Delta Air Lines' (DAL) CEO Richard Anderson on Q4 2015 Results - Earnings Call Transcript

Jan. 19, 2016 4:27 PM ETDelta Air Lines, Inc. (DAL)1 Comment
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Delta Air Lines, Inc. (NYSE:DAL) Q4 2015 Results Earnings Conference Call January 19, 2016 10:00 AM ET

Executives

Jill Sullivan Greer - Vice President of Investor Relations

Richard Anderson - CEO

Ed Bastian - President

Paul Jacobson - CFO

Gary Chase - SVP Financial Planning and Analysis

Analysts

Michael Linenberg - Deutsche Bank

Julie Yates - Credit Suisse

Rajeev Lalwan - Morgan Stanley

Jamie Baker - JPMorgan

Duane Pfennigwerth - Evercore ISI

Andrew Didora - Bank of America

Savi Syth - Raymond James

Dan McKenzie - Buckingham Research

Jon Ostrower - The Wall Street Journal

Jeffrey Dastin - Thomson Reuters

Edward Russell - Flightglobal

Linda Lloyd - Philadelphia Inquirer's

Operator

Good morning and welcome to the Delta Air Lines December Quarter Financial Results Conference. My name is Kelly Ann and I will be your coordinator. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session following today's presentation. [Operator Instructions]. As a reminder, today's call is being recorded.

At this time I’d like to turn the conference over to Ms. Jill Sullivan Greer, Vice President of Investor Relations. Please go ahead, Ma’am.

Jill Sullivan Greer

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

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

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

And with that, I'll turn the call over to our Richard.

Richard Anderson

Thank you, Jill. Good morning, everyone. This morning Delta reported a $1.45 billion pre-tax profit and delivered earnings per share of $1.18 for the fourth quarter of 2015. This result marks a 42% improvement year-on-year and was in line with consensus expectation.

For the full year, we generated a $5.9 billion pre-tax profit, an increase of 29% over 2014. We grew our top line by 1% and realized substantial fuel savings which allowed us to expand operating margins by over 3 points to 16.2%.

Our return on invested capital was 28.3% for 2015. We generated $3.8 billion of free cash flow and returned $2.6 billion of that back to our owners this year. Our 2015 financial performance ranks Delta among the top 10% of S&P Industrials. We are poised to continue outperforming as low fuel prices will allow us to produce further earnings and margin expansion in 2016 in the face of a strong dollar and some global economic uncertainty.

I want to thank the entire Delta team for all their hard work that contributed to another record year in 2015. For their efforts, we accrued $1.5 billion in profit sharing for the full year 2015. We are looking forward to our largest profit sharing payout in our history on Valentine’s Day 2016.

Our people are the primary reason Delta is the top performing airline in the world and we are thankful for their commitment to our company. Our foundation at Delta is quite strong, similar to other high quality industrial companies our focus is to drive value for our owners through topline growth, margin expansion, double digit EPS growth and prudent deployment of our strong cash generation.

As we highlighted at Investor Day last month, we have built a durable business model that can deliver strong results throughout the economic cycle. We continue to run the best operation by a wide margin of all the airlines in the world with a full year completion factor of 99.6% in an on time rate of 85.9%. We had a 161 100% main line completion factor days in 2015 which significantly outpaces American United and Southwest even if you combine their operations for the last several years.

That operational excellence along with the investments we’ve made in products and services drove increases in our customer satisfaction. With year-to-date domestic net promoter score increasing more than four points to 38% compared to 2014. The 4Q results show again that high levels of customer satisfaction are widening our revenue lead relative to the industry; we are consistently generating 108% of industry average revenues across our system and north of 114% in the domestic entity.

Through our capacity actions and commercial initiatives, we offset nearly 700 million of currency pressure this year and held our topline revenues intact year-on-year. This performance allowed us to capture more than 75% of the fuel savings in 2015 which drove strong margin improvements. We expect to improve upon this great performance in 2016. The scale and scope of our network allow us to focus on regions of strength, adjust capacity and regions that are economically challenged and move our capital assets to markets with strong returns.

As we continue to globalize our network through our uniquely Delta joint ventures and equity investments we will further enhance the flexibility and durability of our business which will allow us to continue to drive strong revenue margin and cash flow growth through our owners over the long term.

Our focus on our long term goals is unwavering. We will continue to reinvest in the business at an appropriate level to sustain long term growth that disciplined reinvestment had delivered high levels of returns to our owners. The substantial free cash flow we are generating allows us to continue to de-risk the balance sheet.

Our adjusted net debt declined $600 million to $6.7 billion in 2015 which is more than $10 billion lower than when we started almost a decade ago, and we think an investment grade rating will occur in 2016.

