Delta Air Lines' (DAL) CEO Richard Anderson On Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Delta Air (DAL)

Delta Air Lines (NYSE:DAL)

Q2 2014 Results Earnings Conference Call

Month Date, 2014 10:00 AM ET

Executives

Jill Sullivan Greer - MD of Investor Relations

Richard Anderson - Chief Executive Officer

Ed Bastian - President

Paul Jacobson - Chief Financial Officer

Glen Hauenstein - EVP Network Planning & Revenue Management

Mike Campbell - EVP Human Resources & Labor Relations

Kevin Shinkle - Chief Communications Officer

Gil West - EVP and Chief Operating Officer

Analysts

John Godyn - MSSB

David Fintzen - Barclays

Dan McKenzie - Buckingham Research

Jamie Baker - JPMorgan

Duane Pfennigwerth - Evercore

Joe DeNardi - Stifel

Darryl Genovesi - UBS

Mike Linenberg - Deutsche Bank

Savi Syth - Raymond James

Susan Carey- Wall Street Journal

David Koenig - The Associated Press

Mike Sasso - Bloomberg News

Kelly Yamanouchi - The Atlanta Journal-Constitution

Karen Jacobs - Reuters

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Delta Airlines Second Quarter 2014 Financial Results Conference Call. My name is Sherlon and I will be your coordinator. At this time all participants are in a listen-only mode. We will conduct a question-and-answer-session following the presentation. As a reminder, today's call is being recorded.

I would now like to turn the conference over to Jill Sullivan Greer, Managing Director of Investor Relations. Please go ahead.

Jill Sullivan Greer

Thanks Sherlon. Good morning everyone and thanks for joining us for our June quarter call. Speaking on the call today will be Richard Anderson, Delta's CEO; Ed Bastian, our President; and Paul Jacobson our Chief Financial Officer. Richard will open the call and then Ed will address our financial and revenue performance, and Paul will conclude with a review of cost performance and cash flow. We have the entire leadership team here with us in the room for the Q&A session. To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up.

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 forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings.

We'll discuss non-GAAP financial measures. All results exclude special items unless otherwise noted. And you can find the reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com.

And with that, I will turn the call over to Richard Anderson.

Richard Anderson

Thanks Jill, good morning. The June quarter results show Delta is a top performing S&P industrial company. We reported a 1.4 billion pre-tax profit an improvement of 70% year-on-year with 13.5% pre-tax margins. We grew 9% on the top-line with over 4 points of margin expansion and more than 1.5 billion of free cash flow. We grew unit revenues by 6% kept our non-fuel cost flat and used the refinery and hedges to lower our fuel prices despite an increase in market fuel prices. We earned $1.04 a share meeting consensus estimates of $1.03.

Our adjusted net debt ended the quarter below 8 billion it’s lowest level in 20 year. We have accelerated our shareholder returns paying out 550 million to our owners already this year. Our return on invested capital for the last 12 months was 18.2%.

In the quarter we delivered exceptional operating reliability for our customers with a 99.9% completion factor including 27 days with zero main line cancellations and a 1 point year-on-year improvement in our on time rate to 83.4%. We saw an 11% improvement in our baggage performance. Our operational reliability combined with the top notch service delivered by our employees every day has produced a steady increase in our customer satisfaction levels and a 6% decrease in customer complaint.

Delta runs the best overall airline in the industry by a significant margin, with the lowest capital cost per aircraft among our competitors. The credit for this record performance goes to the Delta team worldwide. I want to thank them for their efforts. It's an honor to serve them and to reward them with an additional $340 million accrued toward our profit sharing plan, along with $22 million in share reward payments this quarter.

As part of our capital deployment announcement in May, we laid out a new set of long-term goals which raised the bar on our performance expectations for our owners. These annual goals, 11% to 14% op margin, 10% and to 15% EPS growth, 15 plus ROIC, 3 billion in free cash flow each year, and an investment grade quality balance sheet are aggressive but clearly achievable and we will continue to make meaningful progress year in and year out against these goals.

As we look forward to the remainder of 2014 and beyond, Delta will continue to maintain the steady course we have been on, especially our disciplined approach to capacity levels. This discipline continues to be a key driver of our success as we will post record results for 2014. We see a good demand environment combined with modest capacity increases that will result in solid top line growth.

More than 60% of our business is domestic in entity that is performing quite well and where we run a 13% RASM premium to the industry. We will see further margin benefits from our upgauging strategy. We are also improving international performance by making capacity adjustments to our network. In the trans-Atlantic, the industry has a very rational structure with 90% of the capacity within three immunized joint ventures. Delta's JVs represent about 30% of industry capacity in the trans-Atlantic and we manage this capacity at the JV level.

The Delta JVs are very profitable as we operate those JVs as fully integrated businesses that is as if they were one airline. Over the past several years, Delta has taken the industry's most disciplined approach to capacity which has resulted in strong returns across the trans-Atlantic. We're going to remain disciplined with our capacity and keep both Delta and our combined JV trans-Atlantic capacity growth at 1% to 3% this winter season.

In the Pacific, we are running a profitable operation and we'll further restructure our network by better aligning our Tokyo flying and building our U.S. gateway in Seattle. These efforts along with the benefits of smaller gauge white body replacement aircraft which began delivering in 2015 will drive better returns in the Pacific region.

On the cost side, we made a commitment to you three years ago to keep our non-fuel cost growth below 2% annually by taking out over 1 billion in structural cost. Our results show these initiatives especially the domestic refleeting and maintenance cost management are delivering the projected benefits. Our non-fuel cost will be less than 1% this year.

We also believe in actively managing fuel and we have invested in our fuel organization. Graeme Burnett has done a fine job running our fuel organization. This has allowed us to regularly produce quarter-after-quarter one of the lowest fuel prices in the industry. The refinery has made an impact on market fuel prices and we have a solid hedge book in place that should reduce our fuel expense by more than $350 million for the year including $100 million in the September quarter.

