Delta Air Lines, Northwest Airlines Merger Call Transcript

Apr.16.08 | About: Delta Air (DAL)

Delta Air Lines, Northwest Airlines (NYSE:DAL)

Merger Call

April 15, 2008 9:00 am ET

Executives

Jill Greer - Director of Investor Relations, Delta Air Lines

Richard Anderson – Delta, Chief Executive Officer

Douglas M. Steenland – Northwest, President, Chief Executive Officer and Director

Edward Bastian – Delta, President and Chief Financial Officer

Glen W. Hauenstein – Delta, Executive Vice President, Network Planning and Revenue Management

David M. Davis – Northwest, Executive Vice President and Chief Financial Officer

Analysts

Gary Chase - Lehman Brothers

Michael Linenberg - Merrill Lynch

Frank Boroch - Bear Stearns

[William Green]

Jamie Baker - JP Morgan

Mark Streeter - JP Morgan

Chris Cuomo - Goldman Sachs

Raymond Neidl - Calyon Securities

Dan McKenzie - Credit Suisse

Kevin Crissey – UBS

Operator

Welcome to the Delta and Northwest Conference Call. (Operator Instructions) I would now like to turn the call over to Jill Greer, the Director of Investor Relations for Delta Air Lines.

Jill Greer

Last night we issued a news release outlining the agreement for Delta and Northwest to merge. The purpose of our call this morning is to discuss the agreement and to let you hear directly from the key executives involved.

The presentation slides for this call were filed on Form 8-K this morning and are available on the Investor Relations pages of both Delta.com and NWA.com

We’ll begin the call with opening comments from Richard Anderson, Delta’s Chief Executive Officer; and Doug Steenland, Northwest’s President and Chief Executive Officer. Then Ed Bastian, Delta’s President and Chief Financial Officer, will cover the terms of this transaction, the benefit this transaction brings to our shareholders, employees and customers, and our plans to integrate the airlines to deliver those benefit.

Also with us for the Q&A today are Dave Davis, Northwest’s Executive Vice President and Chief Financial Officer; Glen Hauenstein, Delta’s Executive Vice President for Network and Revenue management; Mike Campbell, Delta’s Executive Vice President of HR and Labor Relations; and Ken Khoury, Delta’s Executive Vice President and General Counsel.

Before we get started please note that today’s presentation contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta and Northwest’s SEC filings.

With that it’s my pleasure to turn the call over to Richard Anderson.

Richard Anderson

I think this has been probably a little bit of so much publicity has already been out that it’s almost you’ve been all expecting it. But we think it’s important and it’s important for Delta and Northwest because you all know and understand this business and this combination gives us the ability one, to have number one or number two market share in every market in the world; number two, it builds a much stronger, more viable airline.

And the combination creates real synergies, both revenue synergies and cost synergies, and given our previous relationship with Northwest through the co-chair frequent flyer reciprocity and our domestic alliance and SkyTeam alliance we can very rapidly upon closing ramp up the integration of the two carriers.

From a customer perspective, we add about 6,000 city pairs because it really is an end-to-end connection between the two networks. We’ve received antitrust immunity last week on the international side, there is really no overlap and we already have a head start with the alliance relationship with SkyTeam. We are very confident with over a billion dollars in annual synergies and it will be in the long-term best interest of our shareholders, our employees and our customers.

So bottom line is we think it’s a really good fit, it’s something you’ve all been anticipating for some time. And with fuel prices where they are, the fundamental changes we are seeing in the airline industry, the need to compete in the open skies arena, and the fact that Northwest and Delta really fit well together because we are the strongest network carriers, the restructuring that both companies went through last year have created best-in-class non-fuel CASM.

The balance sheets are in great shape, the route structures have all been rationalized, we both have very manageable maturities over the next few years, strong cash position at combination, the combined entity will have around $7 billion in liquidity. And so, it puts the combination in a much stronger position to succeed over the long run in a very competitive marketplace.

And that’s key because the combined carrier will be number one in the U.S., number one carrier to Japan, number one U.S. carrier across Europe, number one U.S. carrier in Africa, the Middle East and India, the number two U.S. carrier in Asia and Latin America. So, it really is the first time that we have a carrier in the United States that has a complete route network.

When you think about background of both Northwest and Delta, this is really the culmination of a series of transactions that have taken place over three or four decades. You can go all the way back I think with Northwest to Pioneer and Bonanza Air Lines, North Central Republic, southern US Airways on the Delta side, Northeastern, Chicago and Southern, the Pan Am acquisition, the Western acquisition.

And when you think about what deregulation did, this is really the culmination of that and we are moving to a mature state that will allow us to provide the kind of returns that the shareholders have long deserved and provide the much more stable platform for employees.

I’ll turn this over to Doug and Doug can talk about how this dovetails, but it’s a perfect deal, Northwest is a great airline, Delta is a great airline and this combination is exactly right for all of the constituencies and with that, I’ll turn it over to Doug.

Douglas M. Steenland

From our perspective, today is truly an exciting day for the employees of both airlines, for our collective customers, shareholders, and the communities that we serve. This combination is going to help build a stronger, more resilient airline that will be the leader in creating best in class for customers, employees, and shareholders.

The transaction is going to provide our customers with a wider choice of seamless service across a broad global network and it’s going to substantially improve both the trip itineraries and airport quality. Because of our complementary end-to-end networks, the transaction will also ensure an enhanced level of service to large and small communities, while also allowing us to compete more vigorously with foreign carriers in an open-skies environment.

This is a merger by addition. A combination of the two route networks with virtually no overlaps results in a seamless global network thereby offering more choices for customers and a more stable service for the communities we serve.

Diversification will enhance the airlines’ ability to manage through economic cycles and rising oil prices and the proposed combination will allow us to better utilize Northwest’s valuable Pacific franchise, better develop both carriers’ domestic hubs, and better match the right planes with the right routes.

