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Executives

Richard H. Anderson – Chief Executive Officer

Edward Bastian – President, Chief Financial Officer

Mike H. Campbell – Executive Vice President Human Resources, Labour and Communications

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

Hank Halter – Senior Vice President, Controller

Jill Greer – Director Investor Relations

Analysts

Frank Boroch – Bear Stearns

Ray Neidl – Calyon Securities

Daniel McKenzie – Credit Suisse

Chris Cuomo – Goldman Sachs

Jamie Baker – J. P. Morgan

Gary Chase – Lehman Brothers

Mike Linenberg – Merrill Lynch

William Green – Morgan Stanley

James Higgins – Soleil Securities

Bill Masters – Broadpoint Capital

Delta Air Lines, Inc. (DAL) Q1 2008 Earnings Call April 23, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines March 2008 quarter financial results conference call. My name is Lacie (sp) and I’ll be your coordinator.

At this time all participants are in a listen-only mode until we conduct the question and answer session following the presentation. (Operator Instructions). I would now like to turn the call over to Jill Greer, the Director of Investor Relations for Delta Air Lines. Please proceed.

Jill Greer

Thanks, Lacie, and good morning, everyone. Thanks for joining us to discuss Delta’s first quarter financial results. Speaking on today’s call are Richard Anderson, our chief executive officer, and Ed Bastian, President and Chief Financial Officer. Also joining us for Q&A is Glen Hauenstein, Executive Vice President of Network and Revenue Management, Mike Campbell, Executive Vice President of HR and Labour Relations, and Hank Halter, Senior Vice President and Controller.

Before we begin please note this call is being webcast live and is also being recorded. If you decide to ask a question it will be included in both our live transmission as well as any future use of this recording. Any recording or other use or transmission of the text or audio for today’s call is not allowed without the express written permission of Delta.

Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta’s SEC filings.

We’ll also discuss certain non-GAAP financial measures and you can find the reconciliation of those non-GAAP measures on our investor relations website at delta.com.

Before we begin I’d like to ask that when we get to the Q&A portion of the call we limit each participant to one question plus a follow up. With that, it’s been my pleasure to turn the call over to Richard.

Richard H. Anderson

Thank you, Jill, and good morning, everyone. We appreciate you joining us today. This morning we announced Delta’s financial results for the March 2008 quarter excluding special items. Delta’s pre-tax loss for the first quarter was $274 million compared to a loss of $6 million last year driven by a nearly $600 million increase in fuel prices.

On a GAAP basis we recorded a $6.4 billion pre-tax non-cash write down for the period including a $6.1 million which applied to our write down in goodwill. Ed will provide more details on that in a moment but in short this charge relates to the decline in Delta’s market cap driven by sustained record high fuel prices.

Clearly fuel prices are placing a lot of pressure on the business and the industry as a whole and we’ll talk about that a bit throughout the call. I’d like to first though thank our employees and all the people at Delta Air Lines for doing a really good job in this quarter. We were in the top tier in on-time performance. We’ve really moved the needle on our baggage performance and have been all around providing really good service to our customers. So I’d like to express our appreciation to all our employees at Delta for a job well done.

Let me go to the basic issues that we face with respect to fuel and the environment. We believe our core strategy remains sound and that continued diversification internationally continuing to push productivity into the business and acting quickly and decisively to deal with the realities of the current environment will keep Delta in a strong position.

Let’s think about the specifics. In mid-March Delta was the first airline to announce a detailed plan to mitigate the recent rise in fuel prices, a plan that allows us to stay ahead of the curve on the slowing domestic economy by being the most aggressive in terms of managing capacity. We took a leadership position in aggressively taking out domestic capacity, including a full 10% pull down in domestic capacity in the second half of this year. That was after a pull down last October of about 5% versus what we had budgeted going into 2008. We will continue to be aggressive about pulling capacity in response to fuel prices.

While these actions represent important steps in combating fuel prices, our announcement last week to merge with Northwest is an important part of the long-term plan. By combining these two airlines we will be able to create a company with unique strengths that are difficult to replicate in the marketplace. When you think about Delta and Northwest both have similar balance sheet positions, both have strong cash positions, both have been completely optimized through the bankruptcy process less than a year ago, the route that works are end to end, and both are really coming from a position of strength.

We will be able to optimize Northwest’s Tokyo hub with strong passenger feed from Delta’s network. The combination will provide complimentary fleets to ensure the right aircraft flies on specific routes. We will join end to end domestic networks that allow for better connectivity for the communities we serve and to provide more global destinations. I think overall we create something like 5,000 new city pairs from the combination. We will profit from the largest immunized joint venture relationship in the industry and leverage the strength that the industry-leading cost structure and balance sheet bring.

All this means that Delta will have a more durable business model position for further profitable international growth, which in turn provides a more stable financial foundation for you, our investors, and creates value for all of our shareholders, customers, and employees.

Dovetailing with all of this earlier this month, we received preliminary approval for four-way anti-trust immunity for the Delta, Air France, KLM, and Northwest joint venture for trans-Atlantic travel. This anti-trust immunity starts driving benefits in 2009 because we’ll be able to more closely manage capacity, scheduling, and pricing. The four carriers will have approximately 27% of trans-Atlantic capacity, leading the industry and providing service from four of the world’s leading gateways: New York, Atlanta, Amsterdam, and Paris -- something no other global combination can replicate.

