Delta Air Q1 Earnings Conference Call: Full Transcript

Operator:

Please stand by. Good morning everyone. Welcome to the Delta Air Lines March Quarter 2016 Financial Results Conference. My name Kelly and I will be your coordinator for today. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session following today's presentation. If you wish to ask a question at that time you may press star, one. As a reminder, today's call being recorded. I would now like to turn the conference over Mr. Jill Sullivan Greer, Vice President of Investor Relations. Please go ahead Jill.

Jill Sullivan Greer: Vice President of Investor Relations:

Thank Kelly and good morning everyone and thanks for joining us for our March quarter call. Joining us from Atlanta today are Ed Bastian, our incoming CEO; Glen Hauenstein, our incoming President; and Paul Jacobson, our CFO. We also have the entire leadership team with us in the room for Q&A.

Ed will open the call, Glen will then address our revenue performance and Paul will follow and discuss 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 those described in Delta's SEC filings. We will also discuss non-GAAP financial measures. All results exclude special items unless otherwise noted. You can find the reconciliation of our non-GAAP measures on the Investor Relations page ir.delta.com.

And with that, I will turn it over to Ed.

Ed Bastian: Chief Executive Officer:

Thanks Jill. Good morning and thanks to everyone for joining us. This morning we reported a $1.56 billion pre-tax profit, our 12th consecutive record quarterly results as the business continuous to benefit from low fuel prices and the solid demand. We held our top line roughly flat and realized substantial fuel savings which allowed us to expand operating margin by nearly 10 points to 18.5% and generate $1.4 billion in operating cash flows. These are nothing short of outstanding results in what is typically our seasonally weakest quarter of the year where we also saw additional pressure from the tragic events that occurred in Brussels in late March.

Operationally, we again led the global industry with a 99.4% completion factor and an on-time arrival rate of 86.5%. We have 49 perfect mainline completion days and 6 additional days where the only cancelled flights in our network were to Brussels. It's now more rare to have a day with a cancellation than not on our mainline product.

We also had 8 days of no cancellations across the entire Delta system, both mainline and regional carriers, what we call brand perfect days and we are focusing more and more on the system level performance and working hard to improve on this basis.

With these results, the Delta team proved yet again they are the very best in the industry. I am proud to announced we accrued $272 million in profit sharing this quarter on top of the $23 million in shared reward they earned. I want to thank the Delta team for a terrific quarter. It's an honor to be able to lead this great company and serve all of you.

I would like to take a moment to thank Richard for his leadership and vision in transforming Delta. Richard has been a great partner and mentor for me for the past decade and while he will be enjoying a well-earned retirement, he'll always be a trusted friend and advisor and we'll all benefit from his leadership as the Executive Chairman of our Board.

Our strategy is working and our team is fully in place. We got Gil West, our Chief Operating Officer who leads the best team of operators in the industry. Glen Hauenstein, our new President has led our network and revenue transformation over the last decade. Steve Sear has taken us through five consecutive Business Travel News victories as Head of our sales organization.

Paul, Joanne, Peter, Kevin, the list goes on. Our bench is deep and we're going to keep building on our momentum.

While we continue to post record profits, we are very aware that fuel prices remain volatile and have increased nearly 60% from the lows earlier this year. For this reason, we are determined to get our business back on the path of positive unit revenues because this is how ensure that the margins and cash flow that we are producing are sustainable through good times and bad. Glen will be describing our actions along this course.

As we look ahead at Delta, we have tremendous momentum in the business. While lower to longer fuel prices have added some painful uncertainty to our timeline on getting back to unit revenue growth, they are also driving roughly $3 billion of fuel savings this year and we are committed to pushing as much of that fuel savings to the bottom line as possible. We estimate that we retained 50% of fuel savings in the first quarter on an ex-hedge basis. On a net hedge basis, our fuel savings retention was 75%.

We are using the cash flow generated by these record earnings to invest in long-term profitable growth opportunities for the business, improving the balance sheet by paying down debt and funding the pension and continuing to return cash to owners. As we've done for the past several years, we plan to update you on our long-term plan and capital deployment strategy at our upcoming spring Analyst Meeting which will be held this year on May 16th.

I have been asked many times over to last couple of month as I take over CEO as to what my priorities will be as we look to the future. Our goal as a team will be to continue to invest in the initiatives that are producing a durable, sustainable and the industry-leading foundation at Delta.

First, our top priority is running a safe, reliable, and customer-focused operation. This is at the very core of what we do and is producing meaningful improvement in customer satisfaction. It also translates into our industry-leading RASM premium and a more efficient cost structure, both of which contribute to more sustainable margins over the long-term. Second is enhancing our brand premium. We said before that our product is not a commodity.

In order to earn a premium price from customers, we need to produce a premium product and a brand that drives loyalty. That starts with thoughtful service and reliable operations, but also includes consistent innovation across the entire travel experience.

Third, you'll see us continue on the path towards globalization, whether through initiatives like headquartering our Trans-Atlantic operations in Amsterdam or through our equity stakes in Virgin-Atlantic, China Eastern, Aeromexico and Gulf, we see the international marketplace as the source of long-term profitable growth opportunities. Our goal is to be the best US global airline.