Our fuel price this quarter of $2.93 per gallon compares quite favorably to the industry average fuel price excluding Delta of $3.08 per gallon. All of these factors combined should produce more top-line growth, margin expansion and operating cash flow improvements in the back half of the year. By maintaining capital discipline and keeping our CapEx at $2.3 billion this year, we should generate over $3 billion in free cash flow. We will use that free cash flow to further improve our balance sheet and return more cash to shareholders. We have already returned $550 million to shareholders through dividends and buybacks this year including a $100 million so far in the month of July and we’re on a path to return over $1 billion this year to our owners.

Across the board, the business is performing extremely well but our goal is to make continued improvement. We have a solid plan in place and we are executing well against it. Our performance is setting a new standard and rivaling that of high quality industrial peers. We are one of only 80 companies in S&P 500 with free cash flow of $3 billion or more, and among S&P 500 industrial transports only UPS and Union Pacific have greater free cash flow.

We have a lot of work ahead of us and also a lot of opportunity, we will post even better results in the third quarter with the forecast operating margin at 15% to 17%. I want to thank Jill and the IR team for tolerating our many edits to the materials for this call.

And with that I’ll turn it over to my colleague Ed Bastian.

Ed Bastian

Thanks, Richard. Good morning, everyone. Thanks for joining us today. For the June quarter, we reported a $1.4 billion pre-tax profit which is a $593 million improvement year-on-year.

Our net income was $889 million or $1.04 per share. Our pre-tax margin was 13.5%. I also want to thank the Delta's people for just an outstanding quarter. Their efforts have resulted in a $439 million accruals of profit sharing so far this year that compares to 506 million for all of 2013, which at that time with the equivalents of 8.25% of employee pay just a great job by the entire team.

Turning to the, excuse me the specifics for the quarter, we had a number of commercial successes including our corporate gains, merchandising initiatives, international partnerships and our investments in New York and Seattle. These initiatives were a key factor in driving our solid 9% top-line growth for the quarter. Our corporate revenues increased 8% year-on-year with largest gain in the financial services, media and banking sectors, all growing a double-digit rates, showing the momentum we are building in both New York as well as Los Angeles.

In a recent survey, 85% of corporate travel managers expect to maintain or increase their future spend on Delta. Our passenger unit revenues increased nearly 6% on 3% higher capacity, approximately one point of this gain was attributable to the shift of Easter into the second quarter.

The domestic entity was our best performer as unit revenues increased 7% with particular strength in the Atlanta and New York hubs. Our largest house Atlanta continues to outperform with double-digit gains on 2% higher capacity. New York's performance was supported by a strong spring break. In addition, our upgraded products and service on the New York trans-con help produce double-digit rise of gain in these markets on 12% higher capacity.

Trans-Atlantic unit revenues in the quarter increased 7%, on a 2% reduction in capacity. The June quarter benefited from a strong shoulder period, partially as a result of the Easter shift. Within the trans-Atlantic, our Virgin joint venture helped drive our Heathrow unit revenues up 5% on 18% higher capacity. In addition, Virgin’s June quarter profitability contributed $7 million in non-operating benefit from our equity stake. Our Latin unit revenues were flat, which was a solid performance considering the entity absorbed a 25% increase in capacity and experienced some demand weakness around the World Cup.

We have been investing in our Latin network to leverage our equity investments in GOL and Aeromexico. The carriers both produced solid contributions to our revenues this quarter. GOL provided one-fourth of the traffic on our U.S. to Brazil flights and Aeromexico delivered nearly one-fourth of the traffic on our flight into key Mexican business cities. This traffic contributes $36 million in incremental revenues this quarter year-over-year.

In the Pacific, our network restructuring helped offset the impact of the weakened Yen, resulting in a unit revenue decline of 3% on slightly higher capacity. Yen revenues declined by $10 million net of hedges. We remained well hedge on the Yen with more than 75% of our net Yen exposure hedged between 85% and 90% through 2015. These hedges are currently valued at over $113 million.

Part of our Pacific restructuring is building out the Seattle Gateway, our Seattle international franchise is doing well. We had a 2% unit revenue improvement despite 30% capacity growth in a quarter where we launched new service to Seoul, Hong Kong and London. The domestic feed in Seattle also continued to performed well producing unit revenue improvement inline with our system averages.

Our domestic unit revenues in Seattle grew 6%, while absorbing a 25% increase in capacity. We are also seeing good successes with our seat merchandising initiatives this is one of our fastest growing revenue streams increasing by $45 million over the last year. The success of our First Class Upsell initiative helped push paid first class load factors up more than 6 point to 45%.

In terms of guidance, as we look into the fall, we see good forward bookings and all signs point to a continued solid demand environment. We are seeing particular strength in the domestic entity and expect the world cup driven weakness in Latin America to its swift side.

However our Latin and RASM will be impacted by 3 points to 4 points due to our recent decision to pull down our flying into Venezuela as we work to repatriate over $190 million in revenues that are currently held in Bolivar.

We know the capacity situation in the trans-Atlantic has been a concern for investors. This summer we are seeing trans-Atlantic industry capacity increase by 8% as carriers has shifted flying to capitalize in the regions recent outperformance.

While our revenue generation this summer will be very strong, we expect our Q3 trans-Atlantic revenues to grow 5% to 6% on capacity growth of 3%. Our unit revenues are being somewhat impacted by industry oversupply. It's important to remember that we have profitable immunized joint ventures with both Air France-KLM, Alitalia as well as with Virgin Atlantic, which allow us to effectively manage this entity.

As retrofit combined we manage over $13 billion of revenue and 30% of the industry's capacity. To continue improving our revenue and margin performance, we are leveraging those joint ventures to stay in discipline in our combined offerings.