Supporting this growth will be prudent investments in new international aircraft, including the 777LR aircraft and the 787s that Northwest has on firm order. We are the launch customer for the 777LR and Northwest is the launch customer for the 787 in the US. These aircraft will allow us to connect virtually any two cities around the globe non-stop, saving our customers time while providing them with outstanding service.

We go back and really summarize what the strategy is in this fuel environment and in this economic environment. We will be aggressive with respect to managing capacity domestically and internationally, but particularly in a domestic market. We’ve evidenced that with the steps we took last October and this past March and we will continue that vigilance.

Second, we came out very quickly in response to fuel with a very aggressive cost management plan that was really based on a lot of innovative productivity enhancements across our businesses and we will continue to be very aggressive in being certain that we’re pushing productivity in the industry.

Third, we’re pushing fare increases and fee increases. You’ll see in our results we had 12% top line growth in this quarter.

Fourth, we will maintain high levels of liquidity. Between our cash and our revolver our liquidity is over $3.6 billion and we’ll be dealing through the quarter.

And fifth, we’re merging with Northwest Airlines. So when you take those sort of five principles I really do think Delta’s at the front of the pack in terms of this industry. When you think about the industry and the difficulties it faces remember it’s an essential industry. A very essential industry. And so the airline that acts decisively, acts with speed and determination, will be the airline that in the end wins.

And if you look, you know, I’ll just add one point about where we are with Northwest and the synergy analysis, I will tell you that we established a very conservative base case when we put together the synergy analysis for the combination between the two carriers and now that we’ve announced the merger that first analysis was really a top-down analysis and now we’re going to focus on a bottoms-up analysis over the next month or so with the two teams working together. And we believe that those conservative estimates as we’re able to prepare more detailed transition plans and integration plans will reveal significantly more opportunities to both reduce one-time costs and increase synergies.

In conclusion, we’re excited about the Northwest transaction. We think it’s a real game changer. Our competitors have said it’s a real game changer. We think that in the meantime, between now and the time we close, we will continue to be very prudent managers in this fuel and capacity environment and I’m confident of our ability to execute on these plans. We have the best employees in the industry. They have a proven track record of pretty much accomplishing anything and these goals are readily achievable in terms of the sort of five principles that I’ve laid out in the call.

Now I’d like to turn it over to Ed to discuss the financial results for the quarter and then we’ll be able to take questions.

Edward Bastian

Thanks, Richard. Good morning, everyone. Thank you for joining us today.

For the March 2008 quarter on a GAAP basis Delta reported a pre-tax loss of $6.4 billion. These results included two special charges.

As Richard mentioned, we recognize the $6.1 billion non-cash charge to write down the value of goodwill. This charge represents a revaluation of Delta’s market cap since emergence last year and, as you remember, our plan was predicated on a then-current oil function of roughly $70 a barrel crude.

Recently oil has almost doubled, trading as high as $119 per barrel with a refining spread to the $30 range driving significantly higher fuel expense, not just for Delta but for the industry, and obviously lower cash flows. This change in economic conditions combined with the recent merger announcement created a triggering event for accounting purposes requiring us to update the valuation of Delta’s stand-alone business plan using current assumptions regarding fuel price and the economic environment.

Goodwill under fresh start accounting principles was originally $12 billion based on the original business plan with fuel, again, at a $70 crude oil equivalent. This write off represents roughly half that balance bringing our goodwill balance down to $6 billion and our net equity is now at $4 billion. This write down is non-cash only and will have no impact on any of our financial covenants.

We also recorded a $16 million severance charge in the quarter related to the reduction programs we announced in March relative to head count. Excluding these two charges, our pre-tax loss for the quarter was $274 million, which was worse than the prior year by $268 million but was in line with our expectations as we entered the year.

Fuel prices were 48% higher, which added roughly $585 million in expense versus the prior year, although importantly we were able to recover a little over half that amount through revenue and cost initiatives. On a base of 396 million diluted shares this equates to a net loss of $0.69 per share.

We were able to grow unit revenues by over 7% and our mainline non-fuel unit cost increase by 4%. Our first quarter results were also impacted by non-cash emergence related items as we lacked the fresh start accounting. This will be the last quarter in which we have that lacking issue. The non-cash emergence related items increased pre-tax income by a net of $9 million. This includes the benefit of fresh start at $25 million partially offset by share base compensation expense of $16 million.

These emergence related changes increased consolidated passenger RASM by $0.14 and increased mainline non-fuel CASM by $0.13.

In recognizing a loss for the first quarter you’ll also note that we recorded no related tax benefit for the period. I would also like to point out that we have begun providing additional information about Delta’s ancillary businesses in our press release this morning, including our industry leading MRO business. Just last week we announced new and extended contracts that will generate over $800 million in additional revenue. This new business will contribute to our planned $450 million MRO top line revenue target for 2008.