And finally, we will maintain the balanced approach with all our stakeholders, our employees, our owners, and the customers and communities we serve share in Delta's success. This strategy has driven tremendous value for all our stakeholders and this is the foundation for sustainable performance over the long term.

I am excited about the future of Delta Air Lines and honored to lead the very best team of airline professionals in the world. I thank to our investors for the trust they place in us and assure you we are working hard to be great stewards of your investments.

With that, I am happy to turn the call over to my good friend, Glen Hauenstein.

Glen Hauenstein: President:

Thank you Ed and good morning everyone. I would like to start by expressing my deep gratitude to the Delta team for all of their hard work. Taking great care of our customers everyday has resulted in another record quarterly performance. I am honored and humbled to be taking on the role of President at this is very exciting time for our company.

There are enormous opportunities ahead for our business and I look forward to driving our continued success together.

Our revenues for the quarter were roughly flat to last year, including a $125 million headwind from currency, a $5 million impact from the recent events in Brussels. We also maintained our top line performance despite a 40% decline in market fuel prices. Our corporate demand remains solid with volume growth of 2% this quarter. So our increases across most sectors including Healthcare, financial services and technology.

However, the improvement in volumes is being more than offset by lower deals.

The outlook for corporate demand remains favorable with 82% of respondents who are latest corporate travel manger survey protecting their overall travel spend will be maintained or increased for the rest of the year. This is consistent with outlooks from previous surveys. We continue to see good performance with our branded fare initiatives. Total merchandising revenues grew over 30% for the quarter led by comfort plus growth of 45% and first class revenue growth of 12.

Basic economy grew roughly $20 million in incremental revenue and we begin our broadest city level expansion initiatives during the quarter.

Our partnership with American express produced $80 million in incremental value this quarter and we expect $265 million in incremental value for the year. Year-to-date new car acquisitions are at record levels and up substantially form 2015. To expand our courts is a double digits we continue to work with our great partners -- to produce innovative program our offerings for our customers and continue to grow our portfolio. Our passage or unit revenues declined 4.6% with roughly 2 points of the decline attributable to currency.

This result was at the low end of our initial guidance as we continue to see choppiness in the domestic closing yield environment during the quarter.

Focusing our domestic business, unit revenue declined 5% on 6% more capacity with one point of that growth attributable to leave day All of our domestic hubs improved margins in the quarter with the best performances in Salt Lake City, Atlanta and Minneapolis. Our investments in markets like New York and Seattle are continuing to pay off as we drove margin expansion in excess of the domestic average in both of these cities. Our international business is still facing headwinds from foreign exchange and lower fuel surcharges as well as economic and geopolitical challenges in certain regions.

All of which we continue to address with capacity actions.

The TransAtlantic entity so unit revenue declined to 6% on a 3.5% reduction in capacity, driven by a 4 point headwinds from currency and pressure on yields as industry capacity grew in the high single-digits during the normally slow season. In our core European markets US point of sale demand was strong and recovered quickly following events and --. On the flip side European point of sale demand has been softer largely due to the weaker euro. We are pleased with our performance in London and we continue to benefit from a deeper integration with Virgin Atlantic and the network changes we made together in 2015.

Unit revenues improved year-over-year as travel to the region rebounded following the events of last November.

In Latin America, unit revenue were down 9% with 5% of the decline attributable to currency, largely driven by the Brazilian real. Mexico and Caribbean markets performed well during the quarter and have remain resilient throughout the peak spring travel period -- related cancellations had a very small impact on Latin America. Our Brazil capacity has been reduced by nearly 30% from peak levels while our modest capacity growth has been well absorbed in Mexico and the Caribbean in the Pacific RASM declines are moderating with unit revenues down 5% including roughly 8 points of impact from FX and fuel surcharges. Yen was a $35 million headwind in the quarter, $30 million of which was driven by lower year on your hedge gains.

While the recent appreciation of the yen is a positive for our business. We will see roughly a four point headwind the Trans-Pacific RASM for more hedged gains through the remainder of the year.

Capacity to the Pacific declined 9% this quarter primarily driven by Japan. This is part of our continuing Pacific restructuring which includes the ongoing retirement of our 747 fleet. Our China business continues to mature as to our partnerships with China Eastern and China Southern. Today between 15% and 20% of our customers are traveling beyond Shanghai and Beijing to our partners networks.

We expect that number to steadily increase overtime. Demand in China in the broader Pacific held up well for the first quarter although yields remained under pressure due to high levels of industry capacity growth in the region.

Looking ahead we are forecasting that second quarter unit revenues will be down 2.5% to 4.5%. A sequential improvement from our first quarter revenue results. On that 2% year on year capacity increase.

While we are not there yet we understand the importance of getting back to positive revenue. Volatility and close to yield and challenges in Europe may mean we achieve our goal a few months later than we previously had factored. Well we continue to target reaching the inflection point this year.

We have a good line of site to getting there in domestic our trends encouraged by there is a yield trends which are now beginning to turn positive after being down for roughly a year.

In addition to our domestic capacity -- in addition our domestic capacity growth moderates with each successive quarter during the year. In Latin and the Pacific our capacity, our actions and restructuring efforts will continue to benefit us while currency headwinds are also easing. We continue to expect unit revenues to inflect in both entity in the summer timeframe. In the TransAtlantic which accounts for 15% to 20% of our revenues is where we have the greatest challenge.

