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Delta Air Lines, Inc. (NYSE:DAL)

Q4 2011 Earnings Conference Call

January 25, 2012 10:00 AM ET

Executives

Jill Sullivan Greer – Managing Director, Investor Relations

Richard Anderson – Chief Executive Officer

Ed Bastian – President

Hank Halter – Senior Vice President & Chief Financial Officer

Glen Hauenstein – Executive Vice President–Network Planning & Revenue Management

Ned Walker – Senior Vice President-Corporate Communications

Analysts

Jamie Baker – JP Morgan Chase

Dan McKenzie – Rodman & Renshaw

Bill Greene – Morgan Stanley

Gary Chase – Barclays Capital

Glenn Engel – Bank of America/Merrill Lynch

Mike Linenberg – Deutsche Bank

Kevin Crissey – UBS

Helane Becker – Dahlman Rose

Hunter Keay – Wolfe Trahan

Savi Syth [ph] – Raymond James

Jeff Kauffman – Sterne, Agee

Josh [ph] – Goldman Sachs

Ray Neidl – Maxim Group

Josh Freed – Associated Press

Kelly Yamanouchi – Atlanta Journal Constitution

Mary Jane Credeur – Bloomberg News

Jeremy Lemer – Financial Times

Darren Shannon – Aviation Week

Wayne Risher – The Commercial Appeal

Operator

Good day, ladies and gentlemen, and welcome to the Delta Air Lines December 2011 quarter financial results conference call. My name is Katie, and I will be your coordinator. (Operator instructions) I would now like to turn the call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Jill Sullivan Greer

Thanks, Katie. Good morning, everyone, and thanks for joining us on our December quarter call. Speaking on the call today will be Richard Anderson, our CEO; Ed Bastian, our President; and Hank Halter, our CFO. We also have our leadership team here for the Q&A, including Glen Hauenstein, Mike Campbell, Paul Jacobson, Holden Shannon, Ben Hirst, and Ned Walker.

Richard will open the call, Ed will then address our financial and revenue performance, and Hank will conclude with the review of our cost performance and liquidity. To get in as many questions during the Q&A, please limit yourselves to one question and a follow-up. I do have to tell you today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events.

All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause these 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 delta.com.

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

Richard Anderson

Thank you. And thank you for joining us this morning. Today Delta reported a $379 million profit for the December quarter, beating First Call by $0.07. Our operating margin increased three points to 8%, as revenue growth covered more than $500 million in higher fuel cost. This is Delta’s most profitable December quarter in its history. We are continuing our successful strategies to make this business healthy, strong RASM growth, fully covered fuel, capacity discipline, superior operations in customer service, healthy employee relations, debt reduction, wise capital budgets, and innovations across our businesses.

For the full year, we had top line growth of 11% with about 30 fewer airlines, generated a net profit of $1.2 billion and $1.6 billion of free cash flow, with $3 billion in higher fuel expense. This is the most important factor for investors because fuel cost increases were covered by revenue. Our CapEx came in below $1.3 billion. Our 9.1% return on invested capital represents the second year in a row that we have returned our cost of capital. And we have returned our extra cash flow to shareholders by reducing net debt to $12.9 billion.

During the year, we significantly improved our operations in customer service with our 2011 performance coming in at the top of the global airline industry for reliability, baggage and customer service. The Wall Street Journal Middle Seat column recognized Delta for its significant operational turnaround in 2011. At the same time, we continued to invest in our product and customer service, and we’re pleased that we earned top honors from Fortune, Business Travel News and Travel Weekly. And most recently, PC World selected Delta as the Top Tech-Friendly Airline in the US.

These results would not have been possible without the hard work of the Delta people, and I congratulate them and thank them. They will earn $60 million in shared rewards during 2011 as well as $264 million in profit sharing to be paid out on Valentine’s Day.

As we enter 2012, we are well positioned to build on our 2010 and 2011 performance and take advantage of solid demand. This momentum continues in 2012 and is reflected in the 1Q guidance we issued this morning, projecting a 2% to 4% operating margin in 1Q. Ed and Glen will provide more color on the forward demand as our unit revenues for January are up double-digit, continuing the trends of 4Q. We continue to see revenue momentum from corporate share gains and new merchandising revenues, which will be about $400 million incremental revenue in 2012, which when coupled with our revenue premium to the industry bode well for strong 2012 performance.

We are keeping a curt conservative stance on capacity with a planned reduction of 2% to 3% system in 2012. We will remain flexible with the ability to further reduce capacity if conditions so dictate. We are making needed facility improvements in our key hubs and we are on track to begin operating from Atlanta’s new international terminal this spring, 12 new wide-body gates, and from our new world-class Terminal 4 in JFK in summer 2013.

We finally closed the LaGuardia slot transaction, and we are implementing our new schedule, which we will give Delta nearly 50% of LaGuardia departures and solidify Delta as the leading carrier at New York’s number one business airport with over 250 daily departures by this summer. As part of our expansion, we are combining and renovating terminals C and D to create a 26-gate complex with the best facilities in operations for business travelers in New York City.

Our biggest opportunity in 2012 is to improve our cost structure and effectively manage our fuel expense. First, we will not use capacity to manage non-fuel unit costs. Second, we showed in December quarter with non-fuel CASM below 2% on a 3.5% reduction in capacity that we can reduce our fixed cost as capacity is full. It just takes a bit of time.

We expect fuel prices to remain at current levels or higher, and we will keep Delta’s capacity in equilibrium with demand and fuel price. We will continue to pass along higher input costs in ticket prices while at the same time working to manage the volatility of our fuel expense. In 2011, our fuel hedging program generated $450 million in saving net of all premium costs.

