billion in annual revenue and a quarter of the total transatlantic capacity.

The partnership is deeply integrated, rooted in the principles of the highly successful Northwest [Kale] JV and fully aligned with a common bottom line to drive profit for both carriers.

Also during the quarter, we made great progress with our airport consolidation. We’ve completed more than 80% of our stations to date and are on track to finish by year-end. We will have over 90% of the Northwest mainline fleet in over half the regionals in Delta colors by the end of this year.

Over the rest of the year, we will also be focused on achieving key milestones like resolving representation in our remaining employee work groups, attaining the single operating certificate from the FAA by year-end, and integrating our frequent flyer programs.

We have begun training pilots and flight attendants for single carrier operations and we are on schedule to complete our technology cut-over by the end of the first quarter of 2010. So by the Spring of next year, we should be finished with integration activities and driving full force towards realization of the $2 billion in annual synergies we foresee by 2012.

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

Hank Halter

Thanks and good morning, everyone. I want to join Richard and Ed in thanking the entire Delta team for their hard work this quarter. With unprecedented declines in revenue, strong cost performance is always critically important and the Delta people consistently deliver solid results.

Total operating expense was down $1.9 billion year over year in the June quarter, driven by $1.3 billion in lower fuel price, as well as cost reductions from lower capacity, synergy benefits, and productivity.

Both consolidated and mainline unit costs excluding fuel were up approximately 2% year over year. Excluding the impact of pension expenses, consolidated and mainline non-fuel CASM were down slightly despite our significant capacity reductions.

We were able to fully capture capacity reduction related savings and offset some of the pension pressure on unit costs during this quarter. We will continue to maintain a sharp focus on disciplined cost management as we reduce the incremental 10 points of system capacity this fall.

Non-operating expense was $199 million higher in the June quarter last year, largely as a result of non-cash debt discount amortization.

Looking ahead at our cost guidance for the September quarter, we expect non-fuel unit costs to be flat to up 2% for our consolidated operation and 1% to 3% for mainline. Both include about three points of pension impact as compared to last year.

We will have additional cost pressures moving into the fourth quarter from the capacity reductions we are implementing. We will continue to drive additional productivity initiatives into the business and look for opportunities to capture merger cost synergies earlier.

In the June quarter, we hedged 76% of our fuel consumption. Our consolidated all-in fuel price declined 40% year over year to $2.06 per gallon. Included in that figure is $0.33 per gallon of fuel hedging losses.

In the September quarter, we hedged 52% of our anticipated consumption with more than half of that position in call options with full downside participation. Based on a $75 market price for crude and refining costs, we expect our all-in fuel price for the quarter, including hedges, to be $2.17.

In terms of earnings performance for the September quarter, we are expecting a positive operating margin in the range of 1% to 3%. Benefits from lower year-over-year fuel prices and merger synergies are expected to help offset the revenue decline from the recession and the H1N1 virus.

Moving on to liquidity, we have a solid liquidity balance and are well-positioned to manage our cash requirements. Despite the challenging revenue environment, we grew our liquidity balance $400 million during the June quarter and had $5.4 billion in unrestricted liquidity on June 30th.

We generated positive cash flow from operations of $834 million for the quarter and free cash flow of $509 million.

We paid approximately $400 million in debt obligations during the quarter.

Delta took delivery of six aircraft and issued $330 million in aircraft debt.

So far this year, Delta has produced nearly $1.5 billion in operating cash flow and $600 million in free cash flow. Our operating cash flow in the first half of the year has enabled us to pay down about $1 billion in debt, make investments in our products and services, and grow liquidity. We’ve already covered about two-thirds of our expected full-year debt maturities and capital expenditures.

Looking ahead, we have very manageable debt obligations of less than $300 million in the third quarter and $350 million in the fourth quarter. We expect net CapEx of about $270 million in the September quarter, with approximately $150 million for aircraft parts and modifications.

Looking at the December quarter, our net CapEx will be approximately $215 million with $140 million in aircraft parts and modifications.