Yields remain under pressure and industry capacity growth continues to demand. Peak season volume from U.S. To Europe remained very strong and will drive record profits in this summer giving the lower fuel prices and one positive is that we will get help from currency and returns from headwinds into a tailwind beginning in the next quarter.

In closing, I would like to reiterate that we are focused on taking the necessary actions to get that positive RASM for 2016 and ahead of our network competitors. If for no other reason than to get back. We will say to achieving our goal in domestic the Pacific and Latin America, we are addressing the headwinds we face in Europe and we will quickly to move all the levers in our business including capacity if we do not see sufficient progress in the coming months. With that I would like turn it over to my good friend Paul.

Paul Jacobson: Chief Financial Officer:

Thanks Glen and good morning everyone and thank you for joining us today. While lower fuel cost are providing huge benefits for our business, there is a lot of uncertainty in the global environment and we know fuel will stay low permanently. As a result we remained focused on staying disciplined with our cost. Total operating expenses for the quarter however were down more than $1 billion as this decline in fuel cost offset wage increases as well as higher profit sharing expense which doubled versus last year this quarter. Non-fuel CASM increased 4.5%, including profit sharing, better than our initial expectation with roughly half of that increase coming from higher profit sharing in the quarter.

As you may recall, our cost growth is more weighted towards the front half of the year given the timing of last year's wage increases and this quarter is the peak. During the quarter, we retired 10 older mainline aircraft including nine 757 and one 767-300. We removed six 50 seaters from our schedule also during the quarter. We continue to except our refleeting efforts to drive another $350 million of savings in 2016.

Our maintenance initiatives benefited us by $90 million in the quarter and we continue to target a $400 million benefit for the full year.

For the second quarter we expect non-fuel CASM including profit sharing to increase roughly 2% as our productivity and other cost initiatives help offset higher wages and product and service --

CASM growth in second quarter will be well below 1Q levels as lap last year's April 1st wage increase. We remain on track to keep non-fuel costs, ex-profit sharing below 2% for the full year.

Moving on to fuel, our total fuel expense declined by $1.5 billion due to lower market fuel prices and lower year-over-year hedge losses. Our all-in fuel price was $1.33 per gallon, down 55% from the prior year. The refinery lost a modest $28 million in the quarter. While lower crack spreads are a headwind for the refinery, they are obviously a significant net benefit for Delta as a whole.

Looking ahead, we expect an all-in June quarter fuel price of $1.48 to $1.53, which is down 40% from prior year. We continue to have no open hedges going forward and anticipate hedge losses of approximately $200 million in each of the remaining quarters this year. With a combination of the fuel tailwind, our non-fuel cost discipline, and the sequential improvement in RASM performance Glen discussed, we expect another record quarter in June with an operating margin of 21% to 23%, roughly 5 point improvement from the prior year.

On cash flow, we are using our strong cash generation to our appropriately balance the long-term investments we are making in the business, while continuing to return cash to our owners and de-risking the balance sheet.

As Ed mentioned, we generated $1.35 billion of operating cash flow in the quarter. This was net of $1.5 billion in profit sharing pay-up to employees for 2015 and an $825 million cash contribution to the pension plan. We also contributed $350 million in Delta stock to the pension during the quarter. With the additional $100 million in cash we put into plan this month, we have contributed $1.3 billion in cash and stock since the beginning of the year.

This completes our funding for 2016.

We reinvested $870 million back in to the business during the quarter. As you may recall, we expect higher capital spending in the first half of the year due to the timing of aircraft spend and we'll spend roughly $1 billion again in the second quarter. Additionally, this year we expect our AeroMexico tender offer to close in the third quarter.

In the March quarter, we returned $880 million to shareholders, including the $350 million accelerated share repurchase we completed to offset the dilution from the contribution to the pension plan.

Adjusted net debt at the end of March was $7 billion, up slightly from year-end due to the timing of cash flows, including pension funding and profit sharing. And the decision we made to stay on track for run rate for buybacks during the quarter. We expect our adjusted net debt to be below $6 billion by year-end with our cash flow. We remain significant progress on delevering our business over the last decade and we are pleased to have this recognized with an upgrade by Moody to investment grade during the quarter.

In closing I would like to thank and congratulate the entire Delta team not only for another record quarter, but also for achieving our long health goal of returning as an investment grade company. These accomplishments would not have been possible without your termination, dedication and hard work each and every day. Jill back to you.

Jill Sullivan Greer:

And we are now ready for questions from the analyst if you could give instructions.

Question & Answer

Operator:

Thank you. At this time if you do have a question that will be star, one on your touch tone phone. Again star, one for questions. We will move first to Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth:Evercore ISI:

Hey guys good morning. Thanks for the time.

Ed Bastian:

Good morning, Duane.

Duane Pfennigwerth:

As we look towards the inflection to positive revenue later this year and you touched on some of the can you just pick expand your thoughts on kind of domestic versus international in which international region you might expect that first specifically Latin America there is been lot of capacity cuts or anymore instructive on getting back to positive unit revenue within that region.

Glen Hauenstein:

Good morning this is Glen. I think we are very constructive frequency not only to we have some positive shoots in Brazil while first in many years or closing bookings that actually provide positive momentum if it close --, but we are coming off the very little pace in Brazil and as we start to lapse the currency changes I think we are positioned well as the capacity down and inflection point later this year.