At the same time we are accelerating capital returns to our shareholders and repurchased 7% of our market cap in 2015. Including the dividend, this is the equivalent of 70% of our free cash flow going back to our owners well above our 50% long term target. We remained strongly committed to exceeding our long term commitments to our owners.

You will recall from our Investor Day, our long term goal is to sustain operating margins of 14% to 16%, to have EPS growth year-on-year at 15%, to maintain a return on invested capital of 20% to 25%, to generate atleast $7 billion to $8 billion of operating cash flow and atleast $4 billion to $5 billion of free cash flow and to reach $4 billion in adjusted net debt by 2020.

We expect to significantly exceed these goals in 2016. We had a significant opportunity in 2016 as the decline in fuel prices will provide us with a $3 billion tailwind in 2016 at current levels. Low fuel prices do put some pressure on our unit revenues which we saw throughout 2015.

It is important for us to produce unit revenue improvements and we are committed to doing so in 2016. However, our capacity discipline and service excellence are contributing to unit revenue outperformance for Delta relative to the industry. We expect to grow capacity between 0% and 2% in 2016 in appropriate level of growth to balance capital investment with supply and demand and ensure the momentum in our business continues.

Strong non fuel cost discipline is critical to our long term success. In 2015, we kept our non fuel cost flat. Since the merger, we have grown non fuel cost at a rate of less than 2% on an annual basis while investing significantly in our people, customers, operation, fleet and product.

We are on track to meet or exceed the targets we laid out for you last May and at our Investor Day of growing annual EPS greater than 15% and achieving returns on capital in excess of 20% and generating free cash flow in the range of 4 billion to 5 billion in 2016. We have consistently achieved our long term goals and we will continue to do so regardless of the direction of fuel prices.

Our first quarter 2016 performance will break all records as we expect an operating margin of 18% to 20% in what is seasonally Delta’s lower margin quarter. As we lay out the framework for 2016 and beyond we see big opportunities ahead for our business. The key message of our Investor Day last month was that we are a high quality industrial company built to deliver consistent and sustainable current [ph] returns through the cycle. We believe executing on this commitment should result in a premium evaluation that is in line with our peers who produce financial results similar to Delta.

With that I’ll turn the call over to Ed and Paul to go through the details of the quarter. Thank you.

Ed Bastian

Thanks, Richard. Good morning everyone. Thanks for joining us today. For the December quarter our pre-tax income increased 42% year-over-year to $1.45 billion. We expanded our operating margin more than 4.5 points to 17.1%. We are able to drive a significant improvement in our margins because we remained disciplined and strategic about our growth, which allowed us to capture more than 75% of the savings from lower fuel prices.

For the quarter, we saw a five point improvement in domestic margins, while international margins improved by four points. Thanks to our Delta employees for the contributions to another strong quarter, performance that drove a profit sharing accrual of nearly $400 million bringing full year total to $1.5 billion.

2015 was another record year on all fronts and we look forward to rewarding the Delta team for driving industry leading operation and financial results on February the 12. We have the best employees in the industry driving superior performance which allows us to pay industry leading total compensation.

Our revenues declined two points for the quarter versus the prior year driven by $160 million headwind from foreign exchange which means we were able to successfully push most of these fuel savings to the bottom line. Corporate demand remains solid with volume growth of 3%. Domestic continues to be strong particularly in the Transcons and West Coast markets.

Corporate travel buyers recently named Delta the leading airline for the fifth consecutive year rating us number one in the business travel news annual airline survey. This is the first time BTN voters who manage tens of billions of dollars in annual travel spend have selected the same airline for five years in a row. We continue to invest in our ability to upsell on Delta.com which is driving our ancillary revenue growth. We have strong momentum with our plant to make our products available to all Delta customers with the recent introduction at Delta Comfort+ as a fair product and our first mover branded fares launch with Expedia.

Sales of Comfort + increased nearly 60% to $125 million in the quarter and we see significant opportunity head now that we have started selling the product as a separate fare class. First class upsell increased 20% driven by a six point paid load factor improvement. Our agreement with American Express produced over $100 million in incremental value again this quarter and more than $400 million in incremental value for the year.

For the December quarter, our past year unit revenues declined 1.6% as our winter capacity actions and holiday demand strength offset foreign currency and domestic yield headwinds. This result was better than our initial guide due to stronger demand than we had anticipated during the peak holiday season. Domestic unit revenues declined approximately one point as the yield environment remains competitive, similar to what we have been experiencing for most of the year.