Speaking of revenues, our March quarter revenue improved 12% or $525 million on a year-over-year basis. Our network restructuring and yield management initiatives continued to drive strong results driving a 10% increase in passenger revenue. Delta’s consolidated unit revenue improved in the March quarter by over 7% driven by strong demand and better yields both internationally and domestically.

International passenger RASM have increased 13% on 11% capacity growth; a 12% increase in yield and strong demand for improved international product and it also represents the unique product that Delta serves.

Domestic passenger RASM increased 6% on a 2% decline in capacity and a 5% improvement in yield. Capacity cuts implemented in early July, correcting actions, and the continued re-gauging of the domestic network contributed to the improvement.

Delta’s consolidated length of fall adjusted passenger RASM was 101% of industry average for the March 2008 quarter, up two full points year over year and 15 points since 2005. In fact, every region during the quarter was at 100% of industry average or above. This is due to the truly outstanding work of our network, sales, marketing, and revenue management team.

In addition, our focus on non-passenger revenue growth is beginning to show dividends with cargo revenue improving $22 million or 20% in the quarter. Other net revenue increased $133 million driven by an increase in SkyMiles revenue, higher passenger fees and charges, and our MRO revenue growth.

Turning to clause mainline CASM excluding special charges increased 16% for the quarter reflecting the sharp run-up of fuel costs. Ex fuel our mainline CASM increased four points year over year to $0.07.31. The increase resulted mainly from the impact of fresh start accounting as well as employee wage and benefit improvements that we announced last year.

Fresh start accounting impacted our mainline ex fuel CASM by $0.01.13. Excluding that impact our mainline ex fuel CASM would have increased by 2%.

As I mentioned previously, higher fuel prices which include the prices paid under our contract carrier arrangements increased operating expenses by $585 million compared to the March 2007 quarter. While we hedged 27% of our fuel consumption we still paid an all-in fuel price of $2.85 per gallon. This was 48% higher than the March 2007 quarter. Our hedges in the quarter drove $46 million in cash savings.

Strengthening our balance sheet and liquidity position continues to be top priority. For the March 2008 quarter we generated $250 million in operating cash flow. Net capex for the period was approximately $550 million which includes $500 million in net expenditures for new aircraft, for parts, and modifications. These investments improved Delta’s international product and positioned the airline for continued international growth.

During the quarter we issued debt totalling $733 million to refinance a portion of the 2003-1 EETC maturities and also to finance two 777LR and seven CRJ900 aircraft that were delivered in the quarter. In addition, we paid $622 million in debt maturities and capital lease obligations in the March 2008 quarter which includes the outstanding maturity on the EETC I mentioned previously.

Our $1 billion revolver remains undrawn at the end of the quarter. Because this facility contains no max clause it provides us with a great deal of flexibility should we ever need to access this cash. As a result we ended the quarter with an unrestricted liquidity position of $3.6 billion. At the end of the March quarter we are well within the required range of all of our financial covenants.

Turning to expectations for the June quarter and the full year. As you know, we announced in mid-March our plans to mitigate the sharp rise in fuel prices with significant capacity reductions. As a result, in the second half of 2008 we expect a full 5% reduction in total system capacity compared to our business plan and a full 10% reduction year over year in domestic capacity. We continue to monitor fuel prices, the economic outlook, and the changing competitive landscape in order to determine whether additional capacity reductions are warranted for the fall and winter seasons.

In all we plan to reduce our fleet this year by 15 to 20 mainline aircraft which include a mix of MD80s, 757 domestics, and 767-300 and 300ER aircraft. We also plan to operate roughly 70 fewer 50C (sp) regional ships by the end of this year.

Specifically in the second quarter we expect system capacity to be flat to up 2% year over year with consolidated domestic down 5% to 7% and consolidated international up 15% to 17%. For the full year we expect system capacity to be flat year over year with consolidated domestic down 6% to 8% and consolidated international up 14% to 16%.

Turning to earnings guidance for the second quarter of 2008. We expect our operating margin to be in the range of 3% to 5%, our mainline non-fuel CASM ex profiteering to be up 1% to 2%, and our fuel costs per gallon to be approximately $3.10 per gallon all in which does include the impact of our fuel (inaudible).

For the full year we expect at this point operating margin to be in the range of 2% to 4%, our mainline non-fuel unit costs ex privateering to be flat on a year-over-year basis, and our fuel costs per gallon to be approximately $3.02 all in, again which includes the impact of our fuel (inaudible).

It’s typically a challenge in this industry to get all the costs out when reducing capacity. Our commitment to our shareholders is to eliminate the full costs of the capacity reduction from our system. In addition to reducing aircraft we are also reducing personnel costs to ensure all overhead associated with the reduced level of flying is eliminated. Included in the productivity initiatives is a reduction of 700 administrative jobs. In addition the capacity reductions require a reduction of 1,300 front line jobs. We’ll achieve those 2,000 staffing reductions through a combination of normal attrition and voluntary severance and early retirement programs which are already well under way and will be complete by the end of June. Because 30,000 employees are eligible for these programs we don’t foresee any difficulty in achieving these reductions voluntarily and we have in fact committed to no involuntary reductions for front line employees.