Duane Pfennigwerth:

And so would that be your guess in term of getting back to positive rounds in first.

Glen Hauenstein:

No I think we are already in positive -- we are already in some of our entities including Mexico now in Japan and domestic I think we have a big line of -- for peak summer. So I think we have a lot network it's doing better that's being by some very dramatic decreases in certain geographic areas including Brazil

Duane Pfennigwerth:

Thanks for that color and then Paul could you update us on your latest thinking regarding CapEx for this year and next. How do we think about your narrowbody reflecting needs relative to kind of that 3 billion core CapEx level that you've got lined?

Paul Jacobson:

Good morning, Duane. I think as we've talked about we are looking at balancing capital against our cash flows and approximately $3 billion remains our goal. We've got needs over the next 5 to 7 years as we think about older narrowbodies particularly MD-88 and we've remain committed to doing that while achieving our EPS goals, while achieving our cash flow and our balanced capital allocation.

Ed Bastian:

Duane this is Ed let me add little bit more closer comments or 2016 CapEx guidance remains in line with what we gave an expectation there is no change is there and we are in good shape as we look at on our international live bodies so there is nothing on that horizon that's changing the focus we're mixed of currently is the domestic fleet renewal over the next five years is not short term maybe some medium term need because the MD-88 do need to retire when we have roughly 115 of them currently and we to continue upgauge our regional planning to the mainline which we thought a lot of success in and there is much more to go and I think s much more to go and I think we can do it cost effectively there is been a lot of media reports we have nothing to report at this time there is no decisions taken so I will not comment of any media reports, what I do hope is that we'll have more information to report and give you that medium term outlook when we meet together next month in New York at the Spring Analyst Meeting.

But the one thing you can remain convinced of your Delta is that we will stay disciplined on capital deployment as always that will never change.

Duane Pfennigwerth:

Thanks very much.

Operator:

We'll hear next from Savanthi Syth with Raymond James.

Savanthi Syth:Raymond James:

Hey good morning

Ed Bastian:

Good morning.

Savanthi Syth: Raymond James:

Just on the domestic capacity I know the first quarter you have the increase related to the extra day, but it still out about 5.5% to 6% and then if you look at second quarter and I -- schedules wrong but trying may be 4 to 5. So I just wondering does that are you still kind of thinking 1% to 3% growth for domestic market in which case may be second half you see in a growth of like 1 to 2 is that still you're thinking?

Ed Bastian:

That is still the thinking and we do have deceleration of that growth throughout the year. Thanks, thanks to team one of the other good benefits we have in the first quarter was in much higher completion factors than we had in previously that was included in a higher number this quarter as well so we do see that number decelerate throughout the year.

Savanthi Syth:

Understood, and then just on the fleet question, just wondering if you're still finding attractive rates for aircraft to part out an even in a mid-life aircraft replacement or as you look to your, now why are you replacing are you focusing more on newer aircraft to kind of keep that the average age going?

Ed Bastian:

Savanthi as we have said we have nothing to report on any speculation in the media and we will wait till we have something to tell you so we can lay out what we are doing. But yes absolutely we continue to see good opportunities in the part out space and Gill and his team have created a new entity called Delta material services where we are going in and saving literally 100s of millions of dollars and are take up some maintenance cost.

Savanthi Syth:

Alright great. Thank you.

Operator:

And from Cowen and Company we will move to Helane Becker.

Helane Becker: Cowen and Company:

Thanks very much operator. Hi everybody thank you for the time. So I just wondering if you could explain a little more flush out a little more the TransAtlantic come in about over capacity in the market and I am asking within the context of the factors there are three large JVs that seems to be able to adjust capacity so are you seeing other entities outside of the JVs increased capacity most part of that are you seeing than back selling what you're taking out so maybe you could just kind of flush that out a little more for me.

Glen Hauenstein:

its Glen. One of the big contributors of course are there ME3 because they are included in our TransAtlantic capacity, so for example here in Atlanta we have Turkish airlines staring non-stop, there is instant this Spring, we also have flying from here in the spring and the Atlanta that marketed is less than 5 people so they're going to need to fill up on some flow, we don't think they'll be successful but that's capacity that we face here locally that I think describes capacity that it's the TransAtlantic and on the other side in Europe itself you have some of the growth from the ultra-low cost carriers that are attempting out of climate and the trends Atlantic such as north region as well as some of the majors like your Canada. So when you add all that together you get a TransAtlantic capacity increase there is in the high single digits, low double digit through the peak summer season given the economic outlook for the United States and for Europe. We think demand will grow in the 4% to 5% range and so there is a more capacity and can be absorbed by the increase in that demand.

Helane Becker:

So just a follow up on that are you seeing than pricing being more aggressive in that market and are you concerned that if oil prices continue them with that it will pressure margins?

Glen Hauenstein:

Well I think those are always are concerns I think that the demands that is strong particularly as US and it’s been a little bit weaker ex Europe, but if these elevated level stay and fuel goes up and economies don't grow I think that would be an indication that the industry would we need to talk about so in order to maintain margins.

Helane Becker:

Okay. Thank you Glen I appreciate your help.

Glen Hauenstein:

Thank you.

Operator:

We will move next to Joseph DeNardi with Stifel.