On the cost side, the transaction combines the two best-in-class network carrier cost structures, which will allow us to create a stable platform for future growth. The economics of the merger are based on expanding the scope of the network, improving the utilization of our aircraft fleets and combining function such as IT to achieve greater efficiencies.

In addition, by increasing our value to customers and reducing costs we will be a much more competitive airline. Because there is very little overlap between our route systems, the impact of the merger on competition will be little if any. For all of these reasons, Delta was Northwest’s first choice and I know Northwest was Delta’s first choice in deciding how consolidations should come about.

The Delta/Northwest combination will join truly two complementary geographically distinct networks to form a truly global airline. Customers will have more worldwide travel options and improved connectivity from the merger.

Importantly, our SkyTeam partners with us have been through the antitrust review several times as a result of the six way antitrust application, which received preliminary DOT approval last week. Because of this, we know that the international competition issues have been addressed by both the DOT, the Department of Justice, and the EU and there has been found to have no anti-competitive impact.

The transaction will be subject to review by the European Commission and the competition authorities with several other countries. Because there is virtually no overlap between the companies’ nonstop overseas routes, the transaction is unlikely to present any issue for overseas regulators.

We also do not expect any issue with the Department of Transportation’s transfer of Northwest international routes to Delta, because Delta operates only minimal service to Asia. While there is some domestic overlap between the two airlines, it is minimal and raises no competitive concerns.

Only 2% of Delta’s seats are in direct competition with Northwest and only 3% of Northwest’s seats are in direct competition with Delta. Delta and Northwest overlap in only 12 domestic nonstop city fares, and all but four of those 12 routes have at least two or more nonstop competitors.

The four single carrier routes make up less than one-half of 1% of Delta and Northwest combined domestic origin and destination traffic, which amounts to just over 500 passengers per-day. Passengers in those cities, Minneapolis, St. Paul, Salt Lake, Detroit and Cincinnati will all obtain substantial benefits from the transaction with new and improved domestic service and there is open entry at all of those points.

The domestic market is highly fragmented. Delta and Northwest combination of passenger share would not surpass that of Southwest which will remain the largest domestic carrier and no carrier in the domestic market would have greater than a 20% share.

It’s important to note the dramatic role that low cost carriers have played in the shifting landscape of the domestic airline scene. During the last decade substantial discount carrier growth has resulted in the more competitive and fragmented industry than ever before. Since 2000, low cost carriers have grown at an annual rate of more than 10% and now carry a third of all domestic passengers. With this growth LCC’s serve all major cities including all legacy carrier hubs that are expanding into smaller cities.

We take our commitment to serve customers in small communities very seriously. Together Delta and Northwest will serve over a 140 small communities nearly double the amount of our next largest competitor. By aligning our network strengths we can enhance service from small communities to new international destinations.

As a result, major international gateways are never likely to be more than one stop away. In the past, small communities look to network carriers to take them around the country. In this new global marketplace we’ll be able to take them around the world.

Finally, let me say that from the outset, our position has been that we would only consider a transaction that benefited all of our key stakeholders, our shareholders, our employees, our customers and the communities we serve. And with the announcement we are confident that we met this objective and we’ve taken a big step in securing the future of the airline while also returning a premium to Northwest shareholders.

I’d now like to turn the call over to Ed, who is going to provide more specific details on the transactions.

Edward Bastian

The strategic foundation for this merger is sound. It’s been structured to generate substantial value for all stakeholders, which we consider to be very important and create a platform for profitable international growth.

We are well positioned for a successful integration and once integrated we’ll have the foundation in place to secure a strong future, one that’s more resilient economic volatility with momentum in improving revenues, combining a best-in-class cost structure, and together with an industry leading balance sheet.

This transaction is about creating a durable franchise, one that can withstand the economic volatility but also can be positioned for profitable growth. We are committed to a strategy of international expansion and believe that global diversification is critical for our future.

Our complementary international networks enable us to bring unique services to our existing customer bases. Delta’s customers will benefit from Northwest’s extensive Asia network while Northwest customers will have access to Delta’s markets in the Caribbean, Latin America, Middle East, and Africa, as well as additional cities in Europe.

Delta and Northwest together will serve more than 390 worldwide destinations, more than any other airlines. Our SkyTeam alliance will further broaden our global reach and together the SkyTeam partners will provide access to more than 840 destinations around the world.

And we have the opportunity to bring you to more global destinations to our customers in the future. Our existing order books on the 777-LR and the 787 along with the new markets this combination will generate will provide us opportunity to exercise options for up to 20 additional wide body jets between 2010 and 2013 creating a world of opportunity for our customers.

On the domestic side Delta and Northwest each have a unique regional presence and very different customer base, with Delta strong on the East Coast and transcon traffic and Northwest strong in the Central U.S.

Because this is an end-to-end merger, there is no need for route closures as a result of this combination. In fact we have the potential to add domestic routes and shorten routings through expansion of our service. Each airline has regional strength in markets that would substantially benefit from the additions made possible by combining Delta in Northwest complimentary networks.

These complimentary route structures allow us to create a globally diverse network, with a combined domestic international mix of 60/40. Over time we expect to move this mix closer to 50/50.

We will also have a more diversified footprint within the domestic and international markets. On the domestic side we will have no more than one third of capacity in any one region. Internally we will have just less than half of the internationally capacity going to Europe, a third going to Asia and the remainder going to Latin America, Africa, the Middle East and Canada.

By diversifying capacity around the world we build a natural hedge against seasonal demand shifts and regional economic weakness, positioning us for the long-term success and increasing financial stability.