We’re targeting a year-end unrestricted liquidity balance of $3.6 billion which represents a reduction of $200 million for the full year. When considering that we’re faced with over a $2 billion hit from the run-up in the cost of fuel to mitigate that liquidity hit to roughly $200 million is a testament to the effectiveness of our restructuring and a quick decisive action to rationalize domestic capacity and eliminate the associated costs.

Regarding fuel hedges, we’ve hedged 49% of our anticipated consumption for the second quarter utilizing heating oil call options with an average jet fuel equivalent cap of $2.79 per gallon. We’ve also hedged 44% for the third quarter at an average cap of $2.84 per gallon and 25% for the fourth quarter at an average cap of $2.92 per gallon.

With respect to capex for the second quarter we expect net capex to be approximately $265 million which includes $200 million for aircraft parts and mods. We expect net capex of $1.3 billion for the full year which includes roughly $1.1 billion in aircraft parts and mods. As we announced in mid-March, this is a $200 million reduction from original guidance. The large majority of the capex plan for the year relates to aircraft purchases that support our profitable international expansion.

Looking at advance bookings at a system level, April advance bookings have been a busy time last year due mainly to the shift in the Easter holiday. For May and June we are continuing to intentionally keep advance bookings slightly behind last year as we focus on more of a yield buys. Demand domestically remains solid with rationalization of domestic capacity allowing us to maintain an optimal balance between capacity and demand. This trend is continuing in the summer period with advance bookings well within line with our projections.

In conclusion, there is no doubt that sustained high fuel prices are a serious threat to this industry. Delta is not immune, obviously, to these pressures but Delta is differentiated from its peers in the industry in a number of ways. We’ve demonstrated our commitment to act quickly to take domestic capacity out of the system and we’re continuing to keep a close watch on fuel prices to determine whether follow on action is required. The benefits of our structuring and strong liquidity balance has provided us the time necessary to implement longer term strategic actions. We believe the merger with Northwest and the full implementation of the JV with Air France and KLM will provide truly unique opportunities that will create substantial value in the long run for our shareholders. And most importantly, I’m confident in the power of the Delta people to accomplish these aggressive goals.

Operator, at this time we’re happy to take questions on the line.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of William Green with Morgan Stanley. Please proceed.

William Green – Morgan Stanley

Hi. Ed, I’m wondering if you could follow up on your comments about demand there at the end. It seems like demand’s okay, but then again we could argue that we’re pricing below costs. So do you or Glen have a sense for elasticity? Have you priced the product such that you could be profitable? How much capacity would you actually need to take out?

Edward Bastian

I’ll make a quick comment, Bill, and then I’ll turn it over to Glen. Based on the guidance that we’ve given you for the second quarter you can extrapolate from that that we do expect to be modestly profitable for the quarter. So with respect to the advance booking guidance we gave you for the second quarter it is obviously what fuel has been a substantial hit to our costs and we do need to cover the cost of that fuel in our ticket prices in the long run we are able to and we expect to turn a slight profit for the quarter.

Glen, do you want to talk about the outlook for domestic?

Glen W. Hauenstein

Certainly. Bill, Delta can’t do it alone. We have to do it in conjunction with the other carriers because certainly there are capacity cuts that we can do on our own, while they will help us, they will not remedy the industry’s woes. So as we look forward we’re hopeful that the other carriers act responsibly and look at the demand profiles as we move into the fall. And I would say if the industry could achieve a 10% reduction in capacity year over year by the fall that we’d be in pretty good shape given today’s fuel environment.

William Green – Morgan Stanley

And the revenue trends that you sort of discussed for the second half, is that being driven by passenger or other revenue?

Glen W. Hauenstein

Certainly we’re very optimistic about the summer for passenger revenue because although we really targeted the reductions for the fall we’ve already started by June to pull domestic capacity down versus our plan and versus prior year. So we are embarking on a more yield bias strategy and advance yields for the June-July period look very robust right now. We’re hopeful that will continue.

William Green – Morgan Stanley

So that 30% growth in other revenue, is that not sustainable with that sort of one-time?

Glen W. Hauenstein

I think, Bill, you’ve seen us add a lot of charges to the passenger fees. Whether or not we’re charging for crude on board the airplane in coach, whether or not we’re charging for excess baggage, we’re not only looking at the ticket revenue but any avenue that we can to increase our revenues across the whole spectrum.

Richard H. Anderson

And Bill, just a few points there. First to Glen’s point. I think Ed noted in his script that I think for the first time on the ATA data in the quarter we were at parity on industry RASM. So Glen and his team have done a phenomenal job, a remarkable job, moving our RASM up to parity and in some instances slightly above parity. That’s number one.

Number two, the extent capacity comes out to Ed’s point in his remarks. We are going to get the costs out when the capacity comes out. Very, very important part of the plan.

William Green – Morgan Stanley

All right. Thanks for your time.

Operator

And our next question will come from the line of Mike Linenberg with Merrill Lynch. Please proceed.

Mike Linenberg – Merrill Lynch

Two questions here. In your latest capacity guidance the international is down a little bit. It looks like a couple hundred basis points or a couple percentage points. Is that a function of the JV ramping up? And I recognize, Richard, you did indicate that the ATITs really doesn’t come on until 2009 or later. Will we start seeing the benefits of the JV later this year and is that what’s reflected in that capacity move?