Joseph DeNardi: Stifel:

Hey thanks, good morning, Glen just on the domestic side just kind of given the slowdown in capacity expected throughout the year where the investments being made now and what markets it's going to fund the capacity reduction through the year?

Glen Hauenstein:

Well I don't think it's necessarily capacity reduction but it’s a last thing of the investments we've made last year. So that we get through the year our capacity in Seattle grew dramatically last year our capacity in Europe were significantly last year as we get to that second half of the year those capacity action start

Joseph DeNardi:

Okay thanks and then Paul just on some the deferral and acceleration transactions you've made hedge book I think that's kind of complicated the cash flows this year and the next year. So I am just wondering if you could kind of where the book stands right now with the net cash flows and outflows are this year next.

Paul Jacobson:

Hey good morning, Joe. What we talked about was if you recall at investor day that I am sorry on the first quarter call that we have locked out the book that's where we sit right now. Our expense recognitions mirrors those cash flows. So we would expect about $200 million a quarter and we do have some modest quarterly impact in 2017, but it’s rather immaterial that the cost of that though is like we said the book remains flat and there is no participation right now is just sitting that.

Joseph DeNardi:

Okay. Thank you.

Operator:

And Jamie Becker with JP Morgan has our next question.

Jamie Becker:JP Morgan:

Hey good morning everybody. First one for who never mind want to take it there is the second quarter margin guide is healthy no question about that. But whether or not we include fuel there is traditionally been more improvement from the first quarter to second historically for Delta anywhere from color 500 to 800 basis points. So today's guidance is obviously below that range in the consolidated industry be showing a little bit more seasonality not less as we move into peak periods any idea what might be contributing to this.

Paul Jacobson:

Hey Jamie its Paul I will start with anybody else time in there was I think we need even you look at just where we are in this particular quarter-to-quarter are you've got a move in fuel that, if you can just look at mid-point of our guide for 2Q against our 1Q actual has moved up almost $200 million for that impact.

And while RASM is improving sequentially, it's not keeping up with that pace in the very, very short term. I don't think that's a judgment on consolidation, I think it's just on the volatility of where we are. Despite that move in fuel, we are sitting roughly at where we ended up at year-end. So I think there is a little bit of intra-quarter noise movement going on with the short term market generation.

Jamie Becker:

Okay, that's helpful. Second, for Glen, I am trying to better understand what happened in the last couple of weeks of multi-segment. January construction domestically, it's unclear whether or not Delta led the effort, I guess that actually doesn't really matter as much as it seems that the reconstruction is potentially driving from a RASM on multi-segment fare, the type that I would often use if I was jumping around the country on Delta. Can you share any background on this?

Glen Hauenstein:

Jamie, as always, we don't really comment on fares on this call. So I'd like to just, if you have another question we could answer.

Jamie Becker:

No, but along with this, we are with you and believing you should be comped against high quality industrial transports, but if you listen to the earnings calls from those companies this quarter or any other, most of them are going to talk openly about price and revenue. So, high quality industrial transports don't duck and weave on this topic. So, just let my point out. I will pass the mic to somebody else.

Glen Hauenstein:

Thank you Jamie.

Operator:

And from Wolfe Research, we will go to Hunter Keay.

Hunter Keay: Wolfe Research:

Thank you very much, appreciate it. Ed, I am curious to know what do you expect from Richard as his level of involvement of Chairman, how much is enough, how much is too much, I should say, and how much is now enough and what do you are you expecting from him and how much you guys get to communicate maybe between Board meeting?

Ed Bastian:

Well, Hunter, I don't mean to speak for Richard, but Richard is going to become the Chairman of our Board in a few weeks and I expect Richard to fulfill the same function and role that our current Chairman Dan Carp has done very ably for the last 7 or 8 years. Richard and I are obviously very close, so we speak a lot and I'd leave it at that.

Hunter Keay:

Okay. And Glen, does your on-time performance give you the opportunity to maybe tighten some block times in order to facilitate maybe some more connecting volumes? And maybe this is a question for you or maybe for Paul or maybe for Gil if he is there, but if you do have some potential CASM pressures in the event that you trip some capacity, how much of that can be offset by tightening some of those block times? Thanks for all the time, I appreciate it.

Gil West:

Yeah, this is Gill. Thanks for the question. I mean, there was a number of variables that drive on-time, I would argue that execution is the biggest of those, so we are wholly focused around that. Block time plays a role in it, of course.

But ground times also play a role. We run a tightest ground times in the industry and we try to buy us ground time to the tightest for a number of reasons and block more or less average now with industry, maybe a little bit higher. But we also try to not just blanket block time, we are more surgical about it. It think that's the next level that we continue to drive.

But our connections are also a metric and a variable that we look at. We run less than a 1% mis-connect rate as well while balancing all of that.

Paul Jacobson:

And Hunter, this is Paul. I will just add. We're not going to integrate the customer experience or put the customer experience that risk in chasing after CASM GOL, more we going to add capacity to manage cost capacity is responsibility of the commercial organization to match to demand and where we see that opportunity CASM has to be driven by productivity and we are going to continue to do that and if we are successful at that it's not going to impact the customer only enhanced their experience.

Hunter Keay:

Thank you very much.

Operator:

We move next to Darryl Genovesi with UBS.