With regards to specific on the transaction this will be an all-stock transaction with a combined enterprise value of approximately $18 billion. Northwest shareholders will receive 1.25 shares of Delta common stock for each Northwest share. This represents roughly a 17% premium to Northwest shareholders based on yesterday’s closing price.

The company will be named Delta with the world headquarters in Atlanta and executive offices in Minneapolis/St. Paul, New York, Tokyo, Amsterdam, and Paris.

The Board will be comprised of 13 members, the breakdown of seven directors from the current Delta Board and five members from the current Northwest Board. In addition, ALPA will have a full voting board seat.

A proven experienced management team will be running the business. Richard will continue to lead the company as Chief Executive Officer and Dan Carp will remain as Chairman of our Board of Directors. From Northwest, Roy Bostock will become the Vice Chairman of the Board and Doug will take a seat on the Board. I’ll remain in my role as President and Chief Financial Officer of Delta.

This combination will make Delta a globally competitive airline that can and will deliver value for our shareholders. We expect to generate substantial recurring synergies, more than $1 billion a year. I’ll break these out in detail shortly, but at a high level, majority of the benefit comes from improvements we generate with a more comprehensive diversified route system and more effective aircraft utilization.

There are also cost benefits from reduced overhead and improved operational efficiencies. These savings, a portion of which will be reinvested in the new company employees as we harmonize wages and benefits, preserve and improve upon the best-in-class cost structure that both companies achieved through the hard work over the restructuring of the last several years.

The transaction will be accretive for all Delta shareholders in the first year excluding one-time costs. Including one-time costs, the transaction will be accretive by the second year of operation. The merger will create a strong financial competitor with a durable foundation, helping to protect the benefits of the restructuring from fuel prices and economic cycles, positioning us well for the future.

We are aware of the difficulties airlines historically have had in realizing synergies, because of integration challenges. So we’ve deliberately structured this transaction to address many of those issues on the front end, so that we can quickly begin realizing benefits and accelerate the integration of the two airlines.

We expect the full run rate of synergies to be achieved no later than 2012, but our goal is to achieve all synergies as quickly as possible. The new Delta pilot agreement combined with the current Northwest contract allows us to realize the bulk of the revenue synergies prior to reaching a joint pilot contract.

The common SkyTeam alliance was a key factor in the decision to combine Delta and Northwest. As alliance partners, we already have partially integrated IT systems and our position to fully integrate systems to coordinate the schedules and frequent flyer benefits.

On the network side, we expect to generate about $700 to $800 million in annual synergies, starting off at approximately $200 million in the first year and getting to full run rate by 2012. Putting that in context, these synergies would increase unit revenues by roughly 2% annually through improved traffic mix, higher yields and increased traffic, a goal we feel quite confident in delivering.

More than half of the network benefits will come from fleet optimization. Delta and Northwest, each bring aircraft that build gaps in each other’s fleet, Delta with mid gauge international aircraft and Northwest with a 100 plus seat domestic aircraft and large gauge international aircraft.

The larger more diverse fleet will give us the gauge and range flexibility to better match capacity with demand and to adjust for seasonal demand shifts. Putting it more simply, we will always have the right size aircraft for any route.

We expect to ultimately reallocate 50% of the international fleet and 10% of the domestic fleet to improve profitability. These changes will allow us to move incremental capacity into high demand market such as Tokyo, Sao Paulo and Tel Aviv, strengthen our joint venture markets by increasing capacity to improve connections, and increase revenues by better matching aircraft range capabilities with the geographic locations of our hubs.

Increased network size and scope from this combination will drive higher loads and yields due to increased customer loyalty, higher penetration amongst the corporate market and improve mix of business passengers.

We expect to gain value from share shift as customers become loyal to a single and the best frequent flier program and global alliance. We also expect to see an increase in business travel as we have schedule options to major business centers and complete more effectively for global corporate contracts.

This combination also creates the opportunity to add new nonstop flights from the combined hub portfolio linking Asia and the Heartland to the Southeastern US, Europe and Latin America. The new optimized network will create a compelling package of worldwide destinations that no other US carrier can match. Ultimately this global network will support our revenue plan going forward.

We also expect to generate incremental value by combining the independent Air France-Delta and KLM-Northwest joint ventures. The combined Delta/Northwest network will allow us to further optimize the flying within the joint venture. With preliminary approval for four way antitrust immunity in hand, we are in position to see the benefits beginning in 2009 as antitrust immunity allows us to better manage capacity, scheduling and pricing.

The four carriers will have approximately 27% of transatlantic capacity, leading the industry and within the single joint venture we will have service from four of the world’s leading gateways, New York, Amsterdam, Paris and Atlanta, something no other global combination can replicate.

The combined joint venture also builds a foundation for the future, the European sales and distribution strength of Air France-KLM will play am important role in future international growth within the joint venture.

While the majority of the benefits of this transaction are on the network side, there are also considerable cost reduction opportunities that can be achieved. We estimate there are $300 to $400 million in net annual cost synergies excluding one-time merger related cost.

We can achieve significant savings from the combination of our sales agreements and vendor contracts and more efficient operation in our airport facilities. We’ll also achieve savings from streamlining overhead structures, redundant facilities, and our technology integration.

In essence, the scale this combination provides will drive considerable efficiency across all areas of the business. The value of the cost synergies will be somewhat offset by the cost of harmonizing the pay and benefits for the employees of the combined carrier.

Preserving our low cost structure is key against fuel price volatility in foreign competition. Through the restructuring efforts of the past few years Delta and Northwest have achieved the lowest mainline non-fuel cost of the full service network carriers.

The cost synergies we can achieve in this transaction will allow the combined carrier to maintain and ultimately improve upon this best-in-class cost structure. This will provide a significant strategic advantage for Delta, not just against our domestic competitors as illustrated here but also against the foreign flags and their higher cost structures.