Together with our partners we are currently making adjustments to our joint capacity plans and expect our combined trans-Atlantic capacity to be up 1% to 3% for the upcoming winter season.

As we approach the winter months, those adjustments will become more visible in public schedule. This level of capacity growth is inline with expected economic growth in the region and it will be accomplished through better utilization of existing Delta assets.

So we believe we are well positioned on trans-Atlantic capacity and our advanced yields for the fall are ahead on a year-over-year basis to where we were at the same point going into this summer.

We have flexibility in the business and we'll make additional changes to our joint capacity levels if necessary to continue on the path to achieving our financial goals. In the Pacific, we expect better performance in unit revenues as we passed the one year anniversary of the sharp move in the Yen and as our new international flight from Seattle mature.

We're also making further changes to our Pacific network, realigning our flying in Tokyo's better matched demand and building more efficient connections with the remaining clients. Capacity from Tokyo to the beach markets is down 15% this summer and we have reduced our intra-Asia flying by 10%.

Based on this overall environment, we are forecasting another quarter of solid top line growth and margin expansion. The comps do get tougher as we move through the year. In fact compared to Q2, our Q3 unit revenue comps are 300 basis points more difficult. We expect our September quarter RASM to improve 2% to 4% on 2% to 3% capacity growth. When combined with our cost outlook, that result should drive an operating margin of 15% to 17% or approximately 300 basis points of margin expansion year-over-year.

With that I'll now hand the call over to Paul to cover cost and cash flow.

Paul Jacobson

Thanks Ed, good morning everyone and thanks for your time this morning. A key focus for the organization has been our cost performance and our results this quarter are product of that focus across the board in non-fuel, fuel and non-operating expense. Total operating expenses for the quarter increased 3% with nearly all of that increase from higher profit sharing accruals.

On a unit cost basis, we continue to meet our goal keep our growth below 2% while consistently investing in our employees, products and operations. Our ex-fuel CASM was flat for the quarter as the benefits of our domestic re-fleeting and other cost initiatives continued to take hold.

On the fleet side, we put 22 new aircraft into service during the quarter which allowed us to retire older less efficient airplanes. This upgauging is producing meaningful operating leverage. For the June quarter, we produced 3% higher domestic capacity on almost 4% fewer departures.

Going forward, our refleeting benefits will continue as we expect to retire an additional 47 aircraft in 2014 and another 80 to 90 in 2015. The refleeting is also the catalyst for a significant amount of maintenance savings, helping drive our maintenance expense down by more than $60 million for the quarter, as a result of more than 60 fewer airframe and engine events, primarily on regional jet. Not only have we avoided costly maintenance events on the aircraft that we’re retiring, we’re also able to harvest certain parts from retiring aircraft to reinvest in our active fleet at a lower cost.

Beyond the refleeting, we have a solid stream of other cost initiatives that have already been implemented as we continue to find new opportunities to reduce expenses. We’re staying disciplined with our headcount and overhead additions as we begin to modestly grow the airlines. We’re also currently offering a voluntary retirement program to help in these efforts. We’ve also been investing in technology that has improved the productivity of our front line employees. Investments in new systems for our reservations and airport agents are helping to create a better experience for our customers as well.

Our supply chain team led by Chris Collette has successfully leveraged our scale to drive efficiencies from our vendors. These efforts should save north of $50 million this year. The success of these cost initiatives has allowed us to keep our unit cost growth well below 2% for each of the last four quarters, while building a foundation to be able to sustain this performance into the future. As a result, we expect our non-fuel CASM growth to remain below 2% for each of the September and December quarters.

In addition to addressing our non-fuel costs, we are also actively managing fuel as Richard mentioned. Our fuel expense for the quarter decreased by $40 million even in the face of higher market prices and consumption were more than offset by improvements in the refinery’s profitability and $98 million in hedge gain.

Our fuel price was $2.93 per gallon, which includes the combined $0.11 of benefits from the hedges and the refinery. These results show the effectiveness of our investments in our strategy in meaningfully reducing our largest expense. The refinery made a $13 million profit for the quarter which was $64 million year-over-year improvement.

Our domestic crude initiative has lowered cost of the plant with more than 40% of the refinery’s inputs for the quarter from domestic sources compared to only 5% a year ago. We've announced an agreement earlier this week for 65,000 barrels per day of domestic crude for the refinery as well. By combining this transaction with our other sources of domestic crude, we expect to meet our full year goal of 70,000 barrels per day of domestic crude for all of 2014.

This will provide additional benefit for the back half for the year and a good tailwind for 2015. For the September quarter, we are expecting to pay $2.88 to $2.93 per gallon for fuel including the impacts from the refinery and hedge. At current prices, our hedge book should deliver another $100 million in benefit and we expect the refinery to be roughly breakeven for the quarter.

Turning to cash flow, the cash generation of Delta has obviously been a key driver of value for our shareholders. We generated over $2 billion of operating cash flow this quarter while our capital expenditures were $520 million, primarily for aircraft. This level of investment resulted in more than $1.5 billion of free cash flow for the quarter.

As Richard mentioned, we will stay disciplined with our capital spending, prudently reinvesting in the business while also maintaining our CapEx in the $2 billion to $3 billion per year range. For 2014, we are on track to spend $2.3 billion including $600 million $700 million during the September quarter. And we continue to take a balanced approach to capital deployment. Debt reduction remains a priority for the company. Our adjusted net debt fell to $7.9 billion, more than 50% reduction since we began this program in 2009. Not only is this strengthening balance sheet and our foundation but it is also improving earning. In the last quarter alone, our interest expense declined by $40 million year-over-year. We are also using a portion of our cash flow to proactively address our pension liability. This quarter we contributed an additional $300 million to the pension plan, completing our contributions for the year at just over $900 million, in line with the plan we outlined in May.