Darryl Genovesi: UBS:

Hi everyone thanks for the time. Not to be the dead horse on CapEx but I saw Paul mentioned a $3 billion number again and I just wanted to be perfectly are you recommitting $2 billion to $3 billion stayed upper limit on Capex regardless in which way to MDA replacement decision goes.

Ed Bastian:

Darryl we talked about CapEx for 2016 and long-term we mentioned that we've got some domestic of fleet renewal needs and we don't have any updates to that number but I think you need to wait and to see if we make decisions along that line and we'll keep you posted.

Darryl Genovesi:

Okay, thanks and then bigger picture question for Ed or Glen, I appreciate it and I am sure most equity investors on this call probably appreciate your admiral goal to getting back to positive year-over-year unit revenue growth. I guess what, what sort of is whether sustained unit revenue growth is actually achievable over the next few years with returns running as high as there across the industry which to me would appear likely to drive continued at least mid-single-digit supply growth which is kind of what we've been seeing, so just wondering and maybe perhaps just focusing on the domestic market assuming the current status flow kind of low single digit GDP growth fuel and kind of the load to mid-40s per barrel and then continued mid-single digits domestic supply growth across the industry how do you really establish confidence that you can get to sustained unit revenue growth and understandably the demand is going kind of have been flow maybe you can get there for a quarter or two. But just any color on sort of how you can get there and sustain there given the return profile across the industry? Thank you.

Ed Bastian:

If you look over the last several years we had seven years of unit revenue expansion all of by it looks like about two years of contraction there'll be about two years of contraction which were caused really by fuel price being cut in less than half and I think if you look at the correlation to fuel and unit revenue overtime you'll see a very tight correlation in the longer term and so as you depending on what your fuel assumption if you see fuel bottoming at 27 in December time period and then you see a gradual improvement although longer -- lower for longer I think that ultimately will be reflected in ticket prices and that's one of the reasons I think we are relatively confident that we will get to a higher unit revenue in the back half for the year as we did in the first half of the year. To coupled out with the foreign exchange is moving from a negative to a positive I think that shows where we can get to, back to the domestic arena I do think that most of this decline is being caused by the decrease in fuel.

Darryl Genovesi:

Okay. I mean maybe just to play -- you know, understanding all these historical metrics that you just laid out I don't think we've really ever seen a period of sustain period of time where the airline industry was putting up a roughly 20% on levered returns like it is today right. So I think most would agree that, that's well above the industry's cost capital and looking across other industries that type of excess return would typically lead to outside growth right and so I guess I have a little trouble understanding how the industry goes about getting price and how Delta goes about getting price with that kind of term backdrop and likely supply trends that it will drive?

Glen Hauenstein:

I just be comment I have I think we have the very best revenue team in the business and I think we are very confident that we have a path forward and therefore the revenue for us to go in our from particularly corporate as we continue to separate ourselves from the pack in terms of our products and services and really that's what our future is about. Is about getting paid towards to the high quality of services that buy in this national transportation network. If you spend some time walk you through some of the initiatives in more great detail but we really do think that we are poised to separate from the past year.

Ed Bastian:

And Joe this is Ed just to add to what Glen was saying. This is a different business and this is a different company and you also have to keep into account for the level of cash that we are generating and putting back into product and services and producing a product that customers want to buy and investing in segmentations, technologies and merchandising opportunities and corporate volume and volumes has states long throughout this period. So I am optimistic we will continue to produce the results that we talked about and we'll have as a good question about more on the spring meeting about that.

Darryl Genovesi:

Great. Thanks very much guys.

Operator:

We will move next to Dan McKenzie with Buckingham Research.

Dan McKenzie:Buckingham Research:

Good morning thanks. Looking at the summer Europe really strikes me as a wild card the best case scenario under looks pretty dam so I am guessing the unit revenue outlook for the second quarter doesn't factor in -- but I believe the demand trends were weak and even before that -- attacks. I am wondering if you can provide some additional color about what's factored into the outlook exactly on the salary so perhaps a trend line of continue to decade part me and then just remind what percent of the revenue is tied to the UK specially?

Glen Hauenstein:

UK specially is probably for us less than 3%. But demand trends for the summer demand itself is strong yields are relatively weak and a lot of that is because of the currency devaluation, but now we're overlapping. So as we move forward in this point we should see actually tailwind from the euro exchange rate. So while your question kind of indicates driven we will confidently say that we will have record profits in TransAtlantic this summer and that's with the high degree of confidence that our profits will be at historic highs TransAtlantic summer and as we get to June and as we usually do we'll excess what demand trends we've see for the off season and then we will take the appropriate adjustments if necessary to ensure that we have the right level of capacity for the full winder.

Dan McKenzie:

That's good color thanks Glen and following up the JBTA forecast for corporate travel spend was revised downward this week. So I am wondering if you can provide some color around this revenue bucket for Delta as the spend deteriorated somewhat or are you expecting been spend part me to perhaps trend a little more stronger this year, just wondering what color you can share along those lines.

Ed Bastian:

Dan, this is Ed. The GBTA Report, as I recall looked at quickly the other night, indicated that demand continues to grow, volume continues to grow, and that's what we are seeing in our corporate space, our volumes were up in Q1. And our forecast through the summer and the rest of the year is for volumes to continue to grow. I think the numbers that they revised down was more reflective of the current pricing environment in which fares are lower than were previously anticipated in the close-in space.