Glen W. Hauenstein

Mike, it’s Glen. First of all we’re going to remove two 767-300ERs from the fleet starting this fall. So that’s really what’s driving the downward pressure. As you know, we have eight 767-400s that are still in domestic that we’re planning on converting for international. So we are paring back our international growth projections for the fall and winter and next spring. We still will be growing internationally but slightly less than we had anticipated. I think what we’re seeing in international is still very robust traffic and yields, but we are being cautious given the fuel environment and the global economic outlook.

Richard H. Anderson

And one point. once the final order issues at DOT, which I think is usually a 60-day show cause order, once it finally issues we will have the right then among the four airlines to begin later this year jointly planning and pricing and scheduling before we even complete the final joint venture agreement. So there is going to be real value in that going forward this year even before we consummate the joint venture agreement.

Mike Linenberg – Merrill Lynch

Okay. That’s helpful. And then my second question, when I look at your CASM guidance for the year, I believe, Ed, you said flat ex fuel profit sharing. How much of that includes, I don’t know if it’s kind of the one time, you know, the cost of costs that one would see or incur as you start potentially ramping up an integration of two carriers. I realize I know I’m sort of putting the cart before the horse here, but as I recall, you know, United US Airways called a year or so before they even got ultimately the rejection by the DOJ. They had apparently spent over $100 million and there are about 1,500 people on the payroll. I’m curious of your thoughts on that and I realize that wasn’t an error when oil was $20 a barrel, so whatever.

Richard H. Anderson

Mike, we are going to do the integration and transition planning to the extent we can during this regulatory review people with our (inaudible). We’re not going to be out bringing 1,000 people in to try to figure out what to do or spend $100 million on it. No. We’re not anticipating there to be any significant costs during this regulatory, incremental costs during this regulatory review period to plan for the merger.

Edward Bastian

I would just add to that sort of the philosophies of the two airlines on costs. If you look at what both airlines have done on the cost side there’s a real sort of disciplined philosophy on both sides about making certain that we beat any projections that we give in that regard with respect to one-time costs and that we don’t let costs creep away from us because that’s where a lot of the value comes from. So we will have that discipline.

Mike Linenberg – Merrill Lynch

Great. Thank you very much.

Operator

And our next question comes from the line of Jamie Baker with J. P. Morgan. Please proceed.

Jamie Baker – J. P. Morgan

Quick question, presumably for Glen. Good morning, everybody. The 60 to 70 regional aircraft that come out, is that incremental to the 36 that you recently rejected from Mesa (sp) and have you identified the source of the withdrawals?

Glen W. Hauenstein

That includes the 34 or 35.

Jamie Baker – J. P. Morgan

Okay.

Glen W. Hauenstein

And they have all been identified and they’re all, these are planes that are off the premises not that have been grounded and that we’re still paying for.

Jamie Baker – J. P. Morgan

So that implies non-Comair aircraft.

Glen W. Hauenstein

That implies non-Comair aircraft.

Jamie Baker – J. P. Morgan

Okay. Thanks a lot. That’s it.

Operator

And our next question will come from the line of Frank Boroch with Bear Stearns. Please proceed.

Frank Boroch – Bear Stearns

Good morning. I’m curious if you could give us your thoughts on DOT’s LaGuardia slot auction proposal and how that might impact, either of the two scenarios might impact the size of your operation there.

Richard H. Anderson

We don’t think that the DOT has the legal authority to do the slot auctions as they’ve proposed. If you go back to the last time that we had slot auctions at LaGuardia the FAA actually filed comments in the proceeding noting that they didn’t have the authority to enter into slot auctions. So the Air Transport Association is gearing up and we’ll file our comments and litigate the issue and, if necessary, go to Congress for relief. So we’re not, at this point in time we think that we have a good strategy and that we’ll be able to prevail in their efforts. They undertook this same sort of effort with respect to JFK late last year and we were able to prevail both on congestion pricing and slot auction. So we’re confident that we’re going to be able to hold our position at LaGuardia.

Frank Boroch – Bear Stearns

Okay. Great. And maybe this is for Glen. Are there any regions across the globe that you’re watching more carefully where some of the capacity in the back half of the year is coming out? More pronounced? Any areas that are lagging the rest of the system from a demand perspective?

Glen W. Hauenstein

Well, certainly domestic is the weak spot right now and international remains strong. Certainly the Middle East and Africa remain incredibly strong. India and South America is quite robust. So really on the international spectrum we’re seeing very strong demand. We have an incredible amount of new capacity in Asia which is being absorbed quite nicely. Of course, last month we just started Shanghai and it’s off to a very good start. So being the only truly global airline we are able to really balance our demand across the whole network.

Frank Boroch – Bear Stearns

Okay. Great. Thanks.

Operator

And our next question will come from the line of Gary Chase with Lehman Brothers. Please proceed.

Gary Chase – Lehman Brothers

Good morning, everybody. I wanted to see if I could ask a quick one of Glen and then maybe a bigger picture one for Richard. First thing, and I know you alluded to it a little bit in the response to Frank’s question just a second ago, but you really kind of changed the definition of what the Atlantic is with a lot of the new flying that you’re doing. You’ve sort of parsed that out and I know you mentioned strength. As you parsed that out against core Europe, how is core Europe doing versus, say, Africa, Middle East, India relative to at least where, I know some of that stuff is full enough but is there any way to give some colour around what is performing well and what isn’t?