On the non-fuel side, we have seen cost inflation over the last couple of years that we are structurally working on improving. We outlined some of these changes at Investor Day in December and we will continue to update you on our progress as we move through 2012.

So to conclude, we are committed to permanently fixing our business model, and our 2010 and 2011 results show that our plan is working. 2012 is setting up as another good year for Delta. We are committed to grow and diversify our revenues, cover fuel costs in our prices while taking a disciplined approach to capacity costs and capital spending. Our goal is to continue derisking the model while generating proper returns for our shareholders.

Thank you for your time today, and I’ll turn it over to Ed.

Ed Bastian

Thanks, Richard. Good morning, everyone. Thanks for joining us today. Excluding special items, Delta reported net income of $379 million for the December quarter or $0.45 per share, ahead of consensus estimates of $0.38 per share. These results are $221 million better than last year as we fully covered higher fuel prices with higher revenues.

Our operating margin was 7.7%, 2.6 points better than the previous December quarter. Special items for the quarter resulted in a $46 million net gain and included $164 million in mark-to-market gains on fuel hedges, which reversed the mark-to-market charge we took the last quarter; $43 million gain associated with the divestiture of slots at LaGuardia and Reagan National Airports; an $81 million impairment charge; and $80 million charge for severance and other items.

For the full year, Delta generated a net income of $1.2 billion, which was $250 million lower than the previous year. While there is more work to do, I consider these results remarkable and that Delta faced over $3 billion of fuel price pressure during 2011, which we were able to mitigate through strong revenue performance, capacity discipline, and a sound fuel hedging strategy.

I’d like to thank the Delta team for their work in achieving these financial results. Together we are building a resilient business when they generate proper return for shareholders, positions the company well for 2012 and beyond.

Shifting to revenue, our December quarter top line revenue grew 8% or $610 million despite a 3.5% decrease in capacity. Passenger unit revenues increased 12% year-over-year and we again produced a unit revenue premium to the industry. For the month of December, our unit revenues increased 13%, continuing the strong performance we have seen all year.

Cargo revenues grew $20 million or 8%, driven by yield improvements. Other revenues increased $35 million, driven by a 24% growth in MRO revenues. And for the December quarter, our capacity and revenue initiatives combined to produce double-digit unit revenue increases across most of our business units.

Domestically, our unit revenues grew 13% on a 3% decrease in capacity. We saw strength in our core business markets. Our Atlanta and Minneapolis hubs in particular produced strong year-over-year unit revenue improvements and we’re seeing nice improvement in the Transcons as well. The benefits of our capacity reduction are especially apparent in the transatlantic where we generated an 11% unit revenue increase despite a weak economic backdrop.

In the Pacific, our unit revenues for the quarter grew 14%, driven by a 20% improvement in yield on flat capacity. Nearly a year after the earthquake and tsunami in Japan, we’re now seeing US to Japan traffic that’s close to pre-event levels. Our Latin unit revenues increased 6% against the 5% increase in capacity, with South America driving the largest increase in unit revenue.

Corporate revenues were strong in the December quarter, with total corporate revenues up 15% despite prior year – versus prior year despite the 3.5% decline in system capacity. We saw strength across many sectors. Financial services sector was up 18%, technology was up 15%, manufacturing was up 10%. Combined, these three broad sectors represent half of our total corporate revenues. Banking, which represents only 3% of our corporate revenues, was also up 5%.

In terms of our revenue outlook, overall system demand trends remain strong for the March quarter. And we are forecasting January unit revenues to be up 15% from the prior year. Our February trends appear largely consistent with what we are seeing in January. The comps in March get a bit more difficult as we start to lapse some of the fuel-driven price increases we saw last year, but we still expect a double-digit year-on-year growth that month.

Corporate travel bookings maintained solid growth rates in spite of our capacity reduction, and we anticipate seeing additional demand as a result of our expanded schedule in LaGuardia, which begins at the end of March. Our transatlantic unit revenues are up 17% for the month of January as compared to prior year as we see the benefits of our capacity rationalization we implemented after Labor Day and we continue to see strong trends in February and March as well.

In the Pacific, we are seeing steadily improving demand trends in both coach and business-only cabins. We’re also experiencing improved market share in yields in markets where we’ve implemented our flat-bed seating. And finally, our outlook for Latin remains positive for the March quarter with both loads and yields showing strength. Mexico is improving in both the beach and business markets, and South America continues to be solid.

Now turning to guidance, as you know, the March quarter is our seasonally weakest quarter of the year. However, despite that, we are expecting a positive operating margin of 2% to 4%. This is a substantial improvement over the $390 million pretax loss during the first quarter of 2011.

On capacity, we expect system capacity to be down 3% to 5% in the quarter. I’d note that capacity would be an additional point lower if not for the inclusion of an extra day this quarter due to leap year. Domestics down 2% to 4% and international will be down 4% to 6% primarily driven by our 10-point reduction in transatlantic capacity. Finally, beginning with our January traffic to release, we will begin providing monthly unit revenue information and actual fuel prices to provide additional transparency for our investors.

With that, I’ll turn the call over to Hank.

Hank Halter

Thanks, Ed. And good morning, everyone. Turning to cost performance for the December quarter, operating expenses for the quarter increased $360 million or 5%. Our oil and fuel price per gallon was $2.97, up 20% from prior year, which drove $515 million in fuel expense pressure, as fuel price pressure was offset by $150 million in settled hedge gains. The hedge gains came as a result of our decision to take advantage of a low fuel environment in September to lock in a substantial portion of our December quarter consumption.