Overall, the domestic business is performing well. We have remained focused on expanding service in higher margin areas within our network such as New York, Seattle and Los Angeles which is also contributing to our RASM premium to our competitors. Atlanta also performed well with domestic RASM outpacing the system average despite competitive capacity growth in our largest hub. Our international business continues to face headwinds from foreign exchange and lower fuel surcharges and we are seeing the benefits of the capacity reductions we have made in our performance.

The TransAtlantic entity saw unit revenues decline four points entirely driven by FX and surcharges. The Paris attacks caused a 0.5 point reduction in our Atlantic RASM in the quarter roughly $10 million impact. Core European market demand held up reasonably well in the quarter and the capacity actions we had implemented in Africa, the Middle East and Russia helped results.

Our joint venture with Air France, KLM and Virgin Atlantic continued to see margin expansion despite currency pressures and increased competitive capacity. In Latin America our unit revenues were down 7 points due to currency primarily in Brazil. Our capacity growth in the region was flat, and we are focussing growth on bright spots like Mexico and the Caribbean while reducing capacity and challenging markets like Brazil.

During the quarter, we announced our intent to increase our stake in Aeromexico to upto 49%. We expect to close that transaction during the June quarter. This investment will bring the companies closer and allow us to participate in the financial improvements the Aeromexico team can deliver going forward, in addition to the benefits we realized from our commercial partnership.

In the Pacific, unit revenues declined 3%, a solid improvement from where we were turning earlier in the year helped by our significant network restructuring. Currency and fuel surcharges were at 13 point drag on unit revenue in the quarter. Pacific profitability improved again with margins up by 3 points this quarter.

Now turning to the first quarter of 2016, we will continue to leverage those opportunities with the greatest profit potential in our network while adjusting capacity in challenging regions. We currently expect capacity growth of 2% to 3% for the first quarter and 0% to 2% for the full year. Remember that our first quarter capacity includes one point of growth from leap day. We are planning for roughly 4% to 5% in the domestic region in the first quarter and 1% to 3% growth for the full year in line with how we see demand and economic growth in the U.S.

Domestic growth will come predominantly from higher gauge and targeting those markets where our past investments are allowing us to drive revenue and margin improvements. Our margin and accretive upgauging actions will continue as we’ll take out an additional 40, 50 seaters in 2016 while adding seats to 23% of our narrow body fleet.

International capacity will decline 2% to 3% this quarter as the large reductions we made during the fourth quarter in places like Japan, Brazil, Russia and the Middle East remain in place. For the year we expect our international capacity to be flat to down two points.

Domestically the demand environment remains solid, although we continue to see yield pressure during the off-peak parts of the quarter, primarily in January and early February. This trend is consistent with what we have seen in the domestic entity over the last six months.

Internationally, we expect the currency headwinds we’ve experienced in the December quarter to persist at similar levels in the March quarter but begin to improve thereafter. In addition, we have seen further surcharge reductions through Q4 as fuel prices move lower.

Broader Europe continues to see an impact following the events in Paris in November and we have slowed our capacity growth into the region. We expect this will be roughly half a point headwind for system unit revenue for the quarter.

In the Pacific, we expect to see good improvement in profitability again in 2016 as we reallocate additional capacity from Japan to growth markets primarily China important pillar of our Pacific and overall company long term strategy. We’ll also benefit from down gauging efforts in the Pacific and will retire the nine remaining 747s in our fleet by the end of next year.

We expect overall system unit revenues to decline 2.5% to 4.5% for the March quarter, which includes a 1.5 points headwind from currency. We expect the off-peak periods of January and February to be more challenging than March when we’ll benefit from Easter and Spring break. We expect unit revenue trends to stabilize this summer, while lower fuel prices have resulted in RASM declines for longer than we initially expected, we are getting significantly larger cost savings from fuel that are driving strong margin and cash flow improvements. And as a result we expect a record first quarter with an operating margin of 18% to 20%, roughly 10 point improvement from the prior first quarter.

Now I’ll turn the call over to Paul to go through the details on cost and cash flow.

Paul Jacobson

Thanks, Ed, and good morning, everybody. I appreciate you joining us today. I will start by highlighting another strong cost performance by the Delta team this quarter. Lower fuel prices and strong cost controls contributed to a roughly $570 million decline in total operating expenses, despite nearly $120 million in higher profit share.

Non operating expenses declined by $9 million even with the $75 million loss associated with the write off of our remaining Venezuelan currency exposure which was included in our results.

Non-fuel CASM increased 1.9% on flat capacity including about a point of pressure from the pay raises we implemented in early December. That was offset by a little more than a point due to the currency benefits on the expense lines.