And we have limited aircraft deliveries remaining this year -- three Boeing 737-700 aircraft with two coming in the September quarter and one in the December quarter, as well as two MD90 aircraft in the fourth quarter. We have committed financing in place for all of those deliveries.

We are expecting our unrestricted liquidity balance at the end of the September quarter to be $5 billion.

So in closing, 2009 is shaping up to be one of the most challenging years in the history of the airline industry. We are being tested with unprecedented declines in revenue and volatile fuel prices while the timeline for economic recovery remains uncertain.

Delta's strengths, our global network, strong financial position, unmatched merger benefits and the best employees in the industry provide the foundation to not only weather the storm but seek opportunities to strengthen our hand. These tough times require us to continue to recalibrate our business and we will take decisive action to ensure Delta's long-term success.

Jill Greer

Thank you, Richard, Ed, and Hank. We are now ready for questions from the analysts. Cindy, can you review the process for asking a question? And again, we ask everyone to limit themselves to two questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question today from Mike Linenberg from Banc of America Merrill Lynch.

Mike Linenberg - Banc of America Merrill Lynch

Good morning, everyone. Two questions here -- Hank, when you were going through the aircraft deliveries, you talked about two MD90s in the fourth quarter and I know you probably talked about that in the past but it seems like this is the first time that at least you formalized taking out-of-production airplanes. Are those first two, are they the first of additional ones? Can you just maybe talk about what’s going on there, maybe pricing on the airplanes as well?

Hank Halter

Mike, those MD90s are used aircraft and they provide a very good cost effective lift for us. As this point, we are not commenting on the price of the aircraft or the delivery schedule beyond what we’ve mentioned today but certainly we are not looking to grow capacity but when there’s very inexpensive opportunities for lift, such as that MD90, we will certainly consider it.

Richard H. Anderson

That airplane has far superior economics to a 737-800 and very similar range and customer attributes and the capital cost is a small fraction of the capital costs of a new airbus or a Boeing 737-800.

Mike Linenberg - Banc of America Merrill Lynch

Okay, good, very good. And then just my second question, and maybe I wasn’t looking through the press release carefully enough but I know in the last couple of press releases, you had given us some details on the MRO business and global services and I’m not sure, maybe it was left out or was it just teaser in those last press releases?

Edward H. Bastian

We are going to be providing that probably more in our 10-K on an annualized basis. We had a lot of questions from the street in the past about the overall size of the business and the margin performance. It’s safe to say that the margins have held up in those respective businesses. Our MRO business, we’re running a low double-digit margin in the second quarter. We didn’t exclude it for any reason other than just to, given the size of the new Delta, we thought it was probably something more that we could leave as an annual disclosure rather than a current quarterly run-rate.

Mike Linenberg - Banc of America Merrill Lynch

Fair enough. Thanks, guys.

Operator

We’ll take our next question from Jamie Baker at JP Morgan.

Jamie Baker - JP Morgan Chase

Good morning. Richard, you talked about powering your way through the downturn but I’m just curious if you have a plan B in the event the demand doesn’t recover and instead just kind of stays here adjusted for normal seasonality?

Richard H. Anderson

Well, I think we have built and we’ll continue to build a pretty conservative plan going forward. We have the ability to continue to right-size capacity because we have a large number of owned and fully depreciated airplanes, and if you look out over the past year or so, we’ve reduced overall headcount about 11%.

So the key is to continue to right-size capacity to demand and we have the fleet and the flexibility in the business to continue to do that. While at the same time, Jamie, we’ve got to keep our cash balances high.

Jamie Baker - JP Morgan Chase

Would you be able to afford your view on how the industry might adapt in that scenario? Or would that not be part of your thinking as you manage Delta?