We moved aggressively to ramp up our shareholder capital returns also during the quarter, paying out $550 million to our owners since the start of the year. Thorough our dividend, we returned just over $100 million in the first half of the year. And as we announced in May, the dividend will increase 50% to $0.09 per share beginning this quarter.

We have used share repurchases to accelerate the pace of our capital return. So far this year, we have repurchased 12.4 million shares at an average price of just over $36 per share for a total $450 million. These efforts completed our 2013 authorization and have already initiated the first $200 million of the new 2014 authorization.

Let me conclude by thanking the Delta people for their dedication and determination in producing these outstanding results. We know we have more work ahead of us as we continue on the path of becoming that high quality industrial company but we have a key competitive and strategic advantage in each of the 80,000 people that are part of our team. There are no employees in the industry with a better track record of success.

With that, I'll turn it back over to Jill.

Jill Sullivan Greer

Thanks. Sherlon, that is going to conclude the prepared remarks and if we could move to the analysts Q&A and you could give them instructions on time to ask a question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll have our first question from John Godyn, MSSB.

John Godyn - MSSB

Hey, thank you for taking my question here. Paul you had a great list of cost initiative and the cost performance has just been tremendous. As we look out the next few years and we think about sustaining a sub-inflationary CASM ex-fuel growth rate. How does upgauging as an initiative rank among the initiatives and what inning are we in there, because it seems like the benefits are really dramatic?

Paul Jacobson

Good morning John and thanks for your comments. It seems you’ve been working really hard on that. Upgauging is obviously a critical element of that and we're still in a relatively early to middle innings of that program. We'll continue to be retiring CRJ's 50 theaters through the end of 2015 which will continue that program in the upgauging benefit through 2016.

But we are also spending a lot of time and effort, investing in productivity initiatives and technology that help streamline the things that we do, recognizing that this is part of that foundation that we need to provide for the future.

John Godyn - MSSB

Great. And Richard we've heard a lot of comments on [Axiom bank] and your point of view is clear just considering that you guys have an RFP out there, I wonder how much your position on the [Axiom bank] influences sort of your position on which manufacture to deal with? There are certainly market mechanisms for sending a message here.

Richard Anderson

No, we are very objective evaluators of airplanes and we'll continue to be very objective evaluators of airplanes. We've done three RFPs over the last three to four years. Boeing did a very nice job on the 737-900 ER campaign with GE and then the last two campaigns we did which were smaller the A321 with the CFM56 prevailed.

So it all comes down to economics and [Ned Peiper] and Paul Jacobson and the team do a phenomenal job. I think we get the best prices on airplanes in the world. And we're going to continue to be very opportunistic and be certain that we're buying proven technology that will give us the kind of returns on invested capital that our shareholders demand.

John Godyn - MSSB

With the A330neo now formally announced is there any update on thoughts that you would be willing to share?

Richard Anderson

Yes. If it's a priced in low 80s high 70s we might be a buyer.

John Godyn - MSSB

Okay. All right thanks a lot guys.

Operator

We'll go next to David Fintzen, Barclays.

David Fintzen - Barclays

Hi good morning everyone. Question from Glen just thinking about the upguaging on the fleet size and John asked about the cost side but on the revenue side there doesn't look so far any evidence around in dilution. I am just curious since they are in the early to middle innings of (inaudible) have you start deploying more and more of the bigger airplanes where we start to see more of that dilution or is this kind of the restructure we should expect on RASM going forward.

Glen Hauenstein

We've been very pleased with the RASM results given the fact that we are continuing to upgauge the airline and embedded within the result for the quarter was about seven-tenth of a point of what we call headwinds that would be structural based on the actual upguage of the airline and we’ve been able to more than offset that by posting our unit revenue increase that was in excess of what the industry did. So I think it’s the great products combined with the great people and the great services we’re offering just creating a demand that’s in excess of what we’re offering in a marketplace and allowing us to continue that upgauge without seeing revenue deterioration.

David Fintzen - Barclays

And that headwind, you think that headwind stays pretty constant through the program?

Glen Hauenstein

Yes it does.

David Fintzen - Barclays

Okay great. And then maybe just a quick one for Richard, you mentioned the JVs are in managed, JV is been managed as one business. Can you just give us some color around, obviously that JV is a part of your broader business and then your partner’s broader business. I am saying it’s specifically Air France. Does that create any tension in terms of how you want to set capacity in your JV when you’re putting in the context of your broader business and as a tension there how do you manage those?

Richard Anderson

Well we have add a trust community and these relationships go back decades. And Ed should probably give even more color, he is sort of more day-to-day than I am in all of these.

Ed Bastian

Hi David. We particularly with Air France scale I mean I’ll tell you our JV is predicated on a 50-50 sharing on capacity and there are some years that we maybe a little bit below or little bit above that benchmark but that’s a key governor on the capacity decision. So of course there is always some tension as to which entity will do the flying and what the economic prospects are for the trans-Atlantic versus other opportunities elsewhere in the world. But I think we’ve proven over the last number of years that we are the most disciplined JV out there and that we’re also the most profitable JV out there and that success breathe a very good platform for future profitable returns particularly in the trans-Atlantic.

The other thing I would add to that is these are highly integrated, we don't have all of the -- all our employees are basically AFKL employees in Europe and we run their operation here, they run yield management pricing in Europe at Amsterdam and we run for all the metal out of the U.S., I mean that can keep going down the list, but it really is single run. You got to think of it as running as a single airline. Even though there are a different colored, different painted to the airplanes in the JV.

David Fintzen - Barclays

Okay. I appreciate all that color. Thanks.

Operator

We'll go next to Dan McKenzie, Buckingham Research.

