Delta Air Lines CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.25.11 | About: Delta Air (DAL)

Delta Air Lines, Inc. (NYSE:DAL)

Q3 2011 Earnings Call

October 25, 2011 10:00 am ET

Executives

Jill Sullivan Greer - MD of Investor Relations

Richard Anderson - CEO

Ed Bastian - President

Hank Halter - CFO

Glen Hauenstein - EVP of Marketing, Network & Revenue Management

Steve Gorman - COO

Mike Campbell - EVP of HR and Labor Relations

Paul Jacobson - Treasurer

Ben Hirst - General Counsel

Holden Shannon - SVP, Corporate Strategy and Real Estate

Ned Walker - CCO

Analysts

Gary Chase - Barclays Capital

Mike Linenberg - Deutsche Bank

Jamie Baker - JPMorgan

Bill Greene - Morgan Stanley

Jim Higgins - Ticonderoga Securities

Glenn Engel - Bank of America Merrill Lynch

Kevin Crissey - UBS

Hunter Keay - Wolfe Trahan

Dan McKenzie - Rodman & Renshaw

Helane Becker - Dahlman Rose

Jeff Kauffman - Sterne Agee

Mary Jane Credeur - Bloomberg News

Kelly Yamanouchi – The Atlanta Journal Constitution

Joshua Freed - The Associated Press

Ted Reed - The Street

Wayne Risher - The Commercial Appeal

Operator

Good day, ladies and gentlemen, and welcome to the Delta Air Lines September 2011 quarter financial results conference call. My name is Cynthia, and I will be your coordinator. (Operator Instructions)

I would now like to turn the conference over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Jill Greer

Thanks, Cynthia. Good morning, everyone, and thanks for joining us for our September quarter call. Joining us from Atlanta today are Richard Anderson, Delta's CEO; Ed Bastian, our President; Hank Halter, our Chief Financial Office; Glen Hauenstein, EVP of Marketing, Network & Revenue Management; Steve Gorman, our Chief Operating Officer; Mike Campbell, EVP of HR and Labor Relations; Paul Jacobson, our Treasurer; Ben Hirst, our General Counsel; Holden Shannon, our Senior Vice President of Strategy and Corporate Real Estate; and Ned Walker, our Chief Communications Officer.

Richard, Ed and Hank will open the call with their remarks on the quarter, and then we'll move to our question-and-answer session. To get in as many questions during the Q&A, please limit yourselves to two questions.

Today's discussion does contain 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 these differences are described in Delta's SEC filings. We'll discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at delta.com.

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

Richard Anderson

Thank you. Good morning, everybody.

Delta earned a $765 million profit for the September quarter with an operating margin of 11%. We offset the majority of this quarter's $1 billion increase in fuel price with a 10% increase in top line revenue.

Delta's overall capacity was down 1% in the quarter. We experienced strong demand, particularly from corporate customers, which drove our unit passenger revenues up 11% from prior year. We continue to see strong demand in the fourth quarter.

We ran a good operation with top tier operational performance in baggage service on-time completion factor, which resulted in a 40% reduction in DOT compliance year-on-year. As a result, Delta people earned $15 million in shared rewards for the quarter.

Business Travel News just recognized our accomplishments by ranking Delta number one in its annual airline survey based on the overall highest ratings by corporate travel buyers. Delta also won awards as the Best Carrier for Business and Travel Agent Support from Recommend Magazine, a leading travel agent publication.

These accomplishments are a direct reflection of the dedication of Delta employees worldwide and their commitment to building a leading global airline. I want to thank them for all of their good work. We're on track to have another good profit-sharing payment for 2011. And while we're pleased with this quarter's performance, we have much work ahead.

For the second year in a row, we have proven that economic turbulence and inflated fuel prices will not prevent Delta from good profitability and cash flow. We are determined to build a consistently profitable airline, one that can pay for wise investments through operating cash flow and that consistently returns its cost of capital.

To get there, we're focused on these key points: growing diversified revenues, treating our people well in a culture of positive employee relations, continuing our capacity discipline, keep our costs under control, running an airline customers worldwide prefer, deleveraging the business and limiting capital spending through investments with high IRRs.

We've had good success in passing on high fuel costs through ticket prices at Delta, as higher revenues covered 85% of our fuel price increase. Delta must cover its fuel costs in ticket prices. Other fuel-intensive industries like railroads, trucking companies, utility operators and overnight express carriers routinely do so, and we must do the same at Delta.

Delta is developing new products and services that customers value and will pay for. We are well on our way to a targeted $1 billion of additional merchandising revenue by 2013 through products like Economy Comfort, which we have announced that we're expanding to our domestic system next year. Our Ancillary and Cargo businesses provide good revenue diversification with annual revenues of approximately $2 billion.

Second, Delta's culture and positive relationship with our employees is unique in this industry. We will always work to maintain that culture and take care of our people, so they provide good customer service.