As we have said previously, we have built a good foundation for cost productivity and we will continue to benefit from several of our ongoing initiatives including upgauging for several more years. Modifications on 20% of the fleet as Ed mentioned during the early innings including on the 757s, the A320s, the A319s and the CRJ700s.

You should remember that in conjunction with the December first wage increase from most of our employees we made a change to our profit sharing plan which affects our CASM due to the geography shift.

Given the timing of those increases in 2015, our core cost growth will be more weighted towards the front half of 2016. We expect non fuel CASM including profit sharing to increase roughly 5% for the first quarter with about approximately half of that growth driven by year-over-year profit sharing.

For the fourth quarter, our total fuel expense declined by over $700 million driven by lower market fuel prices which was net of $340 million in hedge losses including early settlements.

Our all in fuel price was $1.85 per gallon down 30% from the prior year. The refinery contributed $8 million this quarter versus $105 million in the same period in 2014. The decline was primarily driven by considerably lower distillate cracks which are of a substantial benefit to the airline but a headwind for the refinery.

We currently expect our March quarter fuel expense to be $1.5 billion lower year-over-year due to the significantly lower hedge losses and the continued decline in market fuel prices.

For the full year we expect our fuel expense will be $3 billion lower than 2015 and we are forecasting an all in first quarter fuel price of $1.20 to $1.25 based on last week’s prices.

As a result of the uncertainty in the markets we have closed out our hedge book and have full participation to further downward movements in 2016. For the full year we expect our hedge losses to be in the $100 million to $200 million range per quarter or throughout the year.

Moving onto cash flow, we are using our strong cash generation to appropriately balance the investments we are making in the business for the long term while also de-risking the balance sheet.

Also we are increasing our returns to our shareholders. This quarter we generated $1.4 billion of operating cash flow, just over $1 billion of which we reinvested into the business including six slot pairs at London's Heathrow Airport, as well as aircraft acquisitions and continued fleet modifications.

For the first quarter we expect capital spending to again be roughly $1billion. For the full year, we expect our core CapEx to be approximately $3 billion with a little bit higher in the first half of the year primarily due to the timing of aircraft spend.

During the quarter, we returned $530 million to shareholders and expect to return a similar level of cash to our owners during the first quarter. For 2015 full year we returned $2.6 billion which equates to approximately 7% of our market cap. $360 million was paid in the form of dividends with the remaining $2.2 billion returned through repurchases. Specifically, we bought back a total of 48 million shares of our stock at an average price of $45.50.

Adjusted net debt at the end of December was $6.7 billion. Debt reduction was the biggest driver of $35 million in lower interest expense for the quarter relative to last year and $170 million below 2014 levels for the full year.

Additionally, our pension liability decline by $1.3 billion as a result of a 50 basis points increase in the discount rate, we remained committed to behaving as a high value, cash return focus, investment grade company going forward and we’re optimistic that an investment grade rating is insight this year.

In closing, I’d like to echo Richard and Ed’s comment and than the entire Delta team for another record 2015. These results don’t come easy. They come through hard work and we look forward to celebrating with them next month.

Thank you. Jill?

Jill Sullivan Greer

Kelly Ann, that’s going to wrap up our prepared remarks and we are ready for Q&A, if you could give the instructions to the queue.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll hear first today from Michael Linenberg with Deutsche Bank.

Michael Linenberg

Hey, and good morning everybody. Two questions here. Just if I go back on a month, the guidance for the other revs look like it was coming in about $1.5 billion. The print was closer to $1.4 billion. Is there anything in there that we should be aware of maybe why it came in a little bit lighter?

Gary Chase

Mike, its Gary.

Michael Linenberg

Hey, Gary.

Gary Chase

There’s rounding in there. Big drive difference forecast to forecast third party refinery sales. There is no margin in there. So there is no conclusion.

Jill Sullivan Greer

And there was an offsetting benefit in the ancillary guidance as well Mike.

Michael Linenberg

Okay, great. Thanks Gary. Thanks, Jill. And then, just a second question, we’ve had to deal with these present headwinds as it related to fuel surcharges. And I think at the last time I looked at like the U.S. Japan market, it look like that we were moving towards the lower band as it relates to fuel surcharges given this further decline in fuel it would seem that in many of the fares we must be getting close to a zero fuel surcharge in the fare. Is that right? Is this fuel surcharge issue? Is this the fuel price to stay where they are? Are we going to even be dealing with this, three to six months out?

Glen Hauenstein

Sorry, Mike, it’s Glen. We are adjusting based on the fuel and of course in Japan it is a formulaic. Sometimes we are -- in the past we’ve been able to roll that surcharge best peers [ph] as they’ve change, but I’m not predicting what the future is, what we want to comment and how we think that will roll out in future.