We do not expect a one-time cash cost related to the transaction to exceed $1 billion, about half which will have no impact going forward, while the remainder will be capitalized or incorporated into goodwill. These costs will be for the operating in IT transitions as well as other transaction cost.

For the operating transition cost we will be moving to a single operating certificate, changing aircraft interiors and deliveries, and updating branding our gate’s curbside baggage areas of our airport facilities. There will also be technology transition cost as we migrate systems and train employees on these new systems.

A key tenant of this merger is to continue to maintain an industry-leading balance sheet. As in all equity transaction this merger will not increase our combined debt. Our rejected net debts to revenues and EBITDA coverage ratios will be industry leading and better than either the Delta or Northwest stand-alone projections.

At closing, we expect to have nearly $7 billion in total liquidity, which includes the un-drawn Delta revolver of $1 billion. We expect the combined airline to achieve over $4 billion of free cash flow from 2009 through 2011. This demonstrates again the unique ability of this merger to combine the strengths of two great companies to create a platform to improve their ability in a financially challenging industry.

Support from our employees is critical for success. To this end we have reached an agreement with Delta MEC leadership for a three-year extension to the current Delta pilot agreement.

As part of that extension the Delta pilots have agreed to unlimited co-chair abilities with Northwest. To be clear it’s our ability to put the Delta code on all Northwest flights and other scope modifications which will allow us to quickly begin achieving network synergies. In return, they will receive a 3.5% equity stake in the new airline and a wage increase.

The 2009 increase over current Delta books is 3.5%; we have an open contract post 2009 and a negotiated increases for 2010 through 2012. All in are 4% in 2010, 4% in 2011, and another 4% in 2012.

We look forward to discussions with the pilots of Northwest to reach a combined collective bargaining agreement. We expect to be in negotiations with the Northwest pilots during the regulatory review period and our goal is to reach agreement with the Northwest pilots on a combined collective bargaining agreement prior to the close of the transaction.

To structure in this transaction, we took steps to ensure that our employees are committed to a successful integration by displaying our commitment back and then. We planned to make a distribution of stock to all U.S. non-pilot employees giving them an ownership stake of 4% in the combined airline. Employees have the opportunity to benefit from the success of integration and the financial security of a much more durable airline.

We also remain committed to achieving industry standard pay for our front line employees and will grant Delta employees increases toward that standard in 2009. Our commitment to our employees is to get them to an industry standard no later than the end of 2010.

Northwest non-pilot employees will continue to receive the scheduled pay increases that are included in their collective bargaining agreements. We are committed to harmonizing our labor rates and benefits once the representation for non-pilot employee group is established. Longer term, this combination provides our employees job stability, job growth opportunities, as well as the opportunity for financial reward.

Our improved financial position will also allow us to make investments in the products and services our customers value. We know they want the best travel experience from booking to baggage which requires investments in technology, fleet, and facilities.

To achieve this we plan to continue to deploy kiosks, implement wireless tools, outfit new delivery aircraft with lie-flat seats, and in-flight entertainment, upgrade our existing fleet with new products and technology, implement technology-tracked facts, and reduce passenger inconvenience during delays and cancellations.

Re-investment in the products and facilities of our combined airlines is a critical need, an objective that this transaction facilitates. In terms of timelines, because this is a merger of complementary networks with almost no route overlap, we believe it is reasonable to expect regulatory approvals to be finished in time to complete the transaction by the end of this year. So, we will move quickly with the Hart-Scott-Rodino and other regulatory filings.

The merger will also be subject to the approval of shareholders of both Delta and Northwest, which we are targeting for later this year. Following shareholder approval and the completion of the regulatory reviews, we would then close the transaction. Throughout this period, we will be developing detailed transition plan so that we can immediately begin integrating the airlines upon closing.

In summary, it’s an exciting day for our shareholders, our employees, and our customers. By creating a globally competitive airline, we will better position the airline for profitable growth and enhance shareholder value, create a financially stronger company with greater stability and opportunities for our employees, and improve our network and products for our customers.

We have done this in a fashion that’s truly unique and that it generates substantial value for all stakeholders, while not reducing competition domestically. We have the right team in place and we are confident in our ability to integrate the Delta and Northwest teams and begin realizing the substantial benefits we’ve outlined today. On behalf of the entire Delta and Northwest team, I want to thank you all for joining us.

We are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Chase - Lehman Brothers.

Gary Chase - Lehman Brothers

Could you elaborate a little bit on the cost side of the synergies, that it was a little unclear to me when you said the $300 to $400 million whether that was inclusive of the decrement you expect from wage harmonization as you’re calling it or would harmonization subtract from that $300 to $400 million?

Edward Bastian

That is inclusive of the decrement we expect, once we ultimately harmonize all employee, labor rates and the benefit cost. So that number in gross terms is a fair bit larger then the $300 to $400 million number. We are looking at gross terms somewhere in the $600, $700 million range in terms of gross cost efficiencies from the transaction but over time as we do organize and bring more employees to the Delta scale, there will obviously be cost on that.

Gary Chase - Lehman Brothers

When you talk about the benefit from the fleet rationalization, in essence are you suggesting that with better use of fleet you can generate more revenue? Isn’t that a share shift argument or am I thinking about that the wrong way?

Douglas M. Steenland

No. You are not thinking about that’s the wrong way.

We are all looking at this somewhat as share shift in some opportunity and what we’re trying to do is better calibrate the combined networks to the fleet that we both respectively own, bringing some of the larger Northwest international metal to places like Atlanta and then also bringing some of our mid-range international aircrafts to the Detroit and Minneapolis hubs of Northwest as an illustration of that.

So share shift as a result of that will occur, but it’s also better calibrating capacity with the right size of the market.