Third, we will be disciplined in capacity. We trimmed our December quarter capacity by 4% to 5% year-on-year with the trans-Atlantic down 10% to 12%, which is particularly important given the unrest in Europe. And those capacity cuts will roll forward into 2012. We're planning for 2012 capacity to be down 2% to 3% when compared to 2011.

Fourth, we will keep costs under control. Our number one input cost is jet fuel. We will minimize its volatility with a hedging strategy that utilizes a cost-effective approach in selecting hedge instruments and products. This strategy saved us a $100 million this quarter from several fuel hedges, and we expect to save over $400 million for full year 2011. Our 4Q jet fuel cost will be $2.98 per gallon. Our non-fuel unit cost will be only modestly up in 4Q versus 2010 levels despite a 4% to 5% capacity reduction.

We are resizing the airline by voluntary staff reductions and reducing fleet facilities and other assets in line with our capacity reductions, while at the same time improving productivity through better operations and technology. We are seeing maintenance savings as a result of the retirement of older aircraft.

Lastly we are committed to the capital spending discipline and it is key to our debt reduction initiative. We plan to keep our annual capital spending between $1.2 billion and $1.4 billion. Our adjusted net debt currently stands at $14 billion and we will reach the goal of $10 billion by mid 2013.

So in conclusion we've made good progress toward our goal with an 8% return on invested capital for the last 12 months, despite a $3 billion increased fuel price. As we look out, our demand is good. We are seeing solid bookings in yields in 4Q, which will result in strong profitability in the December quarter.

I'm happy to turn it over to Ed, so he can provide you the details.

Ed Bastian

Thanks, Richard. Good morning everyone, we appreciate you joining us this morning. Excluding $216 million of special items, we reported in the September quarter a net income of $765 million or roughly $0.91 per share, largely in line with where First Call Consensus was. These results are $164 million lower than last year, as we offset 85% of the $1 billion impact of higher fuel prices in the quarter.

Our results came in at the high-end of the guidance we gave in mid-September. However, that guidance did not include the $31 million or $0.04 per share impact of foreign exchange losses in non-op expense, due to the strengthening of the dollar as of September 30, against our foreign currency assets.

We generated an operating margin of 11% and EBITDAR of $1.5 billion for the quarter. Our $216 million of special items was primarily non-cash mark-to-market adjustments on our forward fuel position due to the late September market sell-off. Hank will give you more details on the current value of our hedge position shortly.

I'd like to thank the entire Delta team for their strong performance this quarter, both in delivering industry leading unit revenues and in running a great operation. And I'm pleased to report that we've set aside a $167 million of profit sharing this quarter to reward the team on their hard work.

Turning to revenue, our September quarter top line revenue increased $866 million or 10% versus the prior year on 1 point decline in capacity. Our passenger unit revenues were up 11% on a year-over-year basis. For the September month, our passenger unit revenues were up 13%. However, after adjusting for a one-time benefit of $15 million in September month last year due to the expiration of Northwest ticket stock, our September month unit revenues were really up 15.5%.

Our cargo business continues to do well, with cargo revenue up 13% on 10% higher yields. Other revenue increased $43 million, largely driven by increased MRO revenues. We had solid revenue performance across all entities, as demand remained strong in the face of a tepid economic recovery.

Domestic unit revenues increased 12% on a 2 point decline in capacity. Strong business demand contributed to a 10 point increase in yield, while load factor increased 1.86%. Our trans-Atlantic unit revenues grew 10%, driven by a 10 point increase in yields. Capacity was down 4% for the quarter, as we began our pull-down of secondary markets following our summer peak.

We're pleased to see our Pacific unit revenues increase 7% on 14% capacity growth as we annualized new markets. Japan continues to show steady improvement and we're almost at pre-earthquake demand levels for point-of-sale Japan this quarter, which is traditionally the strongest season for the Pacific.

Our U.S. point-of-sale to Japan remains somewhat weaker, but is certainly recovering. We anticipate continued improvement over the near term with peak seasons recovering quicker than the off-peak. Our Latin unit revenues improved 13% with strong performance in South America driving yields up 12%.

Corporate revenues across all regions continued to post solid gains, even against increasingly strong comps. Our latest booking data as of last Friday showed forward corporate revenues up 13% year-over-year, even though our forward capacity is down 5 points.

We have had good success with our merchandising initiatives as Richard mentioned, including our international economy comfort and first class upsell products. Economy comfort has been so well received internationally that we've made the decision to expand it to our 800 domestic aircraft and will be in place by next summer. We anticipate our new merchandising revenue streams will generate $200 million for the full year of 2011 and are on track to reach our goal of $1 billion in new revenue streams by 2013.