Dan McKenzie - Buckingham Research

Hey, good morning guys. You obviously get a nice job of taking Atlantic revenue worries off the table here. So Air France is profit warning obviously not a tied to the trans-Atlantic and demand out of the UK is obviously strong. I'm wondering if you can comparing contrast the corporate share gains out of London versus New York City driving that strength to London and also elsewhere in Europe. And then to what extend is foreign exchange a tailwind in the PRASM results here?

Richard Anderson

Well, Dan on your first question with respect the corporate I think Glen maybe answer the FX question. Think about it, I'll answering but we can work on answer to that. Maybe he can answer and we will get back to you that.

Dan McKenzie - Buckingham Research

Well, maybe somebody else in the room is going to answer.

Richard Anderson

On the corporate volumes clearly Virgin has been a big assist with respect to our being able to get a stronger foothold into the lucrative JFK Heathrow marketplace particularly with the financial service providers and we continue to see very strong growth in New York. I think I mentioned on the call double digit RASM gains on top of a capacity growth that we have been implementing.

With respect to Continental Europe obviously those are much more establish relationships and we are seeing good growth in Amsterdam and Paris on the corporate side as well and Rome for that matter. But it’s not nearly at the level of growth and development as we are seeing in London.

Dan McKenzie - Buckingham Research

Okay very good. And foreign exchange any perspective you can provide there?

Richard Anderson

Yes. Come on Glen.

Glen Hauenstein

Can we get back to you on that one?

Dan McKenzie - Buckingham Research

Okay, thanks very much guys.

Richard Anderson

Let me go ahead. I mean when you stop and think about how our JV works in the EU, the euro versus the dollar because of how the joint venture works we have a natural hedge because Air France-KLM, Alitalia are euro denominated. So unlike the Pacific where we do hedge the yen very profitably we don’t the yen in euro because we have a natural hedge with our joint venture partners.

Glen Hauenstein

Okay. And if I might add something about our transition of our trans-Atlantic over the last several years. I think this quarter is very important but when you look back it’s even more important to see where we have come as an airline. If you think about Delta many years ago there was a big reason not to invest in Delta and the trans-Atlantic because London represents 35% of all the business traffic from the U.S. to Europe and we had no access to it through open skies, but then through the creativity of the management team to go ahead and create a joint venture with Virgin we have the number two position in the U.S. and the UK. And we've made incredible gains on that. And really we think there is a great opportunity for us to continue to build with Virgin as we move forward, using the best of both brands. So if you take our network to Europe what it was several years ago, primarily U.S. to points in Europe that really didn't have a lot of business traffic.

And you look at the concentration of our network today heavily centered on a big business centers in Europe.

Richard Anderson

And one other point Dan on the FX, these are two areas, I don't think Europe was a big mover for us in the quarter. But the two areas of FX where we did see big impacts one is Japan obviously and we already commented about the RASM decline, we are seeing in the Pacific driven by the yen's weakness, while we do have a good hedge it is still not a 100% effective. And the other one is Venezuela, where we're taking capacity steps to reduce our exposure to Venezuela given the inability to access the bolivars in the country. And those capacity steps will result in about a 3 point hit to a LatAm RASMS in the third quarter.

Dan McKenzie - Buckingham Research

Very good. Thanks guys.

Operator

We'll go next to Jamie Baker, JPMorgan.

Jamie Baker - JPMorgan

Hey, good morning everybody. The first question for Paul 2014 is shaping up to be one of the worst years in terms of worldwide commercial hull losses, I think in over a decade now. And I actually haven't given much thought to insurance premiums since it spiked after 9/11, it is not a line item that we actually modeled. But can you remind us what sort of flexibility your insurers might have to upwardly adjust rates after a year of potentially billions in claims. I'm just trying to assess whether this is a conversation we even need that and feel free to comment if you think the question is irrelevant, it won't hurt my feelings.

Paul Jacobson

Well, good morning Jamie. I would never deliberately, unintentionally even try to hurt your feelings, but….

Jamie Baker - JPMorgan

(Inaudible).

Paul Jacobson

The changes in the insurance market that we anticipate over the next year are probably not material to the overall performance of the company but a couple of things I think worth noting. One, we're actually getting sizeable year-over-year improvements in our insurance premium as we reshape our portfolio with a lower risk balance sheet and the entity that we’ve created being able to take on a little bit more retentions and using that leverage in the marketplace.

Secondly, we also during the quarter opted out of the FA war risk program and it went back into the commercial programs and have realized significant savings on a year-over-year basis. So while the market might be challenged during the renewal periods, I think some of the structures and some of the initiatives that we've taken will help to mitigate that but either way, we don't think it will be material.

Jamie Baker - JPMorgan

Excellent, I appreciate that. And for Richard and forgive me, this is a bit of replay from last quarter. If you consider the next pilot contract, it still isn’t clear to me what management’s ask is going to be unlike last time, you don't need additional scope relief, I don't think. You don't need a 717 rate and so forth. So my concern is that Delta may have the upper hand this time around at the negotiation table which could put pressure on the longer term ex-fuel CASM targets that you were speaking about earlier, any thoughts on this?

Richard Anderson

We have an incredible track record working with our colleagues at ALPA. And if you just look at the track record over the last 10 years, it’s been just phenomenal. And we expect it to continue to be that way. So if you look at what we’ve been doing in the business we’ve really taken the labor risk totally off the table at Delta. And our employees are fully engaged in they are delivering a great product. And that's one of the key de-risking events that we've undertaken at Delta that’s unique to the company. And we’re not -- it’s one of the most valuable things we have and that relationship is very important to us. And we will continue unabated on the track that we’ve been on for a decade.

Jamie Baker - JPMorgan

As a follow-up to that and the hypothetically, if your primary competitors were able to reach the same level of operational integrity along the lines of what you were discussing earlier but without as [generous] profit sharing mechanism, would you ever revisit that structure?