Richard Anderson

The other thing to remember on in the Delta fleet, our shelf size goes from 76 to 150 and on the top side of the fleet we don’t have an airplane that has over 275 seats. So when you think about the size of the Northwest fleet with A330-300 and 74-400s and the size of our hub in Atlanta and the size of the shelf size at Delta, you actually end up with the ability to put the exact right size airplane that the economics of every combined route demand.

And there is profit value in that. And in the case of domestically having A319s in some of our hubs like Cincinnati Westbound instead of 757 is a profit maximizing move. Glen, you want to add anything?

Glen W. Hauenstein

Yes. I want to add that we also have to re-optimize the entire network not only from a gauge perspective but from the markets we fly. And I think a great example of that would be the fact that we have of course the largest market portfolio in JFK and we don’t fly to [inaudible].

So as you can see by putting these two carriers together the average unity we create amongst the network I think are just as great as the gauge place within the network. So I think they are very exciting pieces of this network, the optimization that occurred not only from new markets but from gauge re-optimization, as well as really some rationalization capacity within the hub starts itself.

Douglas M. Steenland

We are also, Gary, going to hopefully develop lots of revenue share shift as our customers become loyal to a new and improved frequent flyer program, the global alliance being able to go into the port contracting world with a stronger product and stronger mix and stronger geographic balance. So all in, the total revenue synergies from the combined transaction we estimate a roughly 2% increase in total revenues of the company.

Gary Chase - Lehman Brothers

You are talking about if I add that up to a roughly $1 billion in share shift away from the rest of the industry and I’ve heard you say that you expect additional consolidation or at least a lot of people do. Does that $1 billion hold up if we see the rest of the industry consolidate or does it start coming down?

Douglas M. Steenland

We are looking at a much lower number in terms of share shift in that Gary. I’d say less than half of that number that you talked about would come from pure share shift.

Operator

Your next question comes from Michael Linenberg - Merrill Lynch.

Michael Linenberg - Merrill Lynch

I didn’t see anything on the NOLs, and I think Delta has got just over $9 billion and I think Northwest has $3. Can this deal be structured in a way such that you are able to preserve as much of the Northwest NOLs as possible?

Edward Bastian

Yes, it is Mike. We were both very cautious through our bankruptcy proceedings to make certain that we preserve the full value of the NOLs on both sides.

Michael Linenberg - Merrill Lynch

In the presentation you did indicate that you are going to use a 100 seat aircraft to up gauge some of the regional flying. Now is that currently aircraft that are in the fleet or are you looking at 100 seaters out there from all the various manufacturers. I guess presuming even Lombardier as well.

Edward Bastian

That’s a reallocation of the existing 100-seat fleet to maximize where it’s flown and we think there is a lot of value in putting, again as Richard indicated, we have a big gap in our current network at Delta from 76 seats all the way to a 150 seats. And we think that having now some airplanes in a 100 and 120-seat category will really be able to optimize both networks when you put them together.

Michael Linenberg - Merrill Lynch

One of the existing 100 seats fleet that’s, I presume, the DC9s.

Richard Anderson

DC9s and A300 fleets.

David M. Davis

I think the map is essentially reallocation of existing aircraft and putting DC9s more optimally on routes that need 100 seat aircraft. But obviously through time as we continue to need 100 seaters and we need to replace the DC9s, we would be considering potentially DC9 replacement aircraft.

Michael Linenberg - Merrill Lynch

I’m sure it’s what would help drive this deal in the first place is a lot of people point to record-high fuel prices, can you just talk about what you are seeing in crack spreads? We know oil is at a record-high today, a $113 plus or minus a few pennies and you are looking at a $30, $35 crack spreads.

As we look at the synergy plan out over the next couple of years, what’s that long-term view that you are using for jet fuel prices maybe underlying some of the model here and if energy prices do remain very high, how do you change, how does the industry change? Assume $3.50 per gallon jet fuel into sustainable or into perpetuity.

Richard Anderson

Mike, we are not expecting fuel prices to decline. The model we felt expect fuel oil to retain the current level, but actually grow north of here. When we built our model for both the crude, as well as on the crack spread, I think $30. I’m not sure that’s sustainable over time, but certainly a crack spread well north of $20 we are expecting over time.

You hit the nail on the head, this is one of the reasons why this transaction at this point in time made a lot of sense when we went back and both looked at our future stand alone plans trying to figure out how as individual carriers we are going to be able to cope with the high price of fuel. We both came to the realization that we need greater scale and mass and the combination of our strength in the combined carriers will help us better generate stability we need in the face of that fuel volatility.

Operator

Next question comes from Frank Boroch - Bear Stearns.

Frank Boroch - Bear Stearns

Could you give us some sense of what underlying industry capacity assumptions are in the ‘09 beyond forecast or if you see $4 billion or so of free cash flow generation.

Richard Anderson

We have a hard time calibrating industry capacity this year much less over the next several years. The main thing we looked at Frank is what do we expect with respect to economic growth rates across both the US and internationally. And we are not expecting any growth domestically on the broader macro economy over the next couple of years, if not a slight decline in the current year.

In internationally, we are also expecting a slowdown overtime. So we are looking at a very mild rate of growth internationally and virtually no growth domestically.

Frank Boroch - Bear Stearns

How would the merger agreement impact respective thinking about spin-offs of certain subsidiaries like regional airlines and so forth.

Richard Anderson

This has nothing to do with that.

Frank Boroch - Bear Stearns

Would there be any breakup penalties for credit card partnerships and so forth as a part of harmonizing the frequent flyer programs?

Richard Anderson

Actually it’s at the perfect point and time, because both of Northwest and Delta are coming up on the expiration of their affinity card relationships. So just about the time the transaction closes, we will be in a position to maximize the value for our shareholders in those arrangements. So we are actually looking forward to the prospect of building the largest and strongest affinity card strategy in the world.