As we move into the December quarter, we continue to see solid revenue trends. Our October unit revenues were up 10% from the prior year with all entities posting improvements. The domestic market has shown particular strength in October, again driven by corporate revenue gains. Looking further out into November and December, our book-to-yield trends remained stable and our system load factor is running two points ahead of last year.

We're staying in close contact with our customers and agencies, and while we continue to see some industry softness in the trans-Atlantic, we currently see no signs of a pullback on overall customer demand at a system level. That said, our winter capacity reductions have us well-positioned if this indeed occurs.

Regarding the December quarter, we expect to be profitable in the December quarter with an operating margin in the 5% to 7% range. This is a bit better than last year's results, despite more than $500 million in higher fuel expense. As we've previously announced, our December quarter capacity will be down 4% to 5% from prior year with a highly seasonal trans-Atlantic market down 10% to 12%.

Our domestic capacity will be down 3% to 5%, as we retire DC-9s, an inefficient regional aircraft. Our Pacific capacity will be flat. The only area of growth for the quarter will be in Latin America, where our capacity will be up 4% to 6% as we respond to growing market demand in Central and South America.

Our strategy has been to reduce flying in those markets, which cannot generate adequate returns in a high fuel environment. We will not chase market share at the expense of earnings. And I am pleased to say that plan is working.

With that, I'll now turn the call over to Hank Halter.

Hank Halter

Thanks Ed, and good morning, everyone.

Turing to cost performance for the September quarter, Delta's operating expenses increased $1 billion or 13%. We experienced $1 billion gross fuel price pressure, which was offset by benefits from our settled hedge portfolio and lower consumption. Our all-in fuel cost per gallon for September quarter was $3.09, up about 35% from last year.

Consolidated non-fuel unit cost increased 3% versus prior year on a 1% decline in capacity, due primarily to higher revenue-related expenses and foreign exchange impacts. These two items accounted for 2 points of the increase. Excluding those two items, our core non-fuel unit cost increase was 1%.

Our non-operating expenses included $31 million loss on foreign exchange in September quarter and we ended September quarter with $5.1 billion of unrestricted liquidity. Related to capital spending for the September quarter, our CapEx was $220 million, including $195 million in aircraft parts and modifications. And net debt maturities were $200 million during September quarter, reflecting continued progress towards our debt reduction goal of $10 billion adjusted net debt by mid-2013.

With regard to our December quarter cost performance, we remain committed to the challenging effort of reducing capacity and unit cost at the same time. For the December quarter, we currently expect our non-fuel unit cost to be flat-to-up 2% on a 4% to 5% capacity reduction. This increase reflects roughly 1 point of pressure related to revenue related cost and foreign exchange.

Through a series of initiatives we have in place to bring our non-fuel unit cost flat to 2010 levels, we expect our cost performance will improve throughout the course of the December quarter and all areas of the business will contribute to our improved cost performance.

First of all, we're continuing to retire our most maintenance intensive aircraft, contributing to an expected double-digit percentage decline in maintenance cost on a year-over-year basis. By the end of this year, we will have removed more then 70 aircraft from our fleet, including our entire Saab turboprop fleet, 50-seat regional jets, older Boeing 757s and 15 DC-9s.

We have consolidated facilities in Atlanta, Minneapolis, Memphis and Cincinnati to minimize our real-estate footprint and we are aggressively working to sell vacant space. We're bringing our headcount down by over 2,000 employees by the end of this year as a result of voluntary programs, which is equal to 5% of eligible employees. In addition to the voluntary programs, we're also streamlining our administrative staff.

We're lowering our distribution cost by continued investment in customer shift to delta.com, which is now our largest distribution channel. Within the North American market, roughly 40% of tickets are sold on delta.com. And finally, we're further tightening overhead and discretionary spending.

Turning to fuel and hedging, for the September quarter, our consolidated all-in fuel price was $3.09, up $0.80 from prior year. During the quarter we realized settled hedge gains of $97 million or $0.09 per gallon. As Ed mentioned earlier, we recorded $208 million charge for non-cash mark-to-market losses on our open fuel hedges. Since we do not use fuel hedge accounting, we'll continue to record future changes in market value until the hedge is settled.

However, with the changes in the fuel market in the past weeks, the value of our hedge book has moved from $120 million loss as of September 30, to a $130 million gain as of yesterday. And for the December quarter, we are hedged for a substantial portion of our fuel consumption and expect our all-in fuel price to be $2.98 per gallon.

I'd like to conclude by thanking the Delta team for their efforts in running a reliable operation this quarter, while at the same time generating a $765 million profit and a revenue premium to the industry. These results would not have been possible without their hard work and efforts.

Jill Greer

Thanks Richard and Hank.

Before we move to the Q&A, I do want to take a minute and remind everybody about Delta's Annual Investor Day, which is scheduled for December 14, in New York. We'll be sending out more details shortly. But for now please hold the date on your calendar and we hope to see many of you there.