Richard Anderson

We’re not going to get into, Jamie, the details of how those conversations go. Those are internal conversations. I would only note that the last time around with our pilots, Ed, what we…

Ed Bastian

We did restructure the profit sharing arrangement two years ago. And I think as we look forward to that, we’ve got a number of things that we can work with to help fund some of the heightened expectations but we’re not, as Richard said, we’re not going to share those details on the call.

Jamie Baker - JPMorgan

Got it. I appreciate it. Thank you very much for both answers. Gentlemen, I appreciate it. Take care.

Operator

We’ll go next to the Duane Pfennigwerth, Evercore.

Duane Pfennigwerth - Evercore

Hey, good morning. Thanks. Just on June, I wonder if you comment on how much of the variance in the month was due to the World Cup, was it Brazil specifically versus the region broadly and most importantly, are you seeing any improvement in bookings there yet?

Ed Bastian

It impacted the entire sector; if you look at the recent A4A data for the month of June that came out, Latin unit revenues were down considerably I think it fell 5% Duane if I am not mistaken for the entire sector. So, it was part of the softness near the end of June. We’re pleased to say though that we do see the demand starting pick back up again. And we have a pretty good outlook relative to the fall for heading into particularly in some of the Central and South American countries.

Duane Pfennigwerth - Evercore

I appreciate that color. And then just a broader industry question about pricing. When you think about where fares can go versus think like U.S. to see demand, where do you think we are in terms of industry fare levels and what region do you think offers the most upside? Thanks for taking the questions.

Ed Bastian

We like to stay completely off of future pricing discussions on these earnings calls. So we're going to differ answering that question.

Duane Pfennigwerth - Evercore

How about if I could, is there a reference point or a metric relative to GDP or relative to I guess travel spend as a bucket more broadly that reinforces the case that airline pricing generally is too low?

Ed Bastian

Once again, in the legal business we have something called, a term called asked and answered. And I think it’s been asked and answered. And this would be better off that we not discuss that.

Duane Pfennigwerth - Evercore

Okay, fair enough. Thanks for taking.

Operator

We'll go next to Joe DeNardi, Stifel.

Joe DeNardi - Stifel

Hi, thanks. Good morning. Richard, I’m wondering if you could talk about given the positive roll that your JVs and partnerships are having on the Atlantic side and down the Latin America. I mean are there opportunities for that on the Pacific side? It just seems like kind of getting that capacity situation under control, is going to be a little bit tougher than only Atlantic?

Richard Anderson

Yes. We do have opportunities in the Pacific. I think we’ve some great experience that we can attain and take from both the trans-Atlantic as well as what we are doing in Mexico and Brazil and apply to some of our Pacific relationships. Clearly Korea is one that we have had a challenge over the last several years in developing a JV construct and some improved revenue and commercial sharing initiatives. I am cautiously optimistic that we can make some progress as we look forward to the next couple of years with Korean and then in addition beyond that much longer-term is China.

Joe DeNardi - Stifel

Okay. And then with Virgin Atlantic, can you just update us on how that’s tracking relative to your expectations and should we expect the contribution there to accelerate going forward as they start to get some of these 787s later this year?

Richard Anderson

Yes, you should expect to see the profitability of Virgin Atlantic improve. For 2014 current year, they are expect to post a small profit but don’t forget two years ago when we acquired our 49% stake, they were losing -- it was well over $100 million a year at that point in time. So they have done a nice job of cutting the losses and starting to build some profitability and margin improvement. As we look to the next two years, the fleet changes are making with the 787s are going to help but also the relationship with Delta and our ability to drive increased levels of U.S. share into London and throughout the UK is also going to help them a lot.

Joe DeNardi - Stifel

Okay. And then maybe a quick one for Paul on trainer, just kind of what the expectations are for CapEx. And then what I saw on, Richard, on CNBC mentioning purchasing a tanker, I mean what’s the plan there, is that like the first of others or maybe I miss read I think?

Paul Jacobson

Good morning, Joe. We leased the tanker over the quarter that is going to help to increase our ability to source domestic crude for the refinery. And I think CapEx is generally inline with what we talked about when we acquired the plant at $50 million to $100 million a year in terms of annual CapEx upkeep et cetera. But I think when you look at the overall sourcing strategy, it's imperative that we get increasing access to domestic crude especially in declining crack spread environments, which by the way is the ideal scenario for us as a large consumer of jet fuel.

Ed Bastian

And just on that point, where you can get, we can get domestic crude delivered to the refinery at $2 to $3 a barrel below So, it generates a lot of opportunity.

Joe DeNardi - Stifel

Okay. Thanks.

Operator

We'll go next to Darryl Genovesi, UBS.

Darryl Genovesi - UBS

Hi, good morning guys. So just on, just wondering about your PRASM trajectory from here, I guess how do you think about your ability to maintain unit revenue growth inline with the industry, when you are already operating from a premium position? How long do you think this can go on and is the biggest driver that you still have really in developmental markets out of New York and LA and Seattle, kind of improving from here?

Richard Anderson

We, it's tough to give a longer term outlook on industry revenues and RASM, all I know is that at Delta we have a conservable pipeline of initiatives for improvement that we have been investing in, and customers really appreciate first and foremost the quality of the service and reliability of the product that our employees deliver. We've got great opportunities as we look to London particularly and the Virgin relationship will take easily another couple of years to ramp up to expectations and we're making great progress there.

And I also think down in Latin America with both Aeromexico and GOL in Brazil, those are very young relationships, that still have a lot of growth opportunity. We're very well positioned in the high growth markets of the world when you think about where we sit both in Asia as well as in Brazil and Mexico and certainly one that which is the cornerstone of U.S. travel to London.

So I think the product and service offerings are going to drive the determination on the customer side of where the industry revenues goal and I feel very good about our performance at Delta to continue to deliver on their expectations.