Michael Linenberg

Okay. Fair enough. Thank you.

Operator

We’ll hear next from Julie Yates from Credit Suisse.

Julie Yates

Good morning.

Richard Anderson

Hi, Julie.

Julie Yates

As you reiterated that your revenue trend should stabilize by this summer, but with crude down another 25% since your Investor Day, how should we think about the goal to return to flat to positive PRASM by summer, we saw this push out last year when crude took another leg down from when you initially gave that goal, this is the most recent collapse in crude impair your confidence at all in the timing of that trajectory?

Richard Anderson

Hi, Julie. Yes, it certainly push additional pressure on getting to a positive RASM result and we made those comments this morning based on where the four sit today, but clearly crude were to fall another 15%, 20% and some people are calling for over the next few month that will put incremental pressure. These are good trades and we’re happy about crude continuing to fall, but we want to make sure our investor base understands that we appreciate the importance of getting the positive RASM and we’re certainly doing through the network actions, pricing actions, what we can to get the revenue line about the water line.

Julie Yates

Make sense. Thank you. And then, Paul one for you perhaps. Just on CASM next guide for Q1, 5% took some by surprise, I appreciate the dynamics on profit sharing and the two raises for the non-union employees, but perhaps if you can walk us through just how the trajectory should look as the year progresses to get you to that guidance of sub 2%?

Paul Jacobson

Good morning Julie. Thanks for the question. Clearly, you highlighted the biggest drivers in the first quarter and as I mentioned in the prepared remarks the core CASM is weighted more towards the front half of the year as a result of the fact they were lapping those two increases in the first quarter. So, we’re going to continue to manage it. We feel good about it as we head into and through 2016.

Julie Yates

Okay. Can you give us the CASM-Ex number for Q1 excluding profit sharing as you’d express in the past?

Paul Jacobson

Yes. We said it, it was about half, half of the five was due to core half of due to profit sharing.

Julie Yates

Okay, great. Thanks guys.

Operator

From Morgan Stanley we’ll hear from Rajeev Lalwan.

Rajeev Lalwan

Hi. Thanks for the question. Just in terms of thinking about capital allocation for the rest of the year, I mean, things like PRASM moving in the right direct. Fuel is coming down. I guess whereas the incremental cash flow go and then kind of related to that it seems like you’re not increasing by the actual quarter year-over-year if I heard you correctly, so just some color there would be great?

Richard Anderson

Yes. This is Richard. We have a bias to holding our core CapEx at around the 3 billion number, and the reason why is – that is really the optimum number that we can execute on a given 12-month period and have a high confidence of delivering the benefits on the time line we lay out. So that really is linchpin to our capital allocation strategy. We do believe that we’re going to have substantially better operating cash flows because low fuel prices is very good for our business overall. We have a bias toward applying that to share buyback. So, I think its reasonable to expect just as we said in our prepared remarks that in 2015 we hit nearly 70% of returning our cash to our owners. And I would expect that we would expect that given the performance that we’re on pace to achieve that our share buyback number would be materially higher in 2016 than it was in 2015.

Now, also understand that we have – we’re going to close the Aeromexico transaction, expected to close in the first half of the year which will drive about $800 million of cash, but that will a quick and immediate return as our investment in Virgin did. So, core CapEx at 3. We have the Aeromexico investment coming, but longer term our bias is to put the money in share buyback.

Rajeev Lalwan

Great. And then just on the topic of fuel I think maybe Ed made the comment before retaining 50% to 75% or so on the savings, can you just talk about what data points we should look for to see where that in fact shakes out and what pushes you above it or below it, and specific items that we should look for throughout the year?

Richard Anderson

Hi. Your question is in relation to how we’re doing with recapturing the full savings.

Rajeev Lalwan

Yes. I mean, just throughout the year what we look for to say, at the end of the year Delta was able to keep 75% of it or 100% of it or we should we focus on capacity or surcharges?

Paul Jacobson

For us it was really simple in Q4. Our revenues were roughly – excuse me, our capacity was roughly flat. Our revenues were down about two points, but that was almost entirely due to the FX impacts on the international. So, by definition we drove all the recovery of savings to fuel to the bottom line or certainly the vast majority of it. As fuel continues to decline that continue to put some incremental pressure on it, but the pricing environment where we stand today is allowing us to do that because we’ve taken some pretty aggressive network actions to accommodate.

Rajeev Lalwan

Great. Thank you.