So with that, Cynthia, if we could give the instructions for asking a question from the analyst.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Gary Chase with Barclays Capital.

Gary Chase - Barclays Capital

Wanted to see if I could probe with you, what do you think the biggest proof point is going to be on whether or not you'll be able to achieve that cost goal for 2012 now? When you talk about cost being flattish with 2010 in the fourth quarter, we can't understand that, but the networks changed a lot. Is that by itself a demonstration that you're already on the run-rate or is there going to be more work to do as we roll into 2012?

Ed Bastian

I do think there is going to be more work to do as we get into 2012. Certainly, we're pleased with the work that we're already doing and I think our fourth quarter guidance reflects that. If you adjust out for the third quarter, the impact of the higher revenue related cost and the foreign exchange impact on our cost, actually in the third quarter we’re at 1% effective overall year-on-year non-fuel run rate. And if you look at, and do that same math, in the fourth quarter we're actually less than 1% in growth relative to 2010.

So I think we're on the path, 2012 will certainly bring some new cost pressures, some inflationary cost pressure across the business. I don't know that, we haven't given guidance specific to 2012 for the full year, other than that's our long-term goal to get back to the 2010 levels. And I feel confident over the next 12 to 18 months, we'll get there.

Gary Chase - Barclays Capital

And I guess as a follow up to that, I mean, a lot of the conversation about this is about maintenance and fleet, the change in the structure of the fleet. Should we be thinking that this is a sustainable performance? The other question is whether or not the reductions that you've achieved in 4Q will set you up to be able to deliver that outcome for years to come. Or whether 2012 is going to be unique, because of some of the rotation of maintenance expense?

Ed Bastian

I'd say it's actually just the opposite. 2011 had some unique cost elements to it, because of some higher maintenance levels and the full integration of the two airlines, and what we needed to do get the operation fully performing. But I'd say if you look at our track record over the last four years, from 2007 through 2010, Gary, you would see our non-fuel CASM was right at that 8.25, 8.3 level. And we think that's a sustainable level to target for the future, as we up-gauge our network as you mentioned. We reduced inefficient small gauge aircraft and continue to bring technology to improve productivity.

Operator

We'll take our next question from Mike Linenberg from Deutsche Bank.

Mike Linenberg - Deutsche Bank

This was a question to Ed, regarding the capacity forecast for the fourth quarter. It looks like that there was a shifting around of between the different entities and it looked like domestic was going to be down, the 3% to 5% I think that the last that we saw was going to be down about 1% to 3%. Is that the economy comfort, is that what's impacting that number?

Ed Bastian

No. It's not, Mike. It's taking some more of the regional jets out and shifting a little bit (inaudible). We have a modest slow growth into South America. So it's a modest shift and there are no strategic changes.

Mike Linenberg - Deutsche Bank

And then Ed, the 2% to 3% that I think you've come out for next year, down 2% to 3% for the company, that does incorporate the impact of moving to putting the premium economy products throughout the domestic fleet. Is that right?

Ed Bastian

It does. So I'd mentioned that's only a modest impact on the overall seat count for next year.

Mike Linenberg - Deutsche Bank

And then just my last question and this is to Richard. You've probably seen the news out that The House now has at least the piece of legislation basically disallowing the U.S. airline industry from participating in the ETS and assuming that it ultimately passes Congress, how does that work? I mean how would you operate within those confines, is that even possible? I mean how should we think about that?

Richard Anderson

Well that's a good question and I actually don't know the direct answer. But I do think it's a good thing that Congress is going to pass a law, so that the ETS shouldn't prevail on U.S. carriers. Ben, what is its effect?

Ben Hirst

I don't know the exact language of the House Bill, Richard. But the effect will be to strengthen the U.S. government’s bargaining position dealing with the EU on this. The EU Court of Justice has not helped at all, but the U.S. government is negotiating hard on our behalf. And I think this will strengthen their hand.

Operator

We'll take our next from Jamie Baker with JPMorgan.

Jamie Baker - JPMorgan

A question for Hank, a follow-up on the headcount issue. If you look at that metric, the seasonal decline that you experienced from the second to the third quarter this year, was actually a little bit less than the decline that we saw a year ago, despite the more favorable capacity comparisons. Does this imply fewer takers for the voluntary exit program than what you had modeled before? And is my observation consistent with the headcount guidance that you discussed a few minutes ago?

Hank Halter

I think, Jamie, last year remember with the networks coming together, I think, looking, trying to compare last summer to this summer's headcount, there's a bit of noise there. Our voluntary program that was completed in the third quarter, those headcount started exiting towards the beginning of September. They will all be gone by the end of the fourth quarter and it was primarily after we get out of the shoulder, get into the shoulder season, but no, the take rate on that was as we expected. And the headcount that you see running the airline now is the appropriate level, given the flying that we're doing.