Richard H. Anderson

Well, I mean, I think you raised the right point, which is the industry is going through a fairly extreme period, similar to what it went through in the early 80s, the early 90s, and would have gone through in the early part of this decade but for government intervention. So it’s clear that the industry is going to go through another pretty significant change and our strategy is to continue to position Delta at the head of the pack, so that as the industry evolves to a more mature state, that we are well-positioned to continue to lead the industry.

Jamie Baker - JP Morgan Chase

Thanks, Richard. I appreciate your comments.

Operator

We’ll take our next question from Duane Pfennigwerth at Raymond James.

Duane Pfennigwerth - Raymond James

Thanks. Good morning. I’m wondering if you could update us on your liquidity target by the end of the year. I may have missed that in the press release.

Richard H. Anderson

We are providing our September forecasted liquidity. We are expecting it to be around the $5 billion range -- given some of the uncertainties in the forward-looking revenue environment, combined with fuel we’ve not updated our full-year end guidance yet. So certainly as we proceed over the course of the third quarter, we’ll give you that later in the third quarter but not at this point.

Duane Pfennigwerth - Raymond James

Okay, thanks and then I know it’s likely early and there’s a lot of uncertainty but given what you know today, how should we think about capacity in 2010, at least maybe in the first part of the year? And along those lines, given the cost synergies that you expect, does Delta have an opportunity to actually reduce unit costs in 2010 ex fuel? Thanks for taking the questions.

Richard H. Anderson

On the capacity front, we haven’t given 2010 official guidance yet. Obviously if you look at our fourth quarter, we are looking at a net 10 points of capacity down, so as we head into 2010, you’d expect our capacity to be down in 2010 but the size of that is really going to be much more dependent on the revenue and demand environment we see closer to that time. We’ll be providing that guidance as we get closer to the end of this year.

On unit costs, yes, we do see opportunities, particularly through the synergies as we get to that single operating certificate, as we can fully consolidate the operations of the two companies, we expect some significant cost savings to start showing up more robustly in 2010. I think the team has done a great job in managing cost out as capacity has come out, so we are keeping our non-fuel costs relatively flat and taking the cost out with capacity, and we expect the merger benefits on the cost side will actually allow us to reduce cost even further in 2010.

Duane Pfennigwerth - Raymond James

Thanks.

Operator

We’ll take our next question from Hunter Keay at Stifel, Nicolaus.

Hunter Keay - Stifel, Nicolaus & Company

Good morning. I would like to dive maybe a little bit deeper into this whole concept of flexibility that you guys talk about and maybe sort of just flush out what you mean by that -- are you talking about you have flexibility with your fleet to maybe re-gauge aircraft to various markets, maybe through the Northwest merger? Or are you specifically referring to, as I think some people assume you are, the ability to ground additional aircraft? Because if you are referring to grounding additional aircraft, presumably your entire fleet right now is collateralizing some form of debt, so are you talking about maybe grounding aircraft that are encumbered by debt or maybe sort of scaling back a little bit on utilization?

Richard H. Anderson

It’s really both of those but we have unencumbered assets in our fleet and we have a pretty significant number of regional jets that we are going to be -- and regional airplanes that are going to be coming off lease over the course of the next 12 months, so between both utilization flying and reduction in the fleet overall, we do have the opportunity to continue to be pretty flexible about adapting supplies to demand.

Edward H. Bastian

And Bill, don’t forget these are two companies that both went through a restructuring over the course of the last several years, so on both the Delta side as well as on the Northwest side, our fleets have been marked down to market with significant savings. So the cost of taking those actions is obviously much lower for us, which provides us that flexibility as compared to some of our peers with newer, more current fleets.

Hunter Keay - Stifel, Nicolaus & Company

Okay, so you actually do have unencumbered aircraft then -- is that something that could be potentially a vehicle to just [inaudible] if necessary?

Edward H. Bastian

It’s not a question of having unencumbered assets or not -- it’s a question of flexibility. At this point in time, we’re not looking to raise additional liquidity through our fleet.