Excluding fuel, our operating expenses were flat, as the benefits of our capacity reduction and maintenance savings were offset by higher revenue-related expenses and profit sharing. Consolidated non-fuel unit costs grew 1.8% year-over-year on a 3.5% decrease in capacity, driven by selling-related expenses and our Shared Rewards Program, which rewards employees from meeting operational goals. Non-operating expenses increased $37 million year-over-year, primarily due to FAS 133 gains in the December 2010 quarter.

Looking to March quarter cost performance, we anticipate March quarter non-fuel unit costs to be up 3% to 5% from prior year. And the main drivers of the March quarter increase are higher selling-related expenses; employee investments, including wage harmonization; strategic initiatives, including the implementation of the LaGuardia slot swap and the new Atlanta international terminal; and the impact of the March quarter 3% to 5% capacity reduction.

With regard to fuel and hedging, for the March quarter, we are 66% hedged between $3.00 and $3.25 per gallon. And for the June quarter, we are 58% hedged between $2.75 and $3.25 per gallon. As of Friday’s curve, we are forecasting our March quarter all-in fuel price to be $3.16, which includes $0.05 of net hedged gains, and our June quarter at $3.10, which includes $0.10 of net hedged gains. We are primarily using collars and cost spreads as our hedging instruments.

Shifting to liquidity, we ended 2011 with $5.4 billion in unrestricted liquidity, which included $3.6 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities. Operating cash flow for the December quarter was $1.2 billion and free cash flow was $750 million. Operating cash flow includes $675 million of SkyMiles purchases by American Express in the December quarter.

Capital expenditures were $400 million, which included $230 million in aircraft parts and modifications. And during the quarter, we paid $725 million in debt maturities and amortizations, which includes $435 million in early retirement of debt. We ended 2011 with an adjusted net debt of $12.9 billion and we’ve now achieved over $4 billion of our $7 billion debt reduction target. And as a result of our debt reduction progress, our annual interest expense is roughly $300 million lower now as compared to 2009.

And looking at March quarter liquidity, for the March quarter, we expect capital spending to be $450 million, and we have net debt maturities of $200 million in the first quarter, and we are forecasting an unrestricted liquidity to remain solid at $5.5 billion at the end of the March quarter.

So in conclusion, 2011 was a challenging year in many respects. But in spite of that, we were able to deliver solid results and generate $1.2 billion in profit. We reduced our adjusted net debt to $12.9 billion, a $4.1 billion reduction in two years, and we generated a 9.1% return on invested capital. We enter 2012 as a stronger airline. And I’d like to thank the Delta team for their hard work and efforts, build a resilient and sustainable airline model, which is successful for our employees, our customers and our shareholders.

Jill Sullivan Greer

Thanks, Richard, Ed and Hank. Katie, we are not ready for questions from the analysts.

Question-and-Answer Session

Operator

Thank you. Today’s question-and-answer session will be conducted electronically, as stated by Ms. Greer. We will first take questions from the analysts and then from the media. (Operator instructions) We’ll take our first question from Jamie Baker.

Jamie Baker – JP Morgan Chase

Hey, good morning, everybody.

Jill Sullivan Greer

Hey, Jamie.

Jamie Baker – JP Morgan Chase

Can you hear me? Great. Richard and Ed, I want to ask an M&A-related question in a way that hopefully you are willing to answer. So here it goes. First, on labor, do you think your relationship with ALPA is strong enough right now that they would have a seat at the table should Delta choose to pursue any further industry consolidation? Second, given the strain you went through on the slot swap, do you think that regulators, broadly speaking, are currently in a position where they are willing to negotiate with multiple parties, multiple airlines? And third, if every airline out there hypothetically was for sale, all of their hubs, all of their aircraft, etc., all of the international routes, where would you see the greatest need to beef up the Delta network? So again, labor, regulatory and beefing up the Delta network. Over to you.

Richard Anderson

Jamie, this is Richard. No comment on all three. Do you want to go ahead and reuse your questions?

Jamie Baker – JP Morgan Chase

It’s so plausibly reasonable what I’m asking now. What if we frame the last one, in terms of Delta’s current network construct? Where do you see through organic growths, for example, a need to round it out in any way, shape or form? How about that?

Richard Anderson

Strike two. You can ask, but we’re not going to make any comments on any of the speculation. So that’s no comment. And if you want to ask a question on our earnings and the quarter or what’s going on otherwise, we’d be glad to entertain that.

Jamie Baker – JP Morgan Chase

Okay. Well, you can’t blame me for doing what I’m paid to do. I will turn it over to others because I thought you did a very thorough job with the guidance, good quarter. Thank you very much.

Richard Anderson

Thank you, Jamie. It’s always a pleasure.

Ed Bastian

Thank you.

Operator

We’ll take our next question from Dan McKenzie with Rodman & Renshaw.

Dan McKenzie – Rodman & Renshaw

Hey, good morning, guys. Richard, you mentioned that the Delta is committed to growing and diversifying the revenues while taking a disciplined approach to cost and capacity. And Latin America remains a smaller part of Delta’s network. Can you talk about the ultimate endgame for this region? How big do you need to be versus where you are today and how do you get there?

Richard Anderson

Well, we’ve done well in Latin America. We’ve (inaudible) the numbers and he can add to what I’m going to say. But if you look at the investments that we made last year in Aeromexico angle and the Aerolineas position that we have through SkyTeam and look at the positioning of the Atlanta hub and our position in Florida, it’s been a profitable operation for us and we have significant opportunity to grow organically.