Jamie Baker - JPMorgan

And second question for Glen, you cited or it was cited that there was a bit of weakness on the North Atlantic. I was hoping you could expand on this. Is there still a capacity issue that you and the industry are facing? Is it confined to sectors that are more heavily traveled by financial services employees, that sort of thing. Any additional color would be helpful.

Glen Hauenstein

Jamie, I think what you see is that the summer holiday season extends through the end of October, and given the recession that’s occurring in Europe, there was a lot of industry capacity growth that ran all the way through the month of October. As you see in November that comes much more in line with what we think the real GDP is.

So we're back to close to zero growth in the trans-Atlantic for the winter IATA season. And we think that bodes well for the winter season, which as you know is historically the worst. So I think October may have been the worst of it, but in terms of year-over-year performance, the winter in Europe is never very good.

Richard Anderson

Jamie, I'd make two points unique to Delta. One is, we've evolved our joint venture with Air France-KLM and Alitalia to the point now, where we really are seriously jointly planning the capacity at all the airlines together, which is taking a while to evolve to that, where you really treat it as a single network.

And the second piece is when passengers do get to the United States from those networks, the KLM, Air France and Alitalia network, all of that traffic is on Delta. So we're really the exclusive partner for all the feed that comes off of those networks. So those two pieces are pretty important from our perspective in terms of our being able to continue to improve our unit revenues across the trans-Atlantic.

Jamie Baker - JPMorgan

And on the North Atlantic or anywhere else in the network, are there any particular corporate channels that jump out in terms of outperforming or underperforming right now?

Ed Bastian

I want to echo what Richard and Glen both mentioned. While the trans-Atlantic showed some softening, continued softening relative to the overall system, trans-Atlantic is still growing in terms of its unit revenue performance. And our corporate volumes are strong. I don't have it broken out by region per se, but let me give you a couple sound bites.

If you look at the overall banking sector, which I think is what your question was, our bookings over the last four weeks in the banking sector across the board were down about 4% on a forward-looking basis. However, over that same timeframe, our bookings in the consulting and business service firms, which account for us were more than two-and-a-half times the revenue than our banks do, were up 24%. So while the banking situation has a trend of softness to it, our overall corporate revenue streams are very strong.

Operator

And we'll take our next question from Bill Greene with Morgan Stanley.

Bill Greene - Morgan Stanley

So I just want to make sure, I sort of understand what I am hearing here, which is 4% to 5% capacity cuts here in the fourth quarter. Some decent trends here so far in October, but as you look to next year, taking capacity down a bit, but we're not seeing any signs of weakness on corporate. So that seems a little bit like either we're anticipating that maybe that will happen, we will see some signs of weakness, so let's get ahead of that. Or maybe some of the stuff in the trans-Atlantic you're starting to see affect other markets, but I didn't really get that from the commentary. So help me think about what we should take from the 2% to 3%, just anticipatory or there's something you can see from a corporate demand side that makes you worried about next year?

Ed Bastian

I think clearly part of it is being cautious. And it is as much in the face of high fuel prices, as it is in the face of any strains of economic weakness that we're seeing in the business. Certainly, if we do see some strains of economic weakness, reduced capacity is going to help.

We're obviously in a lot of dialog with our corporate customers or corporate agencies, as to what their thoughts are, relative to 2012. And since most of those companies are right now in the planning process for next year, the information we are getting from them is that they are anticipating modest growth in corporate travel next year, probably something in the mid-single digit range, which when you take that coupled with the share gains that we're earning this year for Delta should position us nicely for another solid year of corporate revenue activity, so cautious outlook on fuel price, which is driving more of this supply restraint. We still expect corporate revenues to be strong into the next year and as a result should set up nicely for us for our earnings picture.

Richard Anderson

Bill, let me just add one thing to that, that you should bear in mind. When you look at the annualization of where we are pulling capacity, it's in places that make really good sense. So we pulled capacity out of the Middle East and Eastern Europe. And we're keeping much of that traffic as I said earlier, we're really the exclusive partner of our joint venture in the U.S., so we can still carry that traffic, it just goes over Paris, Amsterdam or Rome.

But pulling out of some of the Eastern European markets, given the economic turmoil and pulling out of a number of the Middle East markets because of political unrest, and then taking those actions from 2011 and annualizing them over 2012, represents a fair amount of what that capacity reduction is.

Bill Greene - Morgan Stanley

And then just on Japan, how far are we to get back to kind of where we were pre-tsunami, if you could give us a sense for how much there's left to recapture just to get to back to what might be, I don't know if it's safe to say normal?

Ed Bastian

Point of sales Japan were largely back already, Bill. U.S. point-of-sales to Japan were down somewhere in the 10% to 15% range from where we were pre-earthquake levels, and we see that continuing to improve as we move forward.

Operator

And we'll take our next question from Jim Higgins with Ticonderoga Securities.