Frank Boroch - Bear Stearns

Air France had been pretty public about being interested in co-investing in a combined entity. Do you see a role down the road for partnership like that or an equity stake?

Richard Anderson

Air France and KLM are elated about this transaction because its timing is perfect. The regulators just last week in both the US and in Europe found that the alliance among KLM Air France, Delta and Northwest was co-competitive and cleared 80 regulatory hurdles as if the transaction had been reviewed for a merger. And so that was really the second to last obstacle and the last obstacle is the one we announced today.

So from the positions of KLM Air France this is really a vision that’s coming true after many, many years of work on our separate bilateral arrangements. So Jean-Cyril Spinetta is elated that we’ve announced the merger. We will now engage in a process of combining the two separate joint ventures. We signed our joint venture long-term arrangement last October.

KLM Northwest is just about 20-years old and is probably the most well developed, most profitable of any airlines anywhere. So we now have this great opportunity to pull together. And so the French are very supportive.

In terms of equity investment this combined entity is going to have $7 billion in liquidity at closing and we think it will have the ability to access debt in equity markets as necessary to make sure we maintain a very strong balance sheet. So at this point in time we are just looking forward to negotiating a two-way joint venture agreement with Air France-KLM.

Frank Boroch - Bear Stearns

The $7 billion in liquidity comment, that implies virtually no cash degradation from current position.

Edward Bastian

Frank, that’s our combined projected year-end cash levels at the end of 2008 plus the revolver capacity that Delta has.

Operator

Your next question comes from [William Green].

[William Green]

Did you talk about any potential for capacity cuts as a result of this?

Douglas M. Steenland

We did not, Bill. Both airlines independently are taking pretty aggressive steps to downsize the domestic capacity of our respective businesses. Cuts that have already been announced that will be implemented later this year.

On the Delta side that will result in our domestic capacity, the back half of this year being down a full 10% on a year-over-year basis, and Northwest has I think a 5% domestic capacity cut on a year-over-year basis as well. So we feel like we have proved the domestic system for each respective carrier.

Certainly as we go forward we will look at the economic volatility, fuel prices economic growth and make further decisions on domestic capacity. But we don’t see this transaction in and of itself reducing capacity.

[William Green]

As you looked at this and other opportunities for Delta, I guess its fair to assume that this one potentially offered you in your view the most synergy, just about this billion dollar number. But I’m not sure how to reconcile that with what we heard back in ‘06 about the $1.5 or $1.6 billion, I forgot the exact number, from a U.S. Airways/Delta combination. Can you help me reconcile that at all?

Edward Bastian

I can’t, you might want to ask Doug Parker.

[William Green]

So you had believed that $1.6, I guess.

Edward Bastian

We never believe that, no.

[William Green]

Is there a breakup fee to either carrier if the transaction doesn’t go forward?

Richard Anderson

Yes, there is the standard breakup fee if it occurs in the context of a breach. If the transaction doesn’t go forward simply because of regulatory approval and litigation that might result from that then there is none.

[William Green]

Does this deal cause or does it force Continental to lease SkyTeam or from your perspective is it fine for them to stay in?

Douglas M. Steenland

We would welcome Continental to stay in; we have had Northwest and Delta as well as Air France and KLM, have had very strong and beneficial relationship with Continental. They have been a very constructive partner and they are a great airline. They provide really good customer service. They have got a solid management team.

If at the end of the day the Continental decides that it wishes to remain stand alone, they will always be welcomed to stay in SkyTeam and to participate in other benefits on the cost sharing side that might materialize.

[William Green]

Did any of your customers react, your corporate customers to this?

Douglas M. Steenland

Positively.

Operator

Your next question comes from Jamie Baker and Mark Streeter - JP Morgan.

Jamie Baker - JP Morgan

How do you define a hub, is there a minimum level of operations or spokes that have to emanate for a city to be quantified as a hub?

Douglas M. Steenland

Generally it’s a place where more traffic is connecting than not connecting and generally that level is somewhere around a 150 departures a day or more.

Jamie Baker - JP Morgan

On the regulatory process, what percentage of your city pairs currently do you already have over a 50% share? Which party bears the antitrust breakup fee risk?

Douglas M. Steenland

There isn’t an antitrust breakup fee risk.

I don’t have that number right at our fingertips, but I think the most relevant number is that of the collective 1,000 city pairs that the two airlines serve, we overlap on only 12. And of those 12 routes, eight of them have two or more competitors and we are only talking four routes that fall below that and they have in the aggregate 500 passengers a day.

So, we are talking absolutely minimal competitive overlap and for that reason, we believe and we are confident in being able to pass muster through the DOJ process.

Jamie Baker - JP Morgan

How do you suggest that we frame the objections that have recently come from both the Northwest pilot group and from the seniority objection?

Douglas M. Steenland

If you think about the Northwest pilot group, I think the right way to frame it is think of all the airline mergers in the past. And if we had followed that traditional approach, there would have been no discussions, no conversations, no interactions with the two pilot groups prior to announcement and we basically would be starting from scratch to engage them.

At both pilot group’s request, there was substantial engagement to try to get a combined collected bargaining agreement and a merged seniority list, prior to announcement. Substantial progress was made on both fronts, but notwithstanding everybody’s best efforts, you know the finish line wasn’t crossed.

An agreement was reached with the Delta pilot group and there will be continuous sort of best efforts to try to get to that single agreement and to get to a combined seniority list prior to closing. That’s going to be six to eight months away. There is a substantial amount of time to allow the parties to do that. And if that turns out to be the case, that will be a milestone event that no other airline merger will have even come close to accomplishing.

Mark Streeter - JP Morgan

On the credit side in terms of the capital structure, earlier this year, when oil was 35% lower jet fuel, Air France publicly came out and said they were willing to make that investment of $750 million to $1 billion. And now we sit with the oil strip at $113 and jet fuel $1.00 higher than earlier this year. What sort of changed in terms of their thinking and the rationale in not taking that additional liquidity if it’s available?