Glen W. Hauenstein

Yeah, I think we were really surprised when we saw American’s trans-Atlantic numbers because they really are very different than what we’re experiencing in Western Europe. Western Europe continues to be quite strong for us and I think what you have going on is you have carriers that are centered in Heathrow with the downturn in the financial sector as well as the increased competition probably coming under a lot more pressure and the rest of Europe remaining relatively strong. Africa, of course, as we go into our second year of Africa and the second year of our Middle East expansion and Asian expansion we should be seeing very robust and we are seeing very robust year over year double digit numbers. So we’re quite pleased with all the sectors, Western Europe included.

Gary Chase – Lehman Brothers

Okay. And then, Richard, if I could just ask you to comment. If I look at sort of the projections that were in the stand-alone plan upon emergence, and I’m obviously cognizant of the massive impact that fuel has had since then. I know those are the kind of numbers that you’d like to be generating versus what you’re now planning on. You think about the different things that you could do. There’s a stand-alone case for Delta. There’s the stand-alone case for Northwest which I know you’re keenly familiar with at this stage. There’s also the incremental value that you can tap in the actual combination of the two carriers. How far along the way, in other words, how much are you in control of your own destiny in getting to those return levels and how much are we going to be dependent on the other 70% of the industry kind of doing things that are favourable to get you across the finish line?

Richard H. Anderson

Let me just add one comment to Glen’s note about our trans-Atlantic. Remember, we went full coach, we’ve gone full coach there this summer with Air France. We’re at the beginning stages of the JV and some city pairs. So we’re pretty confident about where we’re headed in the trans-Atlantic. That’s a distinguishing factor when you compare to OA.

Let me go to the broader question about the macro goals and the need to get this business to have a return for our shareholders that justifies the continued investment in capital. The Northwest transaction is a pretty important part of our getting to our macro strategy goals of somewhere between a 7% to 9% pre-tax margin, which is a good proxy for return on capital. And that is being a pretty important part of the equation.

On a stand-alone basis, given our position, I think we could have continued down that path but in terms of long-term returns for shareholders they were not as robust as the original plan, obviously. So we can leverage our stand-alone plan pretty hard. I mean, as Ed said, evening this fuel environment we generated some cash in this quarter and are projecting modest profitability in the next quarter. But long term, in answer to your question, this transaction proposed with Northwest really gives us the opportunity to do that.

I don’t think that, I think we can get that regardless of what happens in the external environment. Obviously domestic capacity is pretty important. But what we’ve tried to do in the modeling of the merged entity is really take a very conservative case and we haven’t really plumbed the depths of the cost synergies we can wring out of the combined airline. We haven’t really wrenched down as hard as we should on one-time costs and the revenue benefits that we’ve projected there are based upon really solid industry algorithms, right? I mean, S-curve (sp) benefits, co-chair benefits, frequent flyer programs. All those benefits are pretty tangible. But we think we can get at those and make a real advancement in pre-tax earnings.

Obviously domestically the industry has got to maintain discipline with respect to capacity in this fuel environment and that, of course, always has an effect. But we do think that the synergies long term with Northwest and the Northwest combination will create a lot of real value that will distinguish Delta.

Gary Chase – Lehman Brothers

And Richard, can I just ask a follow up to that? I mean, is there anything about the combination that you think enhances the flexibility? I mean, there’s sort of the price of oil, which is the big issue now, but there’s also the volatility of oil. What looked like a pretty good stand-alone plan a year ago is suddenly looking a heck of a lot different given the change in energy. Does the combination give you additional flexibility to address changes in the industry landscape as they arrive?

Richard H. Anderson

It absolutely does because it gives you financial stability. The combination has over $7 billion in liquidity and a pretty strong balance sheet and a whole lot of cost in revenue opportunities. The bottom line in managing capacity properly is it’s a lot easier to have an impact if you’re managing that much capacity. When you’re managing 18% to 20% of domestic capacity in the combination you can be a lot more effective at affecting your long-term profitability. Number one.

Number two, the great thing about the combined fleets of the two airlines is those fleets give you an enormous amount of flexibility. There are a lot of paid for, nearly fully depreciated airplanes at the bottom of the fleets at both airlines. So you basically get to bury your capacity without a capital charge.

When you look at that and you combine it with the unique long-term strategic advantages that we’ve pointed out we think that it is absolutely the best course in terms of getting to a return for shareholders that justifies the investment of capital in the enterprise.

Gary Chase – Lehman Brothers

Appreciate it, guys.

Operator

And our next question will come from the line of James Higgins with Soleil Securities. Please proceed.

James Higgins – Soleil Securities

Yes. Good morning, everyone. A couple of question. I’m really trying to get at what I think are some of the key issues –

Richard H. Anderson

Jim, could you speak up? We can’t hear you.

James Higgins – Soleil Securities

Okay. A couple of questions. I’m really trying to get at a couple of key issues that I think have really been hitting the stocks lately. Your fuel price guidance is as of when? Obviously that’s been a real moving target, so it’s important to understand when you took that guidance.