Jim Higgins - Ticonderoga Securities

Your fuel price outlook for the fourth quarter appears to be a bit more favorable than most of the other airlines that have reported so far. I know you're moving towards a more dynamic hedging strategy. Do you think that somewhat slight difference in the outlook accounts for that lower price?

Richard Anderson

I think we've done well, as this quarter shows and what our fuel price outlook is. We're pretty private about how we manage our fuel risk, given the fact that there are counter parties and other parties that are involved in those transactions.

Operator

And we'll take our next question from Glenn Engel with Bank of America Merrill Lynch.

Glenn Engel - Bank of America Merrill Lynch

Two questions, one while 10% is really good in October, it was you were saying 15% in September. Was the deceleration all Europe or were some other markets also slowing?

Glen Hauenstein

I think what we saw in September all the way through the booking curve, which was also in May, was that the shoulder seasons of May and September, all through the booking curves stood out. And so if you look at the whole quarter, what we are seeing sequentially from the third quarter to the fourth quarter is really relatively stable in terms of what we expect the quarter to come in at. And it was just really the mix between the months that we're looking at.

So I would say September and I can't give you all the reasons why September was an outlier or I can't give you all the reasons why May was an outlier. Part of it was the baseline was particularly weak. But it looks like a very stable environment through the third quarter and the fourth quarter in terms of aggregate quarterly results.

Glenn Engel - Bank of America Merrill Lynch

And a follow-up with you Glen is that, at the beginning of this year, I remember you telling me that you thought the fares in your point-to-point market were actually pretty reasonable. It was in your connecting markets that you thought you had better opportunities on fares and yields. Has that worked out this year? Is that where you're seeing bigger gains when you drive the RASM this year?

Glen Hauenstein

I think what you've seen is really remarkable is that we've been able to recover the fuel price pretty much as we went through the year. The first quarter because of the quick runoff, we were behind because we had sold a lot of the tickets before fuel ran. But as we're coming into the third and fourth quarter, you're seeing the pricing environment be very, very robust. And as experienced by the fare increase we went through, this past week and one that's out there floating today. So I think we've been able to make it across the board. And I think it's a remarkable testament to the durability of the model.

Glenn Engel - Bank of America Merrill Lynch

But from point-to-point to connect there really isn't anything to distinguish in the rate of improvement this year?

Glen Hauenstein

It's really across the board that we’ve seen the improvement.

Operator

We'll take our next question from Kevin Crissey of UBS.

Kevin Crissey - UBS

Slot swap, can you remind us what you had indicated on the financials for that and the latest on that transaction?

Richard Anderson

Ben can answer the transaction question and Glen will answer the financial question.

Ben Hirst

With respect to the transaction, the DOT issued a final order approving the transaction last month and has begun an auction process that should culminate in selection of carriers to receive the slots to be divested by Thanksgiving. And we would anticipate being in a position to close the transaction early in December.

Glen Hauenstein

And from the financial perspective, while there is grabs and pulls [ph] as you began any new market, we believe that the transaction will be accretive in the first year of operation. So I think that's all the color we've given on that.

Kevin Crissey - UBS

I know you keep your fuel hedging close to the vest a bit more than other carriers. Is there anything else you can give, did I miss any type of detail? You usually have something a little bit more, maybe I missed it here. Is there anything to go by if we want to do any sensitivity analysis?

Hank Halter

The earlier question tried to get into what was driving the strategy. As Richard said, we prefer that to remain with Delta when we report the results. On the forward look for the fourth quarter, we've got obviously a bulk of the fuel purchase for the quarter. So we're largely locked down and feel pretty good about the estimate we gave you of $2.98.

For 2012, we're about 40% hedged for the first half of the year and about 15% to 20% for the back half of the year at rates at or below today's market level.

Kevin Crissey - UBS

What type of instruments should we think about, you’re hitting all your bases or…

Richard Anderson

It's hitting our bases, and we continue to use collars and a variety of instruments.

Operator

We'll take our next question Hunter Keay at Wolfe Trahan.

Hunter Keay - Wolfe Trahan

You guys talked a little about the evolution of the trans-Atlantic JV. I'm wondering how Pierre-Henri Gourgeon's departure is potentially going to impact how you guys think about that, how you plan on something? I mean I know that the French were a little bit less eager to trim capacity, now that Spinetta’s coming back in, obviously he's been involved in the company in some capacity. But how do you expect that to sort of impact in a way the French kind to view capacity discipline and planning?

Richard Anderson

Well, first Pierre-Henri Gourgeon made a lot of contributions to Air France and a lot of contributions to our joint venture. And you know, we wish him well in his retirement. But at the core, Jean-Cyril Spinetta and Leo van Wijk had been and continue to be Chairman and Deputy CEO. Leo is Deputy CEO and Jean-Cyril is the Chairman and CEO. And we did our first joint venture agreement with Jean-Cyril back five years ago.