Douglas M. Steenland

Mark this is essentially a capital raising opportunity that they’ve provided. It wasn’t a deal. It wasn’t a note per se; it’s a capital raise opportunity. We are confident that this combined airline over the course of the next 12 to 18 months we will have similar capital raise opportunities. Either still with Air France-KLM or other places within the market. I think we will have a tremendous amount of investor interest, it is combined deal and we thought at this point in time was not the right time to raise capital.

Mark Streeter - JP Morgan

And now that are you saying and since it’s a follow-up to that then that, you do need more equity capital that the balance sheet is not where you wanted to be long-term?

Douglas M. Steenland

I did not say that Mark. We said and we made a strong point about one of the reasons we are doing this is we are building a durable financial foundation. We are going to have a liquidity position of roughly $7 billion of the combined entity. It’s about 20% of the combined entities’ revenues. We feel confident that our cash and financial position upon closing will be the strongest, clearly amongst any of the network areas and now they will drive up with almost any carrier on the planet.

Richard Anderson

And I would refer you back to the slides that showed the debt to equity ratio and the EBITDA coverage slide that show how strong the balance sheet is.

Mark Streeter - JP Morgan

I agree with you that you are stronger than your peers. But I’m wondering the optimal level for where you think it should be over the long-term?

Douglas M. Steenland

What I said over the long-term, we will have opportunities to evaluate that and calibrate. And if we decide to raise capital in the future, I’m sure there will be opportunities.

Operator

Your next question comes from Chris Cuomo - Goldman Sachs.

Chris Cuomo - Goldman Sachs

With respect to antitrust, you obviously expressed confidence in regarding antitrust approval of the transaction. What are your thoughts if in fact we were to see another transaction obviously [Cal/United] has been rumored.

How would you perceive the antitrust approval in light of if there is a potential for another series of one or perhaps an additional transaction?

Richard Anderson

Our view wouldn’t change. The airline industry after this transaction and even if there is a follow-on transaction remains remarkably fragmented and there will be no carrier with truly a dominant position. Southwest will remain, if not the leading and biggest domestic airline, pretty close to it.

And the analysis of Justice Department, they look at city pair combinations and we gave you the city pair analysis that Northwest/Delta transaction presents domestically and that analysis wouldn’t change if there was another transaction pending.

Chris Cuomo - Goldman Sachs

The DOJ, do you think they will look at the transactions though in aggregate sort of at the same time or do they view them separately?

Douglas M. Steenland

I don’t think you can say now and probably would depend on timing. But at the end of the day they would look at each transaction on its own merits and for the specific competitive issues, if any, that it would present. And for that reason we don’t think this transaction presents any material ones and we are confident and hopeful that we will able to get through the process expeditiously.

Chris Cuomo - Goldman Sachs

On the synergies particularly on the network side, is the lack of a seniority agreement between Delta and Northwest in anyway an obstacle to realizing a portion of those synergies? Is there potential upside to that number id in fact a seniority agreement was reached sooner rather than later? How should we be thinking about that?

Douglas M. Steenland

The synergies, the revenue synergies that I quoted, Chris, assume the full integration of the airline with the cooperation of the pilots for both companies. We also expect that number to be in the 2012 timeframe in terms of when everything would be full up. So we clearly have time to negotiate a combined collective agreement.

In the near term, we have the ability with the new contract extension or tenant agreement with the Delta pilots to realize the bulk of those network synergies within the existing pilot framework agreements. So no, we are not taking a significant air cut at the present time.

Chris Cuomo - Goldman Sachs

On the one time cost, what is the timing that, the cadence? How should we be thinking about that?

Douglas M. Steenland

Largely over a two-year period, bring those in significantly under that billion. We are giving you the outside number. Our plan is to beat that number. We are just giving you the outside number for your assumption purposes but our intention is to do a lot better than the number we put in the slide deck.

Chris Cuomo - Goldman Sachs

And you sound confident that you can do that. Would that be your current characterization?

Douglas M. Steenland

Yes.

Operator

Our next question comes from Raymond Neidl - Calyon Securities.

Raymond Neidl - Calyon Securities

Previous airline mergers have all proved to be kind of the disaster in the first year or two with the one exception of Delta under old management when they acquired Western Airlines. What made you finally decide to do this merger instead of just keep the partnership going the way it was or possibly doing a merger by keeping the two airlines separate like Air France and KLM did.

Is this merger going to really complicate your fleet type making the merger process even more complicated?

Richard Anderson

Ray, not all mergers are created equal. This is actually if you look back over history, you are taking two very strong carriers that have solid strategies, great balance sheets, best-in-class cost structure, and have already progressed down the road of integration.

Think about it, we already have a domestic code-sharing operation where our scheduling and pricing systems are hooked up. We have a reciprocal frequent-flier program and we are already members of the same SkyTeam alliance. So, we are already well down the road.

And then unlike a lot of the mergers you are talking about, those mergers, at different points in time or since deregulation and even before, involved carriers one or the other of which or both were in distress. And in this case, you have two carriers that just came off of record performance in 2007. So, we are in a strong position going forward.

With respect to the fleet, the fleet issues are a little bit of a misnomer actually. The fleet integration actually works quite well because we don’t have common fleet types except for the 757-200. So, the 747 when you go and get a single operation specification, we don’t have to sit down and merge a lot of maintenance programs.

At the kind of scale we are talking about, 800 mainline airplanes and 600 regional jets is a fleet of about 1,460 airplanes. You have scale in all of those fleets and that’s what the key. The key to keeping your operating cost down in a given fleet is scale.