Unidentified Company Participant

It’s one thing [ph] I think we secured two great partners last year, which I think (inaudible). And if you take Aerolineas in Argentina and you take Gol in Brazil and you take Aeromexico, you need to have a partner footprint in Latin America to be able to grow that franchise over time.

Dan McKenzie – Rodman & Renshaw

Okay. And then I guess if I could just turn domestically here with a question on domestic capacity, Atlanta ranks as the 11th largest city in the United States, but it nonetheless ranks number one for capacity and it’s a similar story nearby Charlotte. So, as I look at the industry domestically here, I see capacity of two nearby airports that has not been particularly the restructured versus just about every other larger market in the country. And so my question is, could Delta’s returns be improved by readdressing capacity in this region?

Glen Hauenstein

Dan, it’s Glen. Atlanta continues to lead the hubs in terms of its core profitability. And I think one of the things you have to look at is what’s the – what are trends in the industry. I think five years ago or 10 years ago, you had 50-seat regional jets that were flying 1,100, 1,200 1,500 miles, which somewhat diminished the pull, if you will, of the geographic historical hubs, which Atlanta is well positioned in Southeast and it is by far the largest market in Southeast. So I think when you look at the core profitability, when you look at the region it serves and when you look at the industry trends, which do not supply 50-seat RJs in unaccounted markets of over time, you’ll see that the hub’s geographic pull becomes more and more relevant over the next cycle. I think that’s why Atlanta is well positioned.

Dan McKenzie – Rodman & Renshaw

Okay, thanks. I appreciate that, Glen.

Operator

We’ll take our next question from Bill Greene with Morgan Stanley.

Bill Greene – Morgan Stanley

Yes, hi. Can I ask a question on the slot swap? We’ve got to sort of think about how we model that in. Is there any sort of guidance or help you can give us in terms of thinking about the impact, the timing and sort of sizing it?

Glen Hauenstein

Well, it’s big for New York. It’s not that big in terms of our total network, and it really is about 100 departures, which are moving from underperforming assets in other parts of the airline to New York where we think they have much higher potential over the short to medium-term. Initially, there are a lot of markets that we found in the period of April or May and the beginning part of June by both carriers, U.S. Air and Delta, and that would probably be not the optimal situation, but that’s the way (inaudible) transition the markets. And beyond that, when we get to the second phase, which is in July, we believe that it will be accretive from that point on. So a little bit of choppy orders during the transition in certain markets, but as soon as we get to July, we think that’s going to be (inaudible) that the transaction becomes very accretive. And remember, it’s only about less than 5% of our assets moving and they are moving from underperforming markets that they are in today.

Ed Bastian

And the other – this is Ed, Bill. The other thing to consider is that we’ll put a little bit of incremental cost pressure in the current year as we build that capacity footprint out to LaGuardia.

Bill Greene – Morgan Stanley

But that was in your first quarter guidance?

Ed Bastian

It is. It is.

Bill Greene – Morgan Stanley

Okay. And then, Richard and Ed, back when we look at the Delta bankruptcy, there seems to be this sort of rule of thumb that a company goes in the bankruptcy and sort of cuts 10% of capacity. I actually think that was more of a domestic specific view for Delta. Do you think that that’s sort of the right way to think about what happens to the companies? Was that your experience or is it sort of more the way we could then think about this? This is a post financial crisis world and the world is very different and the industry has cut enough of that. You’re seeing this come through in the industry’s results pretty clearly.

Ed Bastian

Bill, if you’re trying to get our views on what Americans do, we just simply can’t comment on that. For Delta, we had a very specific set of circumstances. We did – you're right. We did cut substantially the domestic network. A lot of it as coming out of the regional, the regional space, and we grew our international footprint going back over that time.

Bill Greene – Morgan Stanley

Okay. Thanks for the time.

Operator

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

Gary Chase – Barclays Capital

Morning, everybody. I have a couple for Glen, if I could. First, I wanted to just quickly see if you could differentiate for us the – how Japan is doing versus non-Japan Asia in the Pacific numbers, which you’re obviously outperforming?

Glen Hauenstein

Okay. Actually we’re very encouraged by both of those. And if you could think about Japan transpacific, that’s a very stable environment. We’re actually taking a little bit of capacity of ours. We put the flat-bed seats into their marketplace, which we think ultimately will be very accretive to the company. But the Japan transpacific has moved through the year since the events of 3/11 and continued to gain strength. The older flights, which are non-stop US gateway cities into Asian markets, are doing quite well. They are absorbing the capacity and they have high-single digit, low-double digit revenue increases. And then the third component is the Asian beach markets, and that would be the Japan to Hawaii and Micronesian island. And there continues to be very strong demand as the Japanese are timely recovered and as the yen exchange rate is very favorable and continues to remain very favorable.

Gary Chase – Barclays Capital

And then also in the prepared remarks I think Ed mentioned share gain. Wondering if you could elaborate a little bit on where that’s occurring and what the catalyst for it is. What’s driving that at this stage? It’s going to seem like it would be merger synergies this far out.

Ed Bastian

The share gains we are talking about were in the corporate space, Gary. Is that what you’re referring to?

Gary Chase – Barclays Capital

Yes, yes. Was that –?

Ed Bastian

Certainly, yes, the merger continues to play a very important role in the product and the opportunities we offer our corporate accounts. We’re seeing a – certainly in New York we’re seeing a very substantial improvement in the share we’ve been picking up, being able to bring some new Latin partners to the table and the Latin footprint is helping as well. So we – back a couple of years ago, when we did the merger, we talked about the revenue synergies, and I think we’re all waiting for them to materialize. I know you guys were. And I think this past year we certainly have seen them show up.