Edward Bastian

This is Ed, Jim. The guidance we just offered was fuel prices basically as of a week and a half ago when we ran our forecast.

James Higgins – Soleil Securities

And secondly, how much do you have in debt principle repayments remaining for 2008?

Edward Bastian

I’m sorry? Debt maturities?

James Higgins – Soleil Securities

Yeah. Maturities.

Edward Bastian

It’s a little over $300 million for the balance of the year.

James Higgins – Soleil Securities

Only three. Okay. Great. That’s it. Thank you.

Operator

And our next question will come from the line of Chris Cuomo with Goldman Sachs. Please proceed.

Chris Cuomo – Goldman Sachs

Good morning, everyone. Hello? Hey. Hi. Just a question for Richard. On your comments with respect to synergies you noted how perhaps you were a little bit conservative there. I was just wondering if you could provide a little bit more colour on were you getting at both magnitude and timing. So could we see that estimate go up in absolute terms and also could we see perhaps realization of those synergies, maybe not fully in 2012, could it be 2011, any sort of colour you could give on timing and magnitude.

Richard H. Anderson

Maybe this colour will help. When we first did the synergy analysis first it was a top-down synergy analysis. More of a macro synergy analysis. That work was really done in the February timeframe when fuel was $100 a barrel. Your pencil gets a lot sharper when fuel’s at these prices. So the analysis that we did and that we used was an analysis that the teams did in the diligence process from a macro perspective back in sort of late February it got finalized. And we essentially carried that forward when we did the analysis to do the transaction.

What we’re going to do now is do a bottoms-up on synergies both on the cost revenue and one-time cost side of the business and our expectation is that we’ll be a lot more aggressive in terms of ferreting out every single cost savings and every single revenue opportunity while minimizing what kind of cost. I would expect that, I can’t give you a specific timeframe because we’ve been so busy the last week and the rest of this week, but we’ll begin the transition planning process with our counterparts at Northwest and I think over the course of the summer we’ll be putting together the transition plan and in that process we will refine all of these estimates and be back to you about what we think the revisions look like.

Chris Cuomo – Goldman Sachs

Okay. That’s very helpful. And then just a question about the ancillaries. You gave some colour on it. I was just, I’m sorry, I should say the ancillary businesses. Could you just sort of provide how we could think about that business or how you think about that business looking, let’s say, three years out? What’s the revenue opportunity? What are your margin goals? What are the three-year sort of business plan, if you will, the business plan targets for those businesses?

Richard H. Anderson

This is a pretty neat thing about Delta, actually, because the industry has volatility, as you all know. One of the neat things about these businesses, and there’s really three core businesses. The three core businesses are the MRO business, the Delta Global Services business, and the Delta Air Elite businesses. They are related businesses to our core business so you get some economies of scale and some, if you will, free overhead and infrastructure. But we do charge those businesses with those costs but there is an economy of scale that they get. So part of our strategy is to be able to develop these three businesses into nice cash flow businesses that help smooth out the volatility of the underlying core business.

Our operating margin in the tech ops business and all of these businesses we’re shooting for a double digit operating margin in all three of those businesses. The MRO business can grow its top line. I think over the long run given the number of engine overhauls from deliveries if you just look at the bow wave ahead of the industry around the world that bow wave is pretty significant and we think that business can grow in the 15% to 20% range. We think each of these businesses can grow in the double digit range with operating margins around 10% on average.

That’s our goal. Our goal is to develop these three businesses as a moderating force to the volatility of the business. All three are nice growth businesses. They’re ancillary to what we have in terms of running the core airline and they provide a unique value creation opportunity for our stakeholders.

Edward Bastian

And Chris, this is Ed. The only other thing that I’d add to Richard’s response there is that obviously the Northwest transaction gives us even greater scale in each of those business units. So the 15% to 20% per year growth rate that Richard was referring to I think could easily grow much higher when you add the scale of the Northwest into those operations as well.

Richard H. Anderson

And I forget who asked the question earlier about the other revenue line. The other revenue line at Delta is going to be a robust growth line because of these businesses which all this year have significant double digit growth and we can run these businesses profitably for the long term with nice growth.

In addition, the other revenue category, we lead the industry in a lot of fee increases earlier this year and we’re very watchful of all the ancillary fees and the revenue opportunities that provide to the company. In addition, our Affinity card is going gangbusters right now with American Express. So I think it’s reasonable over the long term to see very robust growth in our other revenue lines.

Chris Cuomo – Goldman Sachs

Great. Thank you very much for the detailed answer.

Operator

And our next question will come from the line of Ray Neidl with Calyon Securities. Please proceed.

Ray Neidl – Calyon Securities

Yes, I was wondering with the recent plunge in the stock price of both Northwest and Delta since the merger announcement if that would have any effect on the structure of the deal. If you were going to have to go back and maybe modify some of those items.

Richard H. Anderson

No. There’s no effect, Ray, on the structure of the deal.