So it's business as usual and I think we are going to continue to mature and involve that model so that we treat the trans-Atlantic joint venture as a single network. We're planning and pricing in yield management and distribution decisions.

Hunter Keay - Wolfe Trahan

Some of the 2012 CASM stuff, Hank, have you given any thought to how pension is going to factor in on that? Is this CASM flat to 2010, assume sort of ex-pension noise? And on that note, can you give us any an early cut on how you expect CASMs both funding requirements and GAAP basis to come in next year?

Hank Halter

Actually, Hunter, that's good questions for investor day. We are currently working it up and we'll be sure to go over all of those points in mid-December?

Operator

We'll take our next question from Dan McKenzie at Rodman & Renshaw.

Dan McKenzie - Rodman & Renshaw

In its dispute with Sabre, AMR mentioned that they have been able to document a revenue book away from its corporate clients. And I am wondering to what extent the corporate travel trends you cited might have been positively impacted by this phenomenon. And if there was an impact in the third quarter, does that outlook factor in a reversal as we look ahead?

Ed Bastian

We don't believe there has been any share shift at Delta corporate travel as a result of whatever the allegations between Sabre and AMR are. We see sustainable trends going forward, and I don't think that accounts for any share shift we see.

Dan McKenzie - Rodman & Renshaw

Perhaps a little bit early, but I am wondering what your best read is regarding the final legislation on FAA reauthorization.

Richard Anderson

I don't know that we have a final read yet. Obviously, we think it's in the long-term interest of the industry to have a long-term reauthorization that hopefully reduces our taxes and funds an air traffic control system that allows for the industry to operate efficiently. So we don't have any more prognosis than what you have in terms of the press reports this morning from Chairman Mica.

Operator

We'll take our next question from Helane Becker at Dahlman Rose.

Helane Becker - Dahlman Rose

I noticed that you guys paid down, I think it was around $175 million to the Minnesota Metropolitan Airport to allow, I suppose, what, you to layoff people in that market or are you anticipating adjustments there or is that just coincidental?

Richard Anderson

No, Helane. That's totally unrelated and we don't have any intentions to have any layoffs as a result. We give you a little bit of background. Those monies were not borrowed from the airport or the State of Minnesota. Those are private bondholders that were issued general airport revenue bonds. So it's a private loan with bondholders who are holding in essence a bond that pays very high interest rate.

It's a secured transaction and I think it pays 8.5% interest on good security. So it's just make good sense. When you look at our de-levering initiatives, as you would guess, we try to find the instruments that are callable and have the highest interest rate, particularly in relation to the value of the collateral. And this was just at the top of the list.

So the most important thing we can actually do for our employee is, is pay down high-cost secured debt. And that's really all we are doing. We are very committed to Minnesota. The hub is going incredibly well and the employees there are great. So we've made a lot of investments there. And we'll continue to make a lot of investments there.

Helane Becker - Dahlman Rose

I don't remember what you're calling your new terminal at JFK. Is that T4?

Ed Bastion

It is Terminal 4, yes.

Helane Becker - Dahlman Rose

So can you give us an update on construction and where you stand on target to open? Was that mid of 2013?

Ed Bastion

Yes, Helane, just real quick. We're making great progress out there. We're on track for opening in spring of 2013, and it's going to be a great facility. So we look forward to having you out there.

Operator

Our last question from today's analyst comes from Jeff Kauffman from Sterne Agee.

Jeff Kauffman - Sterne Agee

Glen, I just want to follow up on the corporate travel. You mentioned plus-13% of the forward booking curve service and consulting up almost 24%. I guess two questions. Number one, how much of this is existing customers growing their business with you versus new customers. And I guess the second question is although your customers are still finishing off their 2012 budgets, how are those discussions changing in terms of the questions you're being asked.

Ed Bastion

I'll take it as I mentioned the stats. The shift – the first question is, is that share shift or is that just increased spending levels. And I'll say it's both. We're gaining considerable amount of share as we continue investing our product and technology, the benefits of the merger and having the integration behind it. So you're seeing both.

The overall demand levels grow as well as the demand towards Delta grow. On 2012, obviously it’s still early stages for some of the companies as they are setting the plans for the New Year. But I would say most of the corporates we deal with are taking a cautious outlook, but realize that their travel needs are going to continue to grow into the New Year. And we'll be ready to serve them.

Jill Sullivan Greer

Cynthia, that’s going to conclude the analyst portion of the call, and I'll now turn the call over to Ned Walker for the media portion.

Ned Walker - Media Portion

Okay, thanks very much, Jill. Cynthia, if you could go ahead and review the Q&A process for the media, we'll go ahead and begin the Q&A with the media. And then if I could ask the media if you could leave it to one question with a quick follow-up, we should be able to accommodate most everyone and still finish on time.