And what that diversity of fleet gives you is the ability to match the right airplane to the right market wherever you are around the world. So, there is actually a lot of benefits that in the steady state come from re-fleeting and putting the exact right economic piece of equipment on a given city-pair route.

Douglas M. Steenland

We and I am confident Delta has over the last four or five years, I think at Northwest, we’ve probably spent $50 or $60 million already in terms of airport relocations, in terms of hooking up our pricing systems, hooking up our yield management systems, hooking up our frequent flyer programs, doing all the things that you need to do if you’re going to provide seamless alliance service. So we are well ahead of that game.

And I think and also by having this merger take place within an existing alliance relationship, it really gives us a very big head start on what has historically been gnarly integration issues, not just between the two merged carriers, but also between our existing alliance partners.

I think if there was a merger transaction that took place where you were switching global alliances, I think that’s one that you would really have to ask a question about, and it clearly complicates the durability of the transaction.

Raymond Neidl - Calyon Securities

I know there are benefits to trying to get this integration together as quickly as possible. But labor is always a major problem as we are seeing in this case. Would it worthwhile maybe to keep the two airlines operating separately under one umbrella, similar to KLM and Air France.

Douglas M. Steenland

We do not intend to do that Ray, absolutely not.

Raymond Neidl - Calyon Securities

Switching to the smaller aircraft, you are going to have partnerships with almost every regional airline out there, plus you’re going to own a number of regional airlines. Is there any thought to maybe consolidating that and making that a little bit more streamlined.

Douglas M. Steenland

I think the ratio, the consolidation with our regional jet both carefully owned carriers as well as our contracts is a big opportunity for the combined airline. And yes, we expect there to be of significant shuffling of the deck, as well as some cost value out of realigning our portfolio.

Richard Anderson

The great piece here is between Compass and Mesaba you have the very best operators in cost structure. So, our goal with our contract carriers is to bring their margins down over time to more accurately reflect the overall margins in the industry. And Compass and Mesaba will give us that ability to shift flying from contract carriers to owned carriers at much better CASM.

Edward Bastian

It’s a work-in-process, so it hasn’t got that much attention. But between Compass and Mesaba there exists a holding company and they are actually already between those two carriers sharing functions, and we would expect that that would continue and would expand as times goes on.

Raymond Neidl - Calyon Securities

Is there protection there from preventing a third party coming in to try and make a bid for one or the other carriers or for some of the assets?

Richard Anderson

The merger agreement basically positions the two Boards where they are going to meet their fiduciary duties and their fiduciary obligations if anyone would elect to do that. And we will just have to see what happens.

Operator

Your next question comes from Dan McKenzie - Credit Suisse.

Dan McKenzie - Credit Suisse

The new contract with the Delta pilots is ultimately the new contract that the Northwest labor groups will migrate to, or is there yet a new contract that would need to be negotiated?

Douglas M. Steenland

There is a new contact to be negotiated with the Northwest pilots and coming to a combined collected bargaining agreement together with the Delta pilots. So we have a stand-alone Delta pilot contract that now we’ll run if ratified through 2012.

Dan McKenzie - Credit Suisse

At this point do the Northwest pilots have the option to sue to open the arbitration clause if that’s the case? So there was arbitration that the Northwest and Delta pilots were essentially working towards with respect to the seniority and is that a shut conversation at this point or do the pilots have the ability to sue, to go back and to continue those discussions?

Richard Anderson

Each pilot contract contains very specific provisions and protections that govern this situation. And ALPA, which both the Delta pilots and the Northwest pilots are members of, has a very specific merger policy that the collective bargaining agreement of both airlines obligates both the airlines and the pilot groups to follow. And if the two pilot groups cannot on a voluntary basis get there, there is a very clear roadmap and there is very clear precedent as to how this arbitration process would work to integrate the seniority losses.

Dan McKenzie - Credit Suisse

I hope that you can clarify if and how the synergy estimates that you have announced factors in the effect of other deals that are likely to be announced here?

Douglas M. Steenland

As we develop obviously that would impact the revenue and the network synergies, we’ve given a little bit of thought to that but that’s kind of hard to anticipate, you need a crystal ball. But that said, we feel quite confident in any consolidating environment or if this is the only deal done we can generate these revenues.

Dan McKenzie - Credit Suisse

Ed, are you still planning to execute on some capacity reductions that you have announced, but I also understood you say that you are also planning growth at hubs and I would interpret that to mean Cincinnati and Salt Lake City. Clarify if I’m correct on that and then perhaps some perspective on the timing of future.

Edward Bastian

I think you are mixing the apples and oranges there. We are reducing service across the domestic Delta network. As I said we are going to be down a full 10% year-over-year, by the end of this calendar year if fuel and economic conditions aren’t going forward we will continue to right size the domestic network.

What we said on growth is that we will only grow if its profitable growth. The majority of the growth we are seeing in this combined entity is going to be on the international side of the business, but it certainly makes the hub traffic potentially more interesting for us as we generate some greater international opportunities out of hubs and the feed into the hubs become important.

Operator

Your next question comes from Kevin Crissey - UBS.

Kevin Crissey - UBS

Doug, did you look at just selling the golden share, because when I looked at it, I see $200 million in combined synergies in 2009, $600 million in 2010. The golden share had to be worth something that you could have been able to sell to come up to something similar to that number without the risk of integration.

Douglas M. Steenland

You know we looked at, we looked at all of the options available to us stand alone, sell the golden share, merge with other carriers, and we clearly and unambiguously came to the conclusion that this was the transaction that was in the best interest for all of the Northwest constituents.

Kevin Crissey - UBS

Is there any chance that we will see a frequent flyer spin off in 2009, 2010 type timeframe?

Douglas M. Steenland

We are going to have our work cut out for us in putting these two airlines together. That will be the question we look at in the future.

Operator

This concludes the presentation.

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