Ray Neidl – Calyon Securities

Okay. Great. And you talked a little bit about this before, the post-merger goal of CASM. Both the Northwest and Delta do have very low CASMs ex fuel compared to their airlines. Do you have a goal set going forward? Especially with fuel prices up around $120 a barrel? In other words, are there going to be any major changes to your plan that you have to look at, such as a possible closure of a small hub or a bigger cutback in operations afterwards?

Edward Bastian

Ray, we were very clear. We’re not closing any hubs as a part of this transaction. We need the assets that we have now to be able to actually grow the business profitably in the future. The synergy, the cost synergy analysis between the two companies, I think we’re looking at somewhere between $600 million to $800 million of gross cost efficiencies that we believe the combined airlines – and it would all come out of the non-fuel line which not only will allow us to keep our non-fuel costs at the lowest in the industry but actually bring them that much lower on a combined basis.

Ray Neidl – Calyon Securities

Okay. And any planned asset sales of peripheral type of businesses at the time of the merger?

Edward Bastian

No. No planned asset sales, Ray.

Ray Neidl – Calyon Securities

Okay. Good. Thank you.

Operator

And our next question will come from the line of Daniel McKenzie with Credit Suisse. Please proceed.

Daniel McKenzie – Credit Suisse

Oh, hi. Thanks. Good morning. I appreciate the commentary on the other revenue line item. I guess my first question really relates to passenger revenues. I guess with respect to the full-year forecast of operating margins of 2% to 4% and with so much of the profitability tied to last-minute travel I’m wondering where the confidence comes from that the revenue environment will remain pretty decent given all the macro worries about a recession here. Of course, that’s forgetting about fuel costs for now.

Glen W. Hauenstein

Hey, Dan. It’s Glen. How are you today?

Daniel McKenzie – Credit Suisse

Yeah, thanks.

Glen W. Hauenstein

Just a comment on that. I think with our capacity reductions we’re trying to stay ahead of the curve and anticipating a significant decline in business travel towards the back half of the year and getting ahead of that. Hopefully we’ll be pleasantly surprised and the economy will start to rebound but I think we are really well positioned with the 10% year over year domestic capacity reduction to produce very nice unit revenue growth through the fourth quarter.

Edward Bastian

This is Ed, Dan. The other thing, domestic today is down to 60% of our business mix. So while Delta in the past was largely beholden to the health of the US economy we’re a much more diversified carrier today than we’ve ever been. You also recall in our performance, which I think is the most impressive part of our performance, we had double digit international RASM growth and double digit capacity growth. And while we’re sensitive to the economic environment internationally long term I think the health of the international economy is particularly where we’re going, which are to a number of unique destinations in Africa, the Middle East, Eastern Europe, and Asia, are going to provide us a pretty solid base off of which to gauge the profits for the balance of the year.

Daniel McKenzie – Credit Suisse

Okay. Good. Thank you. I guess my second question is, you know, the Senate Aviation Sub-committee right now is working on the FAA reauthorization bill which could come out sometime soon here. There’s some talk that it could become a vehicle for legislative language to slow down the merger. Is your sense that there could be some congressional risk here?

Edward Bastian

No. Our sense is that while the authorization may or may not move this is essentially a regulatory process through the Department of Justice and while we’re cooperating fully and will cooperate fully with Congress the responsibility for the decision making lies with the DOT and the DOJ.

Daniel McKenzie – Credit Suisse

Okay. Good. Thanks a lot. I appreciate that.

Operator

And our last question will come from the line of Bill Masters (sp) with Broadpoint Capital. Please proceed.

Bill Masters – Broadpoint Capital

Thank you for getting me in under the bell. Ed, I don’t recall any change of control provisions in any one of your public debt instruments but maybe you could go ahead and confirm that there are no change of control provisions in not only any of your debt instruments but any of the restructured leases that you might have had through bankruptcy.

Edward Bastian

The Delta financing obligations, whether it be lease, our exit facility is not affected by this transaction.

Bill Masters – Broadpoint Capital

Okay. And then I thought I heard Glen say that all of the planes that you plan to ground are unencumbered. Do I have that correct?

Glen W. Hauenstein

No. No. The majority of the planes that we’re pulling down are actually coming out of arrangements with contract carriers. The biggest one of which is maintenance.

Bill Masters – Broadpoint Capital

Okay. Are there any planes that are actually being grounded that would have any one of the public ETCs or EETCs actually attached to it?

Glen W. Hauenstein

No. The answer is no. First of all, we’re sensitive to the EETC marketplace and, two, we’re not down to that level of detail in terms of public guidance.

Bill Masters – Broadpoint Capital

So in other words there is or is not on the ETCs?

Glen W. Hauenstein

Oh, on the ETCs no. We’re not planning to reduce any aircraft that are within the EETC structure. That said, we’re also not giving public guidance on our future plans.

Bill Masters – Broadpoint Capital

Okay. Thank you.

Edward Bastian

Other than the total number of airplanes we’re disposing of.

Glen W. Hauenstein

Yeah, the wholly owned carriers, to say it differently, the wholly owned carriers or obviously the aircraft that we own largely are currently operating are not affected by the pull down.

Bill Masters – Broadpoint Capital

Okay. Thank you.

Operator

And this concludes our question and answer session. Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Delta Air Lines, Inc. Q1 2008 Earnings Call Transcript
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