Richard Anderson

Maybe one other way to think about this is if you look at full year 2015 results and we expect to be able to repeat this at least this performance in 2016. In 2015, our operating revenues were up 1%, so top-line was up 1%. Our fuel expenses were down 20%, and our EPS was up 38%. We took a lot of that to the bottom line. That – it means it’s pretty remarkable that our top-line went up 1% in 2015, and we were able to take 20% which was 2.2 and this is after fuel hedge losses. We took 2.286 lower fuels and produced a 38% improvement in EPS.

Rajeev Lalwan

Great. Thank you gentlemen.

Operator

We’ll move next to Jamie Baker with JPMorgan.

Jamie Baker

Hey, good morning everybody. Question for Paul. You gave a lower Q1 up margin guide at Investor Day but there wasn’t lot of clarity as to what assumptions you were baking in at that time other then fuel coming down. Were there any other revisions to your forecast specifically incrementally better or worst on the revenue outlook?

Ed Bastian

Hi, Jamie, this is Ed.

Jamie Baker

Hi, Ed.

Ed Bastian

We did as you know; we closed December revenues with a little stronger momentum than we were anticipating in the guide and we see that continuing into the first quarter, so, its combination of lower fuel and certainly or marginally improved revenue.

Jamie Baker

Okay. Second question, operations related. The general rule of thump that I’ve used at least for the industry is that it takes about four months between deciding to adjust ones capacity and actually beginning to fly the new schedule. And I’m wondering obviously the booking curve is going to influence this, but in the case of Delta have you gotten any more adept at making substantive schedule revisions in even less time or is four months give or take still a reasonable assumption to use?

Glen Hauenstein

Jamie, it’s Glen.

Jamie Baker

Hi, Glen.

Glen Hauenstein

It depends on the circumstance. In the case of the Paris attacks we started making substantial changes to Brussels and Paris capacity within a week or so. So, I think it really depends on severity and whether or not we believe that we would generate cash by flying it or not generate it. We’re able to park the airplane at any point in time, so if you were looking at – I don’t think its ever been four months, I think its probably three months at the outside for just a general slight bias up or down, but on specific actions relating to big changes in demand I think we can do that pretty much real time.

Jamie Baker

Okay.

Richard Anderson

Yes. This is Richard. Let me give the case in point, which is the pilot shortage at the regional. The pilot shortage at the regionals, we adjust that weekly. And bottom line is you can do a pretty dramatic schedule change in 30 days.

Jamie Baker

Okay. That’s helpful. We’re obviously taking lot of recessionary type questions these days, so it’s good to be able to know the speed with which you are could potentially, but hopefully it won’t have to react. So thank you very much gentlemen. Take care.

Richard Anderson

Thank you.

Operator

We’ll hear next from Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth

Hey, thanks. Just to follow-up on Jamie’s question. I wonder if you could just tell us a little bit specifically about what your business is telling you about the U.S. economy, obviously there’s a lot of fear out there for folks to look at other sectors in transports, but as you measure it what is your business telling you about the health of the U.S. economy today versus maybe 30, 60, 90 days ago?

Richard Anderson

Hey, Duane. We’re pretty optimistic relative to what you read on CNBC or Wall Street Journal or some of the thunders out there that are predicting the future. We are booked ahead in terms of load factor for each of the months for February, March, April and really add into early summer, in case of early summer, its little bit early to call that, but we see demand is very strong and I think one of the issues that we’ve talked to our investors about is that dividend or that the American consumer has gotten from lower fuel whether or not its heating their home or whether or not its filling up their car with gas and where they’re reinvesting and they seem to be willing to reinvest that into Airline purchases, but at slightly low fares and those lower fares are being generated by the lower price of fuel, but core demand strength seems very strong in terms of corporate and core demand strength in terms of leisure seems strong as well for as far as we can see in the next 30, 60, 90 days.

Duane Pfennigwerth

Thanks one for that.

Ed Bastian

Duane, this is Ed. Let me add to that, because we also see as I’ve said in the remarks, continued strength in corporate demand. Our corporate demand in the fourth quarter was up 3% across the Board. Obviously, internationally it was down a bit in Europe given some of the effects of the Paris attacks. But broadly speaking our corporates continue to tell us that they expect growth in 2016 over 2015 level.

So I think this really gets down to a question if the volumes are there, we flew the Christmas season and the Thanksgiving season with some of the strongest load factors in our history. And people translate that into what it means with revenue, there is certainly pricing pressure out there from the fact that fuel prices are half of what they were a year ago, but our yield to run average were down about 4% in the quarter, so both of that fall into the bottom line and our business looks pretty healthy.

Duane Pfennigwerth

Thanks for that detail. And then just on a follow-up here, the language about core CapEx of $3 billion. I just want to check does that mean excluding strategic acquisition like Aeromexico or what would be the difference between core and non-core CapEx? And thanks for taking my question.