Gary Chase – Barclays Capital

Just wondered if there was like an identifiable catalyst that we should think about timing wise or it’s just more ongoing process that you are –?

Ed Bastian

I think the scale and the product and the technology and candidly the service of our people are making a very big difference in the marketplace and having a lot of impact.

Gary Chase – Barclays Capital

Okay. Thanks, guys.

Operator

We’ll take our next question from Glenn Engel with Bank of America/Merrill Lynch.

Glenn Engel – Bank of America/Merrill Lynch

Couple of questions. One, just on the maintenance. I thought after the second quarter, you were looking to see second half drop about $250 million from the first half, and the drop was big, but it was only $175 million. That’s a $75 million difference.

Richard Anderson

Glenn, part of that is because in the maintenance space, you got the MRO. We had growth in the MRO. So you’d have to look at the net recurring maintenance, and we actually came in pretty close to the numbers we were expecting.

Glenn Engel – Bank of America/Merrill Lynch

And how does maintenance look in 2012?

Hank Halter

Yes, Glen, it’s Hank. Hey. The first quarter, we’ll see a little bit higher maintenance expense that will be reduced in the balance of the year. And the March quarter is traditionally a high maintenance quarter because the planes are in there getting the visits before the busy summer schedule. So you’ll see it trail off as the year goes, but the first quarter will be up just a bit.

Glenn Engel – Bank of America/Merrill Lynch

And final one for Glen. If I look at the Latin RASM, it was up 5.9, but the industry was up around 10.5 for the quarter. Is there any mixed reasons why you would lag?

Glen Hauenstein

I think if you look at our Latin versus our competitive set, we have a very different Latin America. It’s much larger gauge and it’s much longer length of haul. And so when you look about at other carriers that have 50-seat regional jets going to short haul, we don’t have that component. And so what we’ve been growing have been the longer haul into South America. So you had a little bit of length of haul in there. And I think from a profitability standpoint, we’re very, very excited about the Latin performance and the outlook moving forward. And while we continue to strive to improve all of our sectors, we’re pleased with (inaudible) but we do think there’s more in 2012.

Glenn Engel – Bank of America/Merrill Lynch

Thanks very much.

Glen Hauenstein

Okay.

Operator

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

Mike Linenberg – Deutsche Bank

Yes. Hey, everyone. I’ve just two quick questions. Hank, back at the Investor Day, I remember you’ve provided some color on the pension piece. Where – you probably have a better number now, now that you’ve closed the books. For 2012, what should we be thinking about with respect to both pension expense and then your cash contribution to the plan?

Hank Halter

Yes. Hi, Mike. Pension expense for 2012 will be about $400 million. It will run about $100 million a quarter, which is almost flat to 2011. I think we’re running about $85 million a quarter. And then in terms of funding for 2012, you can expect somewhere between $650 million and $675 million or so. And that is a bit up versus 2011.

Mike Linenberg – Deutsche Bank

Okay, good. And then my second question, this is actually to Glen. You’ve done a great job on closing the revenue gap. In fact, you’re now running at a nice premium relative to the industry. Glen, how does that compare in New York? In the New York market, are you at a premium or are you still lagging? If you are lagging, does – will the dual hub structure in New York, will that close that difference?

Glen Hauenstein

I think that’s a very good question, and I think that is where we see a lot of our upside opportunity as we move through 2012 and beyond. Historically, we haven’t had the position that we will have in New York. And I think if you look at the government data that was just released for last quarter, for the first time in Delta’s history, it was really a neck and neck rates between Continental and Delta. And that’s pre-united merger and pre-LaGuardia transaction.

So you really have two carriers operating in the New York space. One is Continental primarily based in New York and one is Delta primarily based in LaGuardia in Kennedy. And we think that is very synergistic that we will be able to capture the business traveler who wants to use LaGuardia in and out when they are doing business meetings with them when their travel takes them outside their perimeter for the long haul and for the international and they will use us on Kennedy. So that is the one area of our network that does not command a premium, but it definitely has continued to be reduced, and we think that the upsides of our P&L is just getting to parity in the short run and getting to a premium over time.

Mike Linenberg – Deutsche Bank

And the JFK terminal, that comes on line, what is that, 2013 or 2014?

Glen Hauenstein

Before summer of 2013.

Mike Linenberg – Deutsche Bank

Okay. Okay. Very good and a great quarter, guys. Thanks.

Glen Hauenstein

Thanks. Thanks, Mike.

Operator

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

Kevin Crissey – UBS

Thank you. Good morning. Wanted to ask – corporate travel seems to be have rebounded kind of normal cyclically. Wanted to talk about where you think we are in the overall cycle. I know oil and jet fuel prices have really changed what the earnings results look like in a cycle, but want to see if you thought we were just starting this cycle or are we kind of three years in with corporate travel having recovered nicely?

Ed Bastian

Kevin, this is Ed. I think we’re clearly at a midpoint in the cycle. If you look at the strength we’ve had over the last couple of years has helped pace what the industry broadly has seen and I think that contributed a lot of that to our merger. It’s hard to say what the future is. You’re looking at a pretty dim view in the Euro zone in a recessionary outlook, yet our transatlantic corporate revenues because of the capacity discipline we’ve implemented had been pretty strong and the corporate base really hasn’t shown much weakness on the European side. So it’s clearly driven by the big US corporate as compared to the global corporates. And I think we have a pretty solid outlook for 2012. The GBTHs came out recently with their travel survey and they are expecting the corporate space to increase another 5% to 7% again this year. And I think that’s consistent with what we’re seeing though I think our number is probably a little bit higher given the some of the market (inaudible).