Hunter Keay - Stifel, Nicolaus & Company

Okay. And on these transatlantic capacity cuts on the back half of ’09 I guess maybe a little more color, that would be great -- are we talking about maybe pulling out or pulling back, I should say, on some of the new markets that you started flying to last year? Or are you talking about more mature markets that you’ve been flying to that maybe are over-capacitized? And sort of how does the JV play into this whole planning process? Are you -- is this a true 20% cut or are you maybe just sort of shifting flights over to say the [AFKL] code, which would still I assume be reflected in your P&L through the joint venture, if you get what I’m driving at?

Glen Hauenstein

I think you really asked two questions there -- one is about the recovery of the revenue on flights that we are going to cease operating this fall and certainly the JV and the way it’s structured allows us to recapture a significant amount of that revenue, not only on the transatlantic sector but any traffic that’s transiting into or beyond Amsterdam or Paris as well, so we believe that the recapture rates on the revenue on displaced revenue will be very, very high.

On the markets themselves, some are mature markets that we’ve been in for many years that we believe recapture in this environment [as high as the other hubs] and some of the other cancellations will be new markets that we’ve added over the past couple of years. So it’s really a combination of both.

Did that answer both your questions?

Operator

(Operator Instructions) We’ll take our next question from William Greene from Morgan Stanley.

William Greene - Morgan Stanley

I’m wondering if we can talk a little bit around the RASM commentary. If we take out H1N1 that we had in the second quarter and we think about the year-over-year impact from exchange rates and oil in the third quarter, it seems like the commentary you are suggesting is that there’s perhaps a deterioration in your core RASM trend. Is that the right way to think about it?

Richard H. Anderson

No, Bill, I wouldn’t say that’s the right way to think about it. You know, when you think about the third quarter versus the second quarter, the second quarter had Easter in it, which affects a little bit of the comparatives. You know, the third quarter for us historically September is a very weak period as we get into a shoulder period, so we don’t see any deterioration in our trends. But at the same time, we don’t see any meaningful recovery either.

William Greene - Morgan Stanley

Okay, but in the past you preferred to travel sort of stabilizing, is that not true anymore for you?

Richard H. Anderson

I think that’s consistent with what we are saying. We don’t see any deterioration in the trends but we don’t at the same time see it picking back up, particularly on the business corporate travel side.

William Greene - Morgan Stanley

Okay, and then on the liquidity, can I just ask because of the new Delta, I’m not quite sure I understand the seasonality, particularly as it relates to working capital changes between June and September. It seems like the projection that you have incorporates some sort of financing additional liquidity injection or something because it seems to me like the income statement guidance relative to the liquidity guidance don’t quite match, given what I would expect would be normal seasonality.

Richard H. Anderson

We can take that offline in terms of how the working capital on the balance sheet works and some of the details, Bill, but no, we do not have any financing predicated in this forecast. Obviously as the season goes -- you know, we go into a softer cash season, we expect some reduction in our air traffic liability. That’s probably the single biggest effect.

William Greene - Morgan Stanley

All right. Thanks for the time.

Operator

We’ll take our next question from Gary Chase at Barclays Capital.

Gary Chase - Barclays Capital

Good morning, everybody. I wanted to just start off and make sure that I have the right context on some of the capacity issues. First, just to be sure, if I take the down 7 to 9 that I think both you and Richard mentioned in the prepared remarks, the fourth quarter, just if I look at the math has got to be down a little bit more than 10% and I know you are talking about an incremental 10%, so should we take that to mean year-on-year down 10%, or that an incremental 10% actually implies a little bit more than 10% as we move into 4Q?

Hank Halter

At this point, Gary, we are planning the fourth quarter to be year-on-year down 10%. And the numbers are moving around. We continue to take actions on a weekly basis, so these are ranges.

Gary Chase - Barclays Capital

Okay, and that really starts in the month of September, right?

Hank Halter

It really starts late August.