And I think we are not seeing any trend lines to give us pause.

Dan McKenzie:

Very good. Thanks guys.

Operator:

From Stephens, we will hear from Jack Atkins.

Jack Atkins: Stephens:

Good morning guys. Thanks for taking my question. As it relates to rising fuel prices, I am just curious how quickly you think you would be able to pass that through higher fares? What sort of lag (inaudible)

Ed Bastian:

Jack, you are breaking up. We are having real hard time hearing your question.

Jack Atkins:

Sorry about that. Is that any better?

Ed Bastian:

Yes, it is.

Jack Atkins:

Okay great. So just as it relates to rising fuel prices, just I am curious how quickly you would be able to pass that through via higher prices, what sort of lag would you anticipate as fuel goes up before you will be able to pass that through via PRASM?

Ed Bastian:

Yeah, that's hard to speculate on. Historically there has been a lag and I think it's anywhere from 1 to 2 quarters before RASM and volume adjustments get made to keep track of rising fuel prices. So the current environment is different than anything we've seen before at the same time. So it'd heard to speculate.

Jack Atkins:

All right. And then, specifically with regard to the second quarter PRASM guide, what sort of FX impact is baked in there, if you could share, that would be helpful.

Paul Jacobson:

I think it's one point.

Jack Atkins:

Okay. Thank you.

Operator:

And Rajeev Lalwani with Morgan Stanley has our next question.

Rajeev Lalwani: Morgan Stanley:

Hi, gentlemen, thanks for the time. Just as it relates to the June guide, are you assuming the March environment carries forward? And then just coming back to business travel, have you noticed any changes as far as policy shifts on the corporate side?

Ed Bastian:

On the policy side, no we're not seeing any significant shifts and I'd say the Q2 guide is roughly in line with the trendline that we closed out the first quarter at.

Rajeev Lalwani:

Okay. And then just one other quick one. I think, Glen, you mentioned earlier that you're seeing some encouraging trends on the domestic front. Can you just talk a little bit more about what exactly that was and implications for it?

Glen Hauenstein:

Well, for many months and quarters now, we've had advanced domestic yields as they sit on books for out months in negative territory. And as we get to summer of this year, peak summer of this year for the first time in quite a while, the advanced bookings and advanced yield trends are favorable to the baseline of 12 months ago. So that to us is optimistic and now all we have to do is get through that whole booking cycle all the way down to day of departure and keep that in the positive territory. When you're sitting out at 30, 60, 90 days with the minus three or minus four, it's harder to make it up inside that.

So that's kind of the trajectory we are on at seeing a much more favorable advanced book than we've had in the past.

Rajeev Lalwani:

Okay, thanks for the time and congrats all the new and congrats on your roles.

Glen Hauenstein:

Thank you

Operator:

From Deutsche Bank Mike Linenberg.

Richard Tyler: Deutsche Bank:

Hey everyone it’s actually Richard Tyler on behalf of Mike. Good morning. So first we would be curios this year if Delta stands on slot restrictions and New York airport being listed in October, does that represent a growth opportunity for you and how do you think about impact the New York market maybe more broadly and fit into New York strategy

Glen Hauenstein:

New York is a very congested carrier in terms in terms of aerospace and it's a very complex and incredibly expensive environment to operate in and so we are enthusiastic about New York slot restrictions being lifted we are also realistic does not have an infinite number of or infinite capability traffic, so we will examine the options very carefully to see where it is, we can do to improve our position in New York but I don't see a significant amount of work for us in New York.

Richard Tyler:

Okay great thanks and then second regarding the financial difficulties your Brazilian partners going through, we know GOL has a number of fairly young aircraft that's it's looking to restructure with less orders and it's been reported that Delta's is in the as you commented multiple times for near about each jets, so is this sort of a happy harmony on the table where you consider using some of the rest is that an outcome you consider are you really just opting for new aircraft or a different avenue as you consider Europe personal needs?

Ed Bastian:

This is ED. We are working very closely with our good partners down in Brazil and they are certainly going through reduction of their fleet, we haven't made any decisions yet as to whether there would be some of the aircraft that we would take either through addition into our fleet or to part that opportunity or we're in dialogue with them, we are not the only individuals at the table because there is number of less orders that are also talking about sending aircraft back.

Richard Tyler:

Okay thanks for that color.

And Kelly and we have got time for one more question from the analyst.

Operator:

Okay. That will be from Julie Yates with Credit Suisse.

Julie Yates: Credit Suisse:

Good morning. Thanks for taking my question.

Glen Hauenstein:

Good morning, Julie.

Julie Yates:

Glen is there any color you can provide geographically on domestic RASM type of strength and weakness I think last year you called out three specific markets that's drive in the bulk of the weakness is it still a similar story or was the weakness in Q1 more wide spread?

Glen Hauenstein:

I would say that we saw a deepening of that number of market that were impacted by lower close in fares.

Julie Yates:

Okay great. Can you quantify that just in terms of like the number of top 10 market that are not effected or?

Glen Hauenstein:

Well I think what we can do as we can get back to you on that in terms of more specifics because it is a much more wide spread phenomena and then it was last year it was really just in some very key business markets and now it has locations, the good news is that the numbers having got more so they tend to balance out in demand but it is different than it was a year ago.