Richard Anderson

That’s right.

Ed Bastian

That’s it.

Richard Anderson

That’s it.

Duane Pfennigwerth

Thank you.

Operator

And from Bank of America, Andrew Didora.

Andrew Didora

Hi, good morning everyone. I guess kind of follow-up to an earlier question. When you initially gave 2016 capacity of up to do, fuel obviously was 3% higher that it is today. But I know you’ve often said that you do run your business based on a much higher oil price, but if today’s level were to hold for the better part of this year, do you think your thoughts on capacity would change at all?

Richard Anderson

It’s the guide we gave you.

Andrew Didora

Okay. Fair enough. And then just when I think about your growth here domestically, what are some of the key markets that are you’re looking to add in as oppose to maybe some of the weaker markets you’re looking to kind of move capacity around a bit?

Glen Hauenstein

Andrew, hi, its Glen. I think there is really three things we’re concentrating on. One is the continuing up gauge of the airline which we have a lot of great and I think innovative programs in place whether it not identification that Paul talked about or whether it’s the continued retiring of the 50 seat airplane and upgauging the airline more to be a mainline airline. So we have that as a couple of points. And actually the fleet count remains less. When you ask about the commitment and really Jamie asked before what the lower boundary was and we have plenty of space on the lower boundary. What we really plan for the upper boundary in terms of how many airplanes do we have coming in and how many pilots that we hired. That’s really what determine and why we can say with confidence zero to or two, because that’s really running our factories as efficiently as we could.

We can always step back from that if the economic conditions changed. But the investments for this year are really and filling everything we’ve started before continuing to get Kennedy to its full 250 departure per day. We think if 250 departure a day since connectivity is expediential that we will really see some aggressive improvements in return in Kennedy as well as Seattle which more and more is relying not only on the Seattle local traffic but on the connectivity that we’re generating through Seattle at this point from the entire Pacific Northwest, so really those are two key linchpins along with upgauging and making our existing hubs more efficient.

Andrew Didora

That’s great. Thank you very much.

Operator

We’ll move on to Savi Syth with Raymond James.

Savi Syth

Hey, good morning. Just a couple of questions. The first it is a follow-up on the corporate demands standpoint. I know the shift of volume made sense. It was up about 5% I think in the prior quarter, 3% this quarter. Is that a function of just tougher comps as they kind of the slowing growth there? Or how do you – how would you kind of rate the somewhat slowdown in the year-over-year growth?

Ed Bastian

Savi, this is Ed. It’s really a function that we have put less capacity out. The overall rate of improvement continues at the same level.

Savi Syth

That makes sense. And then just a follow-up on the fuel hedge side, I know, its been the kind of the right decision to not hedge here and kind of giving outlook lower, maybe that’s a right thing, but how do you – any kind of latest thoughts on hedging and maybe what prices if you do hedge today or even about to hedge?

Paul Jacobson

Good morning, it’s Paul. You know I would say that what we announced today is really a function of the continued uncertainty and volatility that are in the markets today. We think there will continue to be opportunities out there. We’re still committed to hedging over the longer term, but feel this is the right time to just kind of sit on the sideline and wait it out.

Savi Syth

And if you were to hedge Paul, what kind of prices are you going to hedge?

Paul Jacobson

Very low.

Savi Syth

Okay. All right. Thank you very much.

Jill Sullivan Greer

And Kelly, we’re going to have time for one more question from the Analyst.

Operator

And that will come from Buckingham Research, Dan McKenzie.

Dan McKenzie

Hi. Good morning. Thanks guys for squeezing me in here. Two questions tied to the commercial initiatives. I guess first here with respect to branded fare initiative what percent of the domestic routes are ultimately going to be touched by this once we get to full speed at 2018 and then more importantly how big is the revenue tailwind from curtailing the revenue dilution from business travelers that otherwise might be buying down. Is it worth of half a percentage point of domestic PRASM, one percentage point, any color would be helpful?

Richard Anderson

Let me answer the first question first. The first question is we intended to have all four fare products on all markets by 2018, so that was the easy one. The second one is about the dilution of revenue for basic economy from customers that are in the corporate world and what upside that might have. And I would say that is an indirect benefit and we think that’s in that the several hundred million dollar a year range, based on our trial where we are today.

Dan McKenzie

Okay. Very good. Secondly, at the Investor Day you guys cited fleet initiatives of course as a key commercial initiative driving margin expansion. I’m just wondering holding still constant how much of the margin improvement came from RJ restructuring in 2015 and as the expectation of that trajectory would be similar in 2016?