Gary Chase - Barclays Capital

Late August, okay -- when you mention that the capacity plan was sort of in flux for 2010 and I mean, understandably so, I just wanted to get a little bit of context around what kind of improvement you might need to see in order to believe you are going to dial the capacity levels back up from where you are now going down to as you move into 4Q? Is there any way to calibrate like what kind of revenue environment would it take to be thinking that you would be adding capacity, or is it --

Hank Halter

It’s too early to speculate on the 2010 revenue environment, Gary. Obviously cash is an important feature to that, so if we thought we were -- certainly any cash negative line would be cut and has been cut and would continue to be monitored very closely but no, I think it’s too early to speculate on what the demand environment could be like to predicate a return to capacity.

Gary Chase - Barclays Capital

Okay. And I wonder too if you guys -- you know, a couple of other companies have talked specifically about their business revenues and the thought that those have stabilized and maybe even gotten ever so slightly better in the last month or so. I wanted to see if you had any similar color and in addition, any thought about whether or not we should think about the business demand? Is there any reason to believe that that would get worse as we head into the fall?

Richard H. Anderson

We have seen stabilization in business demand and candidly have seen a bit of an up-tick but I think it’s very early to be trying to call that fact a trend and we want to be certain that we are planning on the conservative side. So while we have seen similar sort of trends, both in terms of number of business travelers and business traveler revenue, we are not in a position yet to call it a long-term trend and think we need to get past the end of August and get some visibility into the fall period and get a better view of what some of the macroeconomic indicators will be September through December before we want to make any adjustments.

We are assuming no recovery because that’s the conservative approach to take in terms of how we build our business and candidly to your question or the earlier question about what 2010 looks like, we have no plans to be adding capacity in 1Q and in fact would budget and begin the planning process into 2010 keeping all the capacity out that we have out through the end of the fourth quarter.

Gary Chase - Barclays Capital

I guess one of the reasons that I am asking the question is it seems everybody talks about this slight up-tick and unfortunately, it’s very slight and off a horrible base but June doesn’t strike me -- June and July don’t strike me as particularly hot and heavy business travel months either and it’s sort of there’s this view that there’s something very scary about September and I’m not sure that -- I’m trying to get my arms around whether or not there’s a reason to have that concern, other than -- I mean, it’s a highly uncertain environment, I understand what’s been going on this year but there seems to be just a lot of trepidation about what business travel is going to be come September, why -- is there a reason to believe that the risk is predominantly to the down side or is that not --

Richard H. Anderson

I just don’t think it’s time to make that call because if you look back to the fourth quarter of ’08 and the first quarter of ’09, even all of the analysts that were on this call and most of the carriers in the U.S. were counting on a very different second quarter and the macro economists all around the world were predicting a much different GDP number than what actually was delivered.

So after having had several quarters of disappointment in the macroeconomic climate, you want to err on the side of conservancy, both in terms of capacity costs and cash. So it’s not that we see anything particularly significant from a data standpoint, but that don’t take the stabilization and actually the bit of increase we’ve seen in business travel the last couple of months as a long-term upward trend.

Gary Chase - Barclays Capital

Okay, guys. Thanks very much.

Operator

We’ll take our next question from Kevin Crissey at UBS.

Kevin Crissey - UBS

Thanks. I wanted to confirm the way you think about the $2 billion in incremental synergies and just reconfirm, I think I’ve heard you say it before, I just wanted to make sure I have it correct -- I mean, that’s somewhere in the vicinity of mid- to high-single-digit margin improvement. Now that would be $2 billion -- call it 7% margin relative to what the industry puts off? Is that the way you would think of it? So in 2012, you should have 5%, 7% better margin than maybe the industry has? Is that the way we should think of that?

Edward H. Bastian

Well I don’t know versus the industry, per se, Kevin but relative to us on our historical numbers is how we measure that. We are expecting to see by the time we get to 2012 roughly three-ish points of improved revenue performance over historical trends driven by the merger and a like amount of improvement on the cost side, you know, three to four points.

Kevin Crissey - UBS

And then what would you --

Edward H. Bastian

And so in aggregate, in aggregate numbers your math is right. I’m not sure relative to what the industry might be doing in 2012.