Darryl Genovesi - UBS

Okay. And then I guess on the cost side you've been coming through kind of at the favorable end of your CASM guidance for the last couple of quarters. Is there anything in particular that makes the second half harder other than perhaps more difficult comps in the second half of 2013 I guess any kind of discrete cost items that, that booked out the first half and into the second half I guess just any comment around the kind of second half versus the first half would be helpful?

Ed Bastian

Yes, sure Darryl, I think you touched on it this is now our fourth consecutive quarter of non-fuel CASM less than 2% so the comps are getting a little bit more difficult, but at the same time we're accumulating more benefits from the updating. So I think we'll continue to have that momentum as we lap that cost performance, but there isn't really anything extraordinary or special I think it's just continuing down the initiative path.

Darryl Genovesi - UBS

Great thank you.

Operator

We'll go next to Mike Linenberg, Deutsche Bank.

Mike Linenberg - Deutsche Bank

Hey, good morning two questions here. Ed if I could just go back to you mentioned that joint venture capacity for the winter would be up 1% to 3%, what was it previously and when you say winter is that fourth quarter is that a combination of the fourth quarter and the March quarter of 2015?

Ed Bastian

It’s the winter I added so essentially November through March, covering basically the fourth and the first quarters. What it was previously it was probably twice of that.

Mike Linenberg - Deutsche Bank

Okay.

Richard Anderson

And certainly its pointed in the published schedules.

Mike Linenberg - Deutsche Bank

Great, I appreciate that answer. Then my next question this is to Richard, Richard you’ve seen the pilots come out, I guess this is really around what’s going on with Norwegian and their subsidiary carrier. They’re talking about maybe rethinking Open Skies Agreement. And then I believe last week the Chairman of Air France came out and even talked about potentially renouncing some of these more liberal agreements these Open Skies agreements. What are your thoughts on that? And do you or you view that maybe our negotiators were outsmarted by some of these smaller countries?

Richard Anderson

Well, I think it’s a first line principal we support Open Skies as a general principal. And overall just like any trade agreement Open Trade Agreements are a good idea. But then there is going to be a subset of just like in steel or beef or any other industry there is going to be a subset of bilaterals that need equity. In other words, the challenge that we have in some of these instances as an industry is that yes, our negotiators have not done a very good job in the United States.

And what we need to be able to do is on a bilateral basis one agreement at a time, make sure that there is parity and equity between the parties, particularly where you have we don’t compete against airlines, we compete against governments. So when Delta is competing against a government, we need to make sure that there is equity in that relationship as part of an Open Skies agreement.

Mike Linenberg - Deutsche Bank

Great. Thanks Richard.

Jill Sullivan Greer

Sherlon, we're going to have time for one more question from the analyst.

Operator

That will come from Savi Syth with Raymond James.

Savi Syth - Raymond James

Hey, good morning. Just a quick question on Trainer. I am a little surprised that the expectation for Trainer is to be breakeven in the third quarter given it's like profit here and the second and maybe more Bakken or domestic crudes being used?

Richard Anderson

Hi, good morning Savi. Thanks for the question. A lot of that has to do with the crack spreads environment particularly been hit hard this year been distillates crack which is actually the great thing for Delta, because we're exposed to 95 million barrels a year on distillates crack that the airline. So when crack spreads decline and we see that performance at a breakeven level particularly with relatively strong gas cracks from time-to-time then we're actually pretty happy from that result.

The important thing for our strategy is to continue to lower the overall input costs for the plant through domestic crudes. So that we can help to create that cushion in a low distillate crack environment where we can make a little bit money at the refinery while also enjoying the full benefits lower crack spreads at the airline.

Savi Syth - Raymond James

Okay, that makes sense. And then just a quick follow-up on the comment that you as made on the Latin route here. A lot of the growth internationally is focused on LAN-TAM and this seems like your unit revenues is stronger than industry in general. Is that as a result of the joint ventures, is it just kind of where you are focused on. I'm just kind of curious a bit just because a lot of growth is coming there. I guess I worry about if there is softness there what happens?

Ed Bastian

Yes Savi, this is Ed clearly the relationships with Aeromexico and GOL are driving a very nice assistant support to our Latin franchise but we are seeing improvements across many parts of that sector and I expect it’s going to continue.

Savi Syth - Raymond James

Understood, okay thanks so much.

Jill Sullivan Greer

And that’s going conclude the analyst portion of the call I am now going to turn the call over to our new Chief Communications Officer, Kevin Shinkle for the news portion.

Kevin Shinkle

Thanks Jill. We would like to open up the call to questions from reporters, please review the steps for asking a question. And we would like to ask if you limit your questions to one with a quick follow up. With that we wish accommodate most everyone. Thanks so I turn it over to Sherlon.

Operator

(Operator Instructions). We’ll have our first question from Susan Carey, Wall Street Journal.

Susan Carey- Wall Street Journal

I understand Richard earlier on CNBC that you are not planning to supply to Israel today did any of your airplanes need to be ferried out of Tel Aviv yesterday or today because of the NO TAM.

Gil West

No there wasn’t. This is Gil West by the way as you saw we were a couple hours outside of Tel Aviv and there was a missile reportedly hit about a mile from the airport. So we diverted proactively and we did not have any aircraft on the ground.

Susan Carey- Wall Street Journal

And Gil do you expect I mean the FAA is promising that they are going to give us some further word on the status of Tel Aviv flights in about an hour or two. I mean what's your, are you guys ready to resume on Thursday, if they indeed do lift the ban today?

Gil West

Well, what I would say is we're in constant communication with the FAA at all levels within the company to assist the situation. And obviously, safety of our customers and employees are first. As the situation changes we're certainly reevaluating that.

Richard Anderson

And Susan, this is Richard. We make those decisions independent of the FAA, we make the decisions that Gil made yesterday was well before we heard anything from the FAA, because a Hamas missile lands a mile from the airport on the north side where we approach on final in a 747. So, we're going to make those decisions wholly independent. We appreciate the advising concern and the intelligence we get. But we have a duty and an obligation above and beyond that to independently make the right decision to our employees and passengers.