Paul Jacobson

You know we don’t candidly all the numbers we have on this table in front of me, we actually don’t track that number per se. I think what you have to look it is what the value is that we receive from upgauging and that’s really reflected in our operating margin.

Dan McKenzie

Okay. Thanks for the time, guys.

Jill Sullivan Greer

And that may conclude the analyst portion of the call. And I am now going to the turn the call over the Kevin Shinkle our Chief Communications Officer for the media portion of the call.

Kevin Shinkle

Thanks, Jill. Welcome to the media portion of the portion. We’ll have about 10 minutes for questions. Please limit yourself to one question and one follow-up. And Kelly Ann, can you please provide the instruction to how to register for a question.

Operator

[Operator Instructions] And we’ll hear first from Jon Ostrower with The Wall Street Journal.

Jon Ostrower

Hi. Good morning, gentlemen. Just touching on the announcement from Frontier earlier this month, I’m curious from that perspective where you guys sit on adding a 42 new routes into their network and whether or not that represents any kind of stabilizing force for the U.S. domestic market more broadly and whether or not how you see that competitive challenge facing up or overall capacity as Frontier [ph]?

Paul Jacobson

You know, it’s our policy to not comment about our future actions with respect to competitive dynamics in the marketplace.

Jon Ostrower

Can you add – do you believe that the action could represent a force that ultimately strengthen Delta’s position or do you see that more as a path for stabilization or any kind of color just to that move just from the competitive dynamics.

Ed Bastian

We have a policy of not commenting upon the competitive – future competitive dynamics in the market place.

Jon Ostrower

Thank you.

Ed Bastian

You are welcome.

Operator

We’ll move next to Jeffrey Dastin with Thomson Reuters.

Jeffrey Dastin

Thank you very much for taking the call. Would you mind saying your thoughts Bombardier's C series and whether Delta is considering a purchase of the aircrafts?

Ed Bastian

You know they brought the C-Series to Atlanta right before Christmas and we met with Fred Cromer, President of Bombardier and it’s a pretty impressive airplane. The geared turbofan is the really the first big innovation since the Boeing 787, revolutionized the composite structure for the body the fuselage of the airplane. So, we actually think that at right price it’s quite a competitive airplane particular given the engine technology. So we’re taking a very serious look at it.

Jeffrey Dastin

Thank you very much.

Operator

And from Flightglobal, Edward Russell.

Edward Russell

Hi, yes. I was just wondering if you could elaborate on your plans for LAX, in regarding moving the terminals 1, terminals 2 and terminals 3 there. Are you planning any kind of renovations, rebuilding the terminals, if you can elaborate please?

Ed Bastian

Hi. This is Ed. We’re – as Richard mentioned on a call a week ago, we have entered into a non-binding MOU with LALA [ph] and the board, and at this point in time we are working with the board on hopefully turning that into a binding intent over the next number of months and we’re not really at liberty to comment on that.

Edward Russell

Okay, could you please give an idea of the timeline when such a move could take place if you do decide this does happen?

Richard Anderson

We’re not at liberty to comment. It’s really up to the commissioners and the Mayor’s office and we appreciate the support we perceive but there’s a long way to go yet.

Edward Russell

Thank you.

Operator

And we’ll go to the Philadelphia Inquirer's, Linda Lloyd.

Linda Lloyd

Thanks for taking my call. Could you help me understand why the trainer refinery posted an $8 million profit for the quarter when the October earnings call you expected a $30 million fourth quarter profit and a full year profit of $230 million? Thank you.

Paul Jacobson

Hi Linda, this is Paul Jacobson. You know primarily its related to the crack spread environment that we see. You know distillate cracks are down which is very very good for the airline since we are a substantial consumer of jet fuel, but the refinery is actually doing a fantastic job in terms of reliability and operational performance. So we are very pleased with the results.

Richard Anderson

Yes and the fact, this is Richard. If I could just add something to that. You know we’re really proud to own the trainer refinery; it’s a great group of professional people that operate that refinery. And if you look at the industry data, it is now the top performing refinery in pad 1 in the Northeastern U.S. So it’s a core and critical strategic asset for Delta.

Linda Lloyd

Thank you. What was the full year profit for the refinery?

Paul Jacobson

Just under $300 million and we paid $150 million for it.

Linda Lloyd

So financially it’s working out fine, right.

Paul Jacobson

Spectacular.

Linda Lloyd

Thank you. Thank you for answering my question.

Jill Sullivan Greer

Hey, thank you. Well with that, we’ll conclude our earnings conference call. Thanks to everyone for listening.

Operator

Again that will conclude today’s Delta Airlines conference. Thank you all for joining us.

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