Kevin Crissey - UBS

Right, but -- so the question I have, and I think most investors kind of discount the probability of that because it just seems to be arbitraged away over time. You know, in most industries, there doesn’t seem to be such a divergence from an average result. How can we reconcile that and why shouldn’t we think that maybe the anti-trust immunities that others are applying for are going to kind of level out those playing fields?

Edward H. Bastian

Well first of all on the cost side, the costs are real, you know, the cost synergies. I think you’ve got the two carriers that have the best track record and certainly amongst the mainline carriers, the network carriers are producing that cost productivity in the lower cost environment and we have every reason to believe we are going to hit those cost synergies, so that’s a number that’s very real and I think can easily be seen based on historical precedent.

On the revenue front, as you know we do have anti-trust immunity across the transatlantic already. In fact, we have a fairly significant head start because we don’t just have ATI, we have fully functioning JV with a common bottom line and we are not waiting to put it together. It’s already up and running as we speak.

But the other part of the revenue synergies are elements that, such as our American Express agreement, driving significant real value that we can already see in the numbers. The fleet, cross-fleeting of our mix as we right-size capacity to demand in a much more efficient and effective manner, so these are -- the S curve is a piece of it but I wouldn’t say it’s the bulk of the revenue synergy.

Kevin Crissey - UBS

Terrific, and I want to thank you for putting in the consolidated CASM ex fuel guidance in there. That should help us maybe plug some synergy numbers because it felt like before it was a little bit more difficult -- not to say that it’s easy to model now but I appreciate that. Thank you.

Edward H. Bastian

We are always trying to be of help.

Operator

We’ll take our next question from Jamie Baker at JP Morgan.

Jamie Baker - JP Morgan Chase

Thanks for taking the follow-up. You know, Richard, just continuing the earlier dialog, you brought up the topic of government intervention that occurred earlier this decade. I sensed there might have been a negative connotation that you implied but I wasn’t quite certain -- any thought on how you’d respond to the notion of federal aid if any of your current and weaker competitors were to request it?

Richard H. Anderson

Well first, whatever happens has to be done, and this is true not just of this issue but any regulation has to be done on a level playing field and that’s very important. Second, we just don’t think the government should pick winners and losers in any industry and that applies to -- excuse me, that the government should pick winners or losers in the airline industry. The market place ultimately has to determine that and since deregulation, it’s done a pretty good job of that and so we’re in the last stages of getting to a more mature industry and we are sort of winnowing out the last effects of regulation and that process needs to work if we are going to have a sustainable, competitive airline industry in the U.S.

Jamie Baker - JP Morgan Chase

Refreshing thoughts. Thanks, I appreciate it.

Operator

We’ll take our next question from Helane Becker with Jesup & Lamont.

Helane Becker - Jesup & Lamont

Thank you very much, Operator. Thank you for taking my question. Can you say now with the pension contributions that you’ve put in the second quarter, or are you done contributions for the year [inaudible]? I think you had talked about $500 million for the year.

Hank Halter

No, our pension contributions will continue for the balance of the year. In terms of funding, expect about another $100 million or so of funding for the back half of 2009 and again, that’s a funding number, not an expense number.

Helane Becker - Jesup & Lamont

Okay, and then I think you have a revolver that you talked about that was maybe coming due sometime in the next six or eight months? Is that true? What’s your thought there? Do you have to replace that?

Hank Halter

We have a $500 million revolver which when the companies are fully legally merged will need to be refinanced, so that’s -- the timing on that is uncertain. It will be probably some point in 2010.

Helane Becker - Jesup & Lamont

Okay. All right, thank you. Those are all my questions.

Jill Greer

Cindy, that’s going to wrap up the analyst portion of the questions. I’m now going to turn the call over to Ned Walker, our Chief Communications Officer, for the media portion of the call.