Susan Carey- Wall Street Journal

But if they say we are keeping the ban in place, obviously you are going to respect that?

Richard Anderson

Absolutely, because it's a NO TAM it's a notice to airlines.

Susan Carey- Wall Street Journal

Right.

Richard Anderson

And we would absolutely respect that. But even if they lift the NO TAM we still may not go in depending upon what the facts and circumstances are.

Susan Carey- Wall Street Journal

Okay, great. Thank you.

Operator

We'll go next to David Koenig, The Associated Press.

David Koenig - The Associated Press

Yes, I guess this is on everybody's mind, just a follow up on the standards, I know what you said there. Could you say anything more about in addition to FAA listing it's a NO TAM, what do you need to see before you can resume Tel Aviv service, what do you need to see on the ground there?

Richard Anderson

Well, I mean a lot of this is information that is not public between Delta and the government. So I don't want to speculate on that publicly and I want to respect our information sources and the cooperation we have with DHS and FAA. But the bottom line is, we need to make sure that we're discharging our safety obligations to our customers and employees and we make those decisions here at Delta all the time on an independent basis.

So, we'll evaluate the information we have and we'll make the judgment that our passengers and employees are allowing us to make for them every day.

David Koenig - The Associated Press

Okay, may be what I was getting at was whether you needed to see a ceasefire. More broadly, are you insisting or would you like to see some change in the way that international risk assessment is handled for airlines?

Richard Anderson

No, we do our -- we have an obligation to make our own risk assessments under our SMS program and we have a broad and deep security network around the world. We have security directors that work for Delta in all the regions of the world. And we have a very sophisticated capability and methodology to manage these kinds of risks whether it is this or volcano or hurricane that's what we do well.

David Koenig - The Associated Press

All right. Thank you very much.

Operator

We'll go next to Mike Sasso, Bloomberg News.

Mike Sasso - Bloomberg News

Hi, thanks for taking my call. Just a quick update, I think any updates on the RFP for the 50 white bodies and if you could just re-clarify what you said about the A330 NEOs please?

Richard Anderson

The most clarifying point I could make is we like very low prices.

Operator

We’ll move to Kelly Yamanouchi, The Atlanta Journal-Constitution.

Kelly Yamanouchi - The Atlanta Journal-Constitution

Hi there. I just wanted to ask about what you think is driving Atlanta’s outperformance in the most recent quarter double-digit gains in unit revenue with the competitive landscape or strength in particular corporate travel sectors.

Glen Hauenstein

Kelly, hi. It’s Glen. How are you?

Kelly Yamanouchi - The Atlanta Journal-Constitution

Good. How are you?

Glen Hauenstein

Good, thank you. I think it’s a combination of bunch of factors. And one of them clearly is that we’re running such a great airline here in Atlanta with the leading (inaudible) performance, with baggage performance and customers are choosing us and they’re choosing us where the competitor set that’s existed in Atlanta for the last 30 or 40 years. So we’re really, really pleased with our share numbers, our share business traffic. But Atlanta is also starting to grow and that’s a good thing for Delta. And so seeing when our economy turnaround and seeing the job creation that’s occurring here, it’s really benefiting us as well. So it’s a combination of higher share of the premium traffic out of Atlanta and a combination of Atlanta starting to grow again. And that’s great news for Delta and great news for everybody who lives here.

Kelly Yamanouchi - The Atlanta Journal-Constitution

Great. And I was also wondering if there is any idea, this might be a question for Richard or Ed, how many people you all expect to take the early retirement offer if is there is any goal?

Mike Campbell

Kelly, this is Mike Campbell. The program is still open. We have another week to run and it just could be in the 800 to 900 range that we’re forecasting, maybe a little higher.

Kelly Yamanouchi - The Atlanta Journal-Constitution

Okay, great. Thank you so much.

Operator

We'll go next to Karen Jacobs with Reuters.

Karen Jacobs - Reuters

Hello. My question I want to get back to the salaries. The comments earlier were useful because it did seem that Delta was upfront yesterday in sustaining flights. My question is do you think the regulatory agencies worldwide that deal of the airlines guidance. Do you think that they are responding with that guidance now to be help with airline, particularly in chances where fighting and (inaudible) make flying in certain aerospace root structures?

Richard Anderson

We have good cooperation with governments around the world and good cooperation with our government sector jobs in the homeland security, Mike reported at the FAA. All the agencies here in Atlanta. They are very helpful and they work very hard to make the right decision.

Karen Jacobs - Reuters

Thank you.

Unidentified Company Representative

Thanks. Sherlon with that we will have time for one more quick question.

Operator

That will come from Susan Carey, The Wall Street Journal.

Susan Carey - Wall Street Journal

Hi, sorry to come back here. But Richard also said earlier today that Delta has not fly zones over Iran, Iraq, Syria, Ukraine, Afghanistan and North Korea. I understand though from your own company that as recently is like earlier this week your Atlantic-Dubai flight would depending on the whether fly over Iraq and Syria. And then your Amsterdam-Mumbai flight had been regularly flying over Ukraine. So is this kind of like you adapt your roots depending on your judgment and your government sourcing.

Richard Anderson

Yes. We have a very dynamic process 24/7 security desk and we are always taking information from various sources and conservatively planning the airline and we make those kinds of changes regularly in our operation center just like we got up yesterday morning you will make the decision to turn (inaudible) fly it around because of the Hamas Rocket.

Susan Carey - Wall Street Journal

Okay, great. Thank you.

Unidentified Company Representative

Okay, thanks to everyone on the phone. Richard, Ed, Paul, Glen, Gil, Mike, [Kevin], thanks very much for your time that concludes our June quarter financial results. Thank you and good bye.

Operator

That concludes today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!