Operator

(Operator Instructions) We'll take our first question from Mary Jane Credeur with Bloomberg News.

Mary Jane Credeur - Bloomberg News

Can you talk a little bit about holiday demand and how that's looking? Your friends in Dallas just launched another holiday fare sale despite seeing last week that they didn't see any weakness in that period. And I wondered if you could give us a little insight as to how things are looking right now?

Ed Bastion

The holidays look strong. We obviously have some reduced capacity out there into the fourth quarter due to the higher fuel price levels, but the holidays for us are still pretty good.

Mary Jane Credeur - Bloomberg News

It sounds like you're looking for 2% to 3% capacity reduction in '12. It sounds like you've got a bias toward caution and cutting more if you see some additional economic weakness. Is that a fair takeaway?

Ed Bastion

That is. That and forward curve fuels prices continue to be high.

Operator

We'll take our next question from Kelly Yamanouchi with The Atlanta Journal Constitution.

Kelly Yamanouchi – The Atlanta Journal Constitution

I wonder what impact you've seen from Southwest Airlines entry into the Atlanta market from a sales standpoint or that you expect to see and if it requires any response from Delta?

Glen Hauenstein

We're actually looking forwards towards competing with Southwest. They are a great competitor. They have great products which are very different than ours, and we are looking forward to pointing out to our customer base in Atlanta what those differences are. So we're enthusiastic and we're looking forward to competing with them, like we had competed with AirTran for many years.

Kelly Yamanouchi – The Atlanta Journal Constitution

Will there be any more job cuts next year along with the capacity cuts?

Ed Bastion

No, we don't anticipate at this time any additional reductions. If we do have additional reductions, they will be voluntary reductions. We typically do not with our front line employees have any voluntary reductions as a matter of policy.

Operator

We'll take our next question from Joshua Freed with The Associated Press.

Joshua Freed - The Associated Press

A quick follow-up on the comments earlier about Japan. I think you mentioned that USA point-of-sale was down 10% to 15% from pre-quake levels. How does that measure, do mean by revenue or by traffic or what are we talking about there?

Ed Bastion

That's revenue, Josh.

Joshua Freed - The Associated Press

Can you say a little more about sort of how you are managing that shift in demand? I mean is there anything specific you can say about maybe where you're shifting capacity to respond to that different level of demand that you are seeing today versus a little more than a year ago?

Ed Bastion

Well, I think that shift has already occurred, the capacity adjustments, since we're in a recovery mode as we speak. We reduced some of the flying that we were doing into Haneda, and we reduced some of the frequencies into Japan. But much of that capacity is back online at this point, and we expect next year to be a strong recovery year for us in the Japanese market.

Hank Halter

I would just add to that that we had a very strong 3Q in the Pacific. And the second piece of that is we've been very successful in over flying Japan, to other points in China and Asia. And lastly, we have really put a big investment in our premium product and our economy comfort products. So we have a great product, great network, and we had outstanding financial performance in the quarter.

Joshua Freed - The Associated Press

So have those over flights mostly stopped at this point or are they continuing for a little while?

Richard Anderson

No, they are permanent part of our network.

Operator

We'll take our next question from Ted Reed with The Street.

Ted Reed - The Street

I want to ask about the trans-Atlantic. You're five years into this joint venture. And you mentioned that you're just now getting the ability to make the capacity cuts that you want to make with your partners. So my question is why does that take so long?

Richard Anderson

Well, I think I used the word evolution. We had always jointly planned capacity at each one of the airlines. But now we are really viewing it in a much more sophisticated and integrated way, because we now have integrated distribution on both sides of the Atlantic. We've been able to hook up the systems the way that systems need to be hooked up on both the reservations and yield management side. And we now have integrated yield management and pricing on the trans-Atlantic both from U.S. point-of-sale and European point-of-sale. So it's an evolution and we are just getting to a higher level of sophistication.

Operator

We'll take our last question from Wayne Risher with The Commercial Appeal.

Wayne Risher - The Commercial Appeal

I was wondering if you could talk about the Memphis-Amsterdam flight and how it's performing, now that it's down to four days a week? And also, could you speak to any plans for further reductions in the frequency of that flight in the near future?

Glen Hauenstein

We are looking at the financial performance real time on this. And it seems to be doing better with a reduced frequency level. And so we'll continue with that and analyze that as the data comes in. Of course, we're not really in the peak yet. We've got December and January to come in and I think it'd be a better question to ask next spring.

Hank Halter

Okay, thank you very much. That wraps it up. Thank you, Richard, Ed and team and thank you, everyone, for joining us today. We'll see many of you in December at our Investor Day on 14th. Otherwise we'll be talking with you in January when we do the Q4 results as well as yearend results. That concludes the call. Thank you.

Operator

Again, thank you for your participation today. You are free to disconnect at this time.

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