Kevin Crissey – UBS

Okay. Thanks. And thanks for putting out the traffic with RASM and fuel. Can you just give us what the capacity changes year-over-year look like by month, because I thought maybe February had less capacity cut than maybe the other months? That could be wrong.

Richard Anderson

This is Richard. On a system basis, our current forecast for February is down about 4.5% to 5.0% system.

Kevin Crissey – UBS

Okay. So basically the change in capacity is relatively stable throughout the quarter. So we should –

Richard Anderson

It is. Yes, it is relatively stable throughout the quarter.

Kevin Crissey – UBS

Okay, sure. That’s what I need. Thank you.

Richard Anderson

In February we have an extra day due to leap year.

Kevin Crissey – UBS

Okay. Thank you very much.

Operator

We’ll take our next question from Helane Becker with Dahlman Rose.

Helane Becker – Dahlman Rose

Thanks very much, operator. Hi, everybody. Two questions. One, (inaudible) RASM increase your – just talking about for January. Do you have a base number that we should use? And my second question just related to regional jets. Can you just – I think you own most of the regional jets. So maybe if some of your regional providers aren’t operating up to snuff, you can move those aircraft? So can you just talk about whether or not you would consider an RFP for regional feed at some of your hubs in the next few months I guess? And so that’s my question.

Richard Anderson

I can take the last one, which is we are not considering any RFPs for regional feed at any of our hubs in the next few months.

Ed Bastian

And on your first question, Helane, you were looking for the January monthly RASM base. Is that–?

Helane Becker – Dahlman Rose

Yes, yes. Would we know what the 15% compares to.

Jill Sullivan Greer

It was 11/01.

Helane Becker – Dahlman Rose

Okay. Thank you very much.

Operator

We’ll go next to Hunter Keay with Wolfe Trahan.

Hunter Keay – Wolfe Trahan

So, assuming you hit the $10 billion net debt target by mid ’13, what’s the next strategic step? Because at that point, the business should be spitting up a good amount of cash flow. And assuming it is to buy a bunch of new planes and lever up again, which I don’t think it is, would you consider turning to the pension plan, maybe overfunding it? I think a number of investors still consider that unfunded obligation to be debt when valuing the equity of the company. So how do you think about the next step to cash deployment as it may or may never relate to the pension plan in mid ’13?

Ed Bastian

Hunter, this is Ed. Yes, we certainly would look at the pension plan as one place where we would make some incremental investments if we had that cash flow flexibility. We do believe we’re on track for the $10 billion by 2013. And as you can appreciate, beyond 2013, we expect that net debt level to continue to decline as well. So it’s not going to be a stagnant number.

Hunter Keay – Wolfe Trahan

Okay. Thanks, Ed. And Richard, I’d love to hear your opinion on foreign ownership restrictions. I know it obviously requires an active Congress to change and this is deeply imbedded and it’s a very, very sensitive issue for a lot of labor unions out there. Do you think there is an appetite to potentially address that in Congress? And if so, would you be supportive of that kind of a bill?

Richard Anderson

I don’t think there is any appetite to address that in Congress. Number two, I believe through immunized joint ventures, the industry has found out the mechanism that allows us to organize transborder effectively.

Hunter Keay – Wolfe Trahan

Okay. Thanks a lot.

Operator

We’ll take our next question from Savi Syth [ph] with Raymond James.

Savi Syth – Raymond James

Hey, thanks for taking my question. I was just wondering just with the capacity cuts that we are seeing this year and you’ve provided a little color on the maintenance, if you could just kind of provide a color on how you expect cost as you progress through the year?

Richard Anderson

Yes. Our cost will be up for the full year in the 2% to 4% range, which is consistent with what we talked about in the December Investor Day. The March quarter is particularly challenging because that’s the time of year where we’ve got the fewest ASMs. It’s seasonally – the capacity is down. We also had higher maintenance expenses in that quarter. And then as the year progresses, you see improvement. And then certainly by the fourth quarter, as we have our strategic initiatives continuing to be implemented, that will provide further benefit to us for the back half of the year and then that will take us into 2013 with additional benefit.

Savi Syth – Raymond James

Okay, great. And another follow-up question. It looks like your –the frequent flyer revenues, if you look at Delta’s frequent flyer revenue, it comes to roughly about 5% of total revenue. But if you look at United or Alaska, theirs just comes to about 10% of total revenue. Just wondering why that discrepancy was and if there was potential for that to increase.

Richard Anderson

Yes. I suspect – I'm not familiar with the specifics of United, but I expect the differences in the deferred revenue accounting. Each airline has the specific values and that will impact comparability between carriers. While the treatment may be the same, it’s unique for carriers. So I think it is somewhat difficult to try to match up the specifics, one carrier versus another.

Ed Bastian

We certainly don’t think that our frequent flyer plan is any less revenue producing than any other carrier out there.

Savi Syth – Raymond James

All right. Great. Thanks so much.

Operator

We’ll take our next question from Jeff Kauffman with Sterne, Agee.

Jeff Kauffman – Sterne, Agee

Thank you very much. A lot of my next questions have been answered. So I’ll just ask two shorter ones. You talked a lot about what you see in corporate travel. What are you seeing on the laser booking window side right now?

Glen Hauenstein

This is Glen. The leader side seems very strong as well. We’ve got a lot of traction eliminating some of the lowest fares that were unattractive in the marketplace as demand continues to show strength. And so we’ve seen very robust increase in leisure deal, and that bodes well as we move into peak summer.

Jeff Kauffman – Sterne, Agee

Okay. The yields are moving up, but what are you seeing in terms of the booking windows right now?