Ned Walker

Thanks so much, Jill and Cindy, if you could once again review the process for asking and queuing up for the Q&A and again, if we could ask the media for one question and a brief follow-up, that should allow us to accommodate most everyone. Jill. Or actually, Cindy.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Martin Mulane at Minnesota Public Radio.

Martin Mulane - Minnesota Public Radio

Could you recap what reductions you’ve had and headcount since the merger and the size of any potential workforce reductions in the immediate future?

Edward H. Bastian

Well, if you want to -- I mean, obviously the Delta Northwest numbers have been merged at this point, so we are talking on combined numbers but on a year-over-year basis, we’ve been managing our employee headcount in line with our capacity reductions and we are down about 11% on an aggregate basis over the course of the last 12 months.

The difference is we’ve been doing it on a voluntary basis, so all of the front line employee actions that have been taken have been purely voluntary and that is what’s separating us from some of our competitors.

Martin Mulane - Minnesota Public Radio

And going forward, what sort of need might you have for a reduction in employment?

Edward H. Bastian

We haven’t given any advanced guidance yet with respect to future headcount forecasts but our commitment continues that the merger will not be the source of any frontline employee reductions.

Martin Mulane - Minnesota Public Radio

Thanks.

Operator

We’ll take our next question from Mary Jane Credeur at Bloomberg News.

Mary Jane Credeur - Bloomberg News

Gentlemen, you talked about the bookings being a point or two behind and that you expect to close the gap -- how much of that gap might you be able to close?

Richard H. Anderson

We would expect on the domestic side entirely and our load factors have been running consistently on the domestic side in the high 80s the last 60 days and we would anticipate closing that gap.

Mary Jane Credeur - Bloomberg News

And international?

Richard H. Anderson

International actually our load factors are running a little bit ahead of last year.

Mary Jane Credeur - Bloomberg News

So far in Q3?

Richard H. Anderson

Yeah.

Mary Jane Credeur - Bloomberg News

Really? Great, thanks.

Operator

We’ll take our next question from Harry Weber at the Associated Press.

Harry Weber - Associated Press

Thank you. At the top of the call, Mr. Anderson said Delta may face some tough choices in the future -- what are some of those tough choices as they may pertain to fares and fees that passengers pay and to employees and jobs? Specifically, are you all open to charging fees for carry-on bags and/or raising fees for checked bags?

And on the employee side, I know Mr. Bastian just addressed this a little bit but do you anticipate significant job reductions in the months ahead?

Richard H. Anderson

On the issue of fees and fares, we cannot speculate or talk about what our future plans are. That would be inappropriate under the anti-trust laws. So as to that point, we can’t give you any specifics, other than to say that our responsibility is to continue to maximize the revenue across our businesses and we will continue to do so.

I think Ed answered your second question, which is we have over the course of the past couple of years managed our capacity very aggressively. There are fewer people flying today so we have to have fewer airplanes and fewer seats available for sales. And as we take that capacity out, it’s important that we take out all of the costs in that regard, and we have I think distinguished ourselves among the network carriers as having done all of those reductions voluntarily through various programs and I would highlight the 11% number that Ed spoke of. And we are proud of the fact that we’ve been able to do that through voluntary retirement, voluntary early outs. We’ve in-sourced a fair amount of work in our call centers. We’ve brought our calls back into the U.S. from India. We’ve in-sourced work in the cargo facilities in Atlanta.

So we are continually looking at those opportunities so that our frontline employees are safe and secure and we are going to continue to do our very best to purse that policy and we hope that the economy cooperates.

Harry Weber - Associated Press

Thanks.

Operator

We’ll take our next question from Kelly Yamanouchi at Atlanta Journal-Constitution.

Kelly Yamanouchi - Atlanta Journal-Constitution

Thank you very much. I’m wondering what your current read is on how long it will take to resolve labor issues in the merger.