Glen Hauenstein

The booking windows, we are booked ahead in total aggregate and we get up to March and beyond what we are seeing is primarily leisure. And we are ahead in all sectors as of today.

Jeff Kauffman – Sterne, Agee

Okay. That’s great. And one follow-up. as we get more and more information on AMR’s restructuring, whether it’s the management ranks, whether it’s what they are doing with the aircraft, which I think they are about to announce. Is this – might you rethink your capacity plan from what you laid out at analyst day or you pretty set on that, given all the capacity you have flowing the LaGuardia. So let’s not worry about that.

Glen Hauenstein

We make our own independent decisions, Jeff, on capacity. That has no impact on our plans.

Jeff Kauffman – Sterne, Agee

Okay, very good. Guys, congratulations. Great quarter. Thank you.

Glen Hauenstein

Thanks, Jeff.

Operator

We’ll take our next question from Justine Fisher with Goldman Sachs.

Josh – Goldman Sachs

Hey, guys. This is actually Josh [ph] for Justine. Just wanted to see if we could get any more details on that $435 million of debt that you repaid early this quarter? And then going forward, how you are thinking about which debt to potentially kick out first if that option comes up

Hank Halter

Yes. Josh, this is Hank. Some of the debt, you may recall, we repaid the MAC loan, and that was at the end of the fourth quarter. We also had some senior notes that we repaid. But as we think about the acceleration of the debt, we’re working towards that goal of $10 billion adjusted net debt. We look at what’s most advantageous from a cost perspective. And obviously we’ve got our scheduled amortizations and maturities, and then with the excess cash, we put it back on the balance sheet by continuing to reduce debt. And it’s working. We’re $300 million lower in interest expense this year versus where we were when we started the program, and we’ll continue being aggressive to pay the debt down as quickly as possible.

Richard Anderson

We like to pay down debt that has high interest rates.

Josh – Goldman Sachs

Got it. All right. That’s it for me. Thanks, guys.

Jill Sullivan Greer

Katie, we’re going to have time for one more question from the analysts.

Operator

Thank you. We’ll take our next question from Ray Neidl with Maxim Group.

Ray Neidl – Maxim Group

Yes. I just want to try and clarify one thing on the pensions. They are frozen, I take it, all the different times are frozen. I assume they are not accruing any more benefits. At some point, once they become fully funded, should that become a non-cost issue?

Ed Bastian

Ray, this is Ed. We’ve got ways to go before they are fully funded. So I – that's – obviously one of the things that’s been causing the liability to grow is the continued reduction in the discount rates. So, over time, as we do expect interest rates to eventually start to inflate a bit, you’re going to see that liability also start to decline. So that – you should factor that into your calculus also.

Ray Neidl – Maxim Group

Okay, great. And the new policy of the government where you have to include taxes in your ticket price, customers won’t see the government raising taxes and you get blamed for prices going up. Under this law, is there any way that you could show taxes separately even though you have to show the total cost of the ticket when you’re advertising?

Glen Hauenstein

Ray, this is Glen. We do show the taxes separately today. And we distribute our product to a lot of different venues. So how the customer ultimately sees them depends on how that venue displays them. But true of all, all of the channels that we control whether or not it’s our reservations agents or whether or not it’s our online purchase, the taxes are broken down.

Ray Neidl – Maxim Group

Okay, great. So the customer will be able to make the decision that way then.

Glen Hauenstein

Yes.

Ray Neidl – Maxim Group

Okay, great. Thank you.

Jill Sullivan Greer

Thanks, Ray. Katie, that’s going to wrap up the analyst portion of the call. And so I will now turn it over to Ned Walker.

Ned Walker

Okay. Hey, thanks very much, Jill. And Katie, if you could go ahead and go through the process for queuing up for the questions for the media. And also with the media, if you could have one question and a quick follow-up, we should be able to accommodate mostly everyone.

Operator

Thank you. (Operator instructions) We’ll take our first question from Josh Freed with the Associated Press.

Josh Freed – Associated Press

Let’s see. You mentioned that you’re going to have some higher costs related to wage harmonization as you kind of finish the integration of the different labor groups. And then I know it’s a big priority also to keep overall non-fuel cost down. So if you say a little more about how you do both of those at the same time and with capacity coming down a little bit also, it makes me wonder if you need to turn the workforce some more?

Richard Anderson

Well, it’s a combination – this is Richard. It’s a combination of actions over time. From an employee standpoint, we’ve had a very firm policy of no frontline involuntary furloughs and that will remain our practices. But if we look at where the opportunities really lie in the inflation and the opportunities lie in our maintenance area and we placed an order this past year for 100 new 737-900s. There will be significant benefits that come from re-fleeting the airline, both in terms of maintenance, operating costs and fuel costs. Second, we need to get back to our historic productivity levels across the airline. And that will be part of leveraging technology and generating efficiencies across the business. Third is restructuring our regional carrier contracts and reducing the 50-seat lift as we up-gauge. And so all of those are part and parcel of a process to be certain that our non-fuel unit costs remain the best in the industry.

Josh Freed – Associated Press

Okay. So, no involuntary frontline furloughs still. How about corporate headquarters level?

Richard Anderson

Our efficiency in the corporate, our productivity and efficiency at the merit or corporate level is double-digit over the last several years.

Josh Freed – Associated Press

All right. Thank you very much.

Operator

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

Kelly Yamanouchi – Atlanta Journal Constitution

Hi there. I was interested in more detail about why the unit revenues in Atlanta are doing so well.

Glen Hauenstein

Kelly, this is Glen. Could you repeat the –?

Kelly Yamanouchi – Atlanta Journal Constitution

I’m interested in why the unit revenues in Atlanta had particularly good improvements. I think you mentioned Atlanta and Minneapolis.

Glen Hauenstein

Right. Kelly, in the last quarter or so, the unit revenues that (inaudible) continue. I would say the reason why Atlanta is doing so well is the Delta people. The Delta people are doing a great job (inaudible) coming through the record-breaking performance.

Ned Walker

And can I – Katie, if you could check one of mikes, it sounds like somebody is breathing heavily in –

Glen Hauenstein

It's hard for us to hear in a way.

Richard Anderson

Thank you.

Kelly Yamanouchi – Atlanta Journal Constitution

Financial advantages of the operational improvements that you had in 2011?

Richard Anderson

(inaudible)

Kelly Yamanouchi – Atlanta Journal Constitution

Is there a way to quantify the financial advantages of the operational improvements that you had in 2011?

Richard Anderson

Well, I think our operational improvement is – we're clearly at the top in terms of customer service and operating performance and the Delta people has just done a phenomenal job. And I think that’s an important factor in having industry-leading RASM.

Kelly Yamanouchi – Atlanta Journal Constitution

Okay, great. Thank you.

Operator

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

Mary Jane Credeur – Bloomberg News

Hi, gentlemen. I wanted to follow up where Mr. Baker left off and see if I could take a step back and try to come with that question a different way. Do you think there is another big airline deal left in the US industry or is the industry where it needs to be consolidation-wise?

Ned Walker

Hey, Mary Jane, it’s Ned. We’re just really not going to make any comment on any industry rumor or speculation on it. So, go ahead and if you want to ask another question, we’d be happy to respond to another one off of that topic.

Mary Jane Credeur – Bloomberg News

Sure, sure. And this one is for Hauenstein. Glen, are you guys gaining any traffic since Americans’ filing, anything notable in Fort Worth, DFW, New York, O’Hare, key markets where you guys overlap?

Glen Hauenstein

I think that the customer has really become used to Chapter 11 in the US airline industry unfortunately. And so we did not see any immediate shift in travel patterns that would fall under that kind of filing.

Mary Jane Credeur – Bloomberg News

Okay. Great. Thank you.

Operator

we’ll take our next question from Jeremy Lemer with Financial Times.

Jeremy Lemer – Financial Times

Hi there. Thanks for taking my question. Apologies if this question has already been asked in different guises. I was pulled off the call to do something else a little while ago. But could you give a little bit of color on the sort of demand environment and whether macroeconomic concerns are filtering through into some slowdown in demand that travel in various segments, whether it’s geographical or if you could cut it also by type of travel, that would be very helpful.

Glen Hauenstein

We actually see good demand across all of the regions we operate in. And corporate demand, in particular, is good as is leisure demand. So even though there is some concern about Europe, we’ve taken pretty dramatic steps to reduce capacity in those markets and right-sized our capacity to demand. And so we’ve seen good RASM performance in all of our –Asia, domestic, Latin and the Atlantic, and we see those trends continuing into the first quarter of 2012.

Jeremy Lemer – Financial Times

Okay. And as a quick follow-up, what explains that (inaudible) that sort of we got down to lower the demand that is sort of essential, is it capacity discipline across the industry, is it other factors? How do you sort of explain this rate of resilience?

Glen Hauenstein

Well, I think, one, we have good equilibrium of capacity to fuel price to demand. So those are the three important factors. And second, around the world, even though there is difficulty in Europe, the economic outlook while that – the 4% to 5% range that you usually have in the US after the downturn of 2008, we are seeing solid GDP performance in all the other regions of the world.

Jeremy Lemer – Financial Times

Okay. Thanks.

Operator

We’ll take our next question from Darren Shannon with Aviation Week.

Darren Shannon – Aviation Week

Can you provide a monthly breakdown by region for your 1Q international capacity cut? And on the domestic side, what are your contingency plans should Pinnacle and Republic file for Chapter 11 and can you replace any or all of that feed?

Ed Bastian

Darren, we don’t provide our monthly forward guidance, that level of detail international versus domestic.

Darren Shannon – Aviation Week

Okay.

Ed Bastian

We gave a broad – international down 4% to 6% for the quarter. And we’re not going to comment in on any other speculation at any of our regional suppliers.

Darren Shannon – Aviation Week

Okay, thanks.

Ned Walker

Okay. Katie, we have time for one more call.

Operator

We will take our next question from Wayne Risher with The Commercial Appeal.

Wayne Risher – The Commercial Appeal

Good morning. I wonder if someone would talk about how the Memphis hub is performing for you at the reduced capacity levels there and where do you think Memphis is, basically right-sized for you or kind of close to what it needs to be? And whoever speaks, please tell me who you are because I don’t recognize your voices.

Glen Hauenstein

Sure. This is Glen Hauenstein. And we have had a lot of success in the reshaping of the Memphis hub. New York revenues are outpacing the domestic US industry at this point, not dramatically but substantially. And so we’re very pleased with the impact that we had in terms of our profit performance on a year-over-year basis. It’s still not where we needed to be. And so we will continue with it to adjust capacity in the future as we need to. But I think generally we are in the vicinity of where we need Memphis to be in order for us to generate profits.

Wayne Risher – The Commercial Appeal

Okay. Thank you very much.

Ned Walker

Okay. Thank you very much. I’d like to thank everybody for joining us on the call. That concludes the December quarter call. We’ll see everybody in April when we do the March quarter. Thanks so much. Appreciate it.

Operator

This concludes today’s conference. We appreciate your participation.

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