Michael Campbell

We are encouraging the unions to -- we have two unions that haven’t filed. The remaining representation has been resolved and we are encouraging the two that have not filed to file. Within the last couple of weeks, we have met with the national mediation board and expressed our views on how important it is for employees to have this resolution. Subsequent to our meeting, the national mediation board has met with the two unions that still have not filed and we are optimistic that we are moving this process forward and I would hope by the fall we would be in some type of resolution process.

Kelly Yamanouchi - Atlanta Journal-Constitution

Will Delta take any action that could directly stimulate the unions to make filings?

Michael Campbell

We’re not going to speculate as to what that course of action may be but we have been public in saying this cannot go on indefinitely.

Kelly Yamanouchi - Atlanta Journal-Constitution

All right. Thank you.

Operator

We’ll take our next question from John [Wellesie] at [inaudible] Press.

John Wellesie - Media

Looking at some airport operation stats, it looks like some of your capacity has been shifted from the mainline to the regionals. There’s a significant amount here at MSP. Will you do more of that or have you gone as far as you can with that movement?

Edward H. Bastian

Well, I think we have right now been taking delivery of the [76-seat] regional RJ as we’ve grounded some of the older DC930s. That is largely complete and we will not be taking any delivery of any additional 76-seat RJs as we move into the future. So that trade-off from the older DC9s into the two class regional jets is pretty much complete at this point.

Richard H. Anderson

And I would add to that that actually the trend will probably start going the other way as we begin having a number of regional jet retirements that start commencing -- some have commenced and we’ll have more next year so you’ll actually see the 50-seat jet count at Delta continue to decline.

John Wellesie - Media

All right. Thanks.

Operator

And we’ll take a follow-up question from Mary Jane Credeur at Bloomberg News.

Mary Jane Credeur - Bloomberg News

Can you tell us a little bit more about how the reduction in capacity will be reflected in year-end fleet numbers? It certainly looks like a big grouping of aircraft are going to come out, presumably some of the wide bodies. What can we expect -- a dozen, more, less?

Edward H. Bastian

We had previously announced that we were anticipating grounding somewhere between 30 to 40 of our mainline aircraft and that’s where we probably expect the year to end up. So you’ll see it in terms of lower aircraft utilization. You’ll also see it in terms of grounding of various equipment types across the board. There’s no one specific type that we are going to concentrate the reductions in.

Mary Jane Credeur - Bloomberg News

So the 30 to 40 still holds, even with some of the additional international pull-downs?

Edward H. Bastian

That’s right. That was already predicated in our thinking, that we’d have some international pull-downs.

Mary Jane Credeur - Bloomberg News

Great. Thank you.

Ned Walker

Cindy, we have time for one more media question.

Operator

Okay, we’ll take our next question from Paul Beebe at Salt Lake Tribune.

Paul Beebe - Salt Lake Tribune

How robust is demand for the Tokyo and Paris services from Salt Lake and how does that play into plans to adjust transatlantic and Pacific capacity?

Richard H. Anderson

Well, this is our second year of serving the non-stop Salt Lake Charles de Gaulle and we are going to retain it through this winter, so we are quite pleased with the demand that we’ve had there. It is a very good performer for us this summer, so we are very pleased with that.

Of course, Narita, one of the issues of non-stop service from Salt Lake to Narita was the unfortunate timing of the H1N1 virus. A lot of the traffic we had counted on to be on that flight was coming from Asia to the Western U.S. and particularly Japan into the Western U.S., including large cities like Phoenix and Las Vegas, where that is the best connection, the best online connection.

Unfortunately that traffic has not materialized and we are reducing to 4X weekly this winter. We will adjust that capacity and that frequency as we see, if H1N1 eases and the Japanese return to traveling.

Paul Beebe - Salt Lake Tribune

Okay. Thank you very much.

Ned Walker

Thank you, everyone. That concludes the second quarter financial results and Richard, Ed, Glen, Mike, Hank, thank you very much. We’ll go ahead and talk to everybody in about three months. Thank you so much.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: Delta Airlines Q2 2009 Earnings Call Transcript
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