Julie Yates:

Okay and then just on the Q2 unit revenue guide of down 2.5 to 4.5 what's the underlying assumption for domestic versus international, I am curious that the sequential improvement is necessarily a function of just lapping the international headwinds like FX or surcharges or if you expect domestic to materially improve from the down 4.8% given the comments you made on advance bookings.

Glen Hauenstein:

As we get through the peak summer we do expect domestic to improve from where we are we are in March maybe it choppy month but I think June and July are looking very solid and we do get one point reduction or 0.5 on the currency headwinds as well. So I think we have some good visibility to peak summer second quarter in the peak for domestic and July is really the peak as we were headed to trying get deposit horizon and domestic we will see if we can get there.

Julie Yates:

Okay, great. Thanks for

DAL:

Thanks

Jill Sullivan Greer:

And that is going to include the analyst portion of the call. I will handed over to Kevin Shinkle, our Chief Communications Officer.

Kevin Shinkle:

Welcome everybody we have about 10 minutes to take questions from journalist. So please limit yourself to one question and one follow up if you can please provide the instructions to how to registered to ask a question.

Operator:

Certainly again to ask a question that will be star, one at this time. We will move first to --

Analyst:

Hi, everyone. I was wondering if you see any challenging for Delta in last few areas Bank of America and also just this week but they expanding late during this is in Seattle how will seeing impact Delta.

Glen Hauenstein:

Your question was, I didn't fully hear your question. How does the Alaska version proposed merger impact Delta.

Analyst:

Yes as well as jet fuel expanding mid services to Seattle.

Glen Hauenstein:

Seattle we're doing quite well. We continue to grow there we had a very good margin in the first quarter and I think our outlook is strong we are not going to comment on proposed transactions will react when we see what happens in the marketplace.

Analyst:

Okay. It’s all right.

Glen Hauenstein:

on the mid product between Seattle and -- came in Boston we are currently have flat beds on a single flight between or two flights between New York and Seattle and we are had already in the plane to make sure that we had a consistent product in terms of flatbed seats and key time channels between the two markets that's not all time channels but on the red eye it’s certainly we will look at a flatbed product in Seattle to New York.

Analyst:

Great. Let me

Glen Hauenstein:

that is not in our plans for before --

Analyst:

Got it and let us -- saying basic economy I think you said that if you had $20 million and incremental revenue in the quarter. Are you happy with that number I know you're not saying significant dilutions from passengers to get better rise that put your tier first?

Glen Hauenstein:

Basic economy is really a its designs for customers who solely are purchasing on price and I think our value proposition relative to the ultra-low cost carriers is very, very strong. We have great customers service and great operational reliability, great fair delivery and we already have a lot of things that on other ultra-low cost carriers are not for you like we don't -- charge or space and overhead debt. So if you are shopping we are just solely priced we want to have our product that can compete effectively and provide the best services against carriers who are providing a much lower quality of service and I think that's what this is design for and what we are seeing is when presented with the options and the really the way we get to the $20 million value is those customers when they were informed to what this product was shows something else and that's really how we get to that $20 million value. Remember its nearly only at about 400 to 500 markets now we have over 20,000 domestic markets.

So our plan is over the next week’s even months we continue to roll it out. So we do have a great volume proposition for people who are just looking for the lowest possible fare.

Analyst:

Thanks a lot.

Operator:

And from the Wall Street Journal, we will hear from Susan Carey.

Susan Carey: Wall Street Journal:

Good morning gentlemen. Could you remind me what your operating margin was in the end in the first quarter?

Paul Jacobson:

For the first quarter, it was 18.5%, Susan.

Susan Carey:

Thank you and secondly, there is a little tussle going on between the EU and the U.S. And Canada about possibly ending the visa waiver program. Apparently it's not settled yet, but are you thinking ahead to a possible negative impact if U.S. Citizens have to apply for visas to go to France or something?

Ed Bastian:

We are not anticipating that Susan.

Susan Carey:

Do you think it will solved then?

Ed Bastian:

We don't have enough information to have an informed opinion at this point. So, I'd say we are not making any plans.

Susan Carey:

Okay. Thank you.

Operator:

We will move next to David Koenig with The Associated Press.

David Koenig: The Associated Press:

Really you've answered the question I was going to ask, which was about basic economy; just one other thing is the entry of American and United into that market this year and how is that going to, do you expect how that will affect you?

Glen Hauenstein:

We really don't have the details yet on what American or United's product is. But I think we are consistent is saying whatever that product is, we want to have the best-in-class product and we will make adjustments as necessary to make sure that for people who are just traveling on price as the only decision maker that Delta always offers the best product offering.

David Koenig:

I guess what I am getting at is, let's assume for argument sake that American and United do something similar to what you have done, doesn't that just kind of divide up whatever that market is, the $20 million in incremental revenue you saw in the first quarter via high watermark?

Glen Hauenstein:

I don't think that's the case. So, we can take that offline and discuss it with you. But I think it might be the opposite.

David Koenig:

Okay, thanks.

Operator:

And Michael Sasso with Bloomberg News has our next question.

Michal Sasso: Bloomberg News:

Hey, good morning. Could just elaborate a little bit on your discussions with GOL, particularly you are talking about doing maybe taking back some jets from them; what exactly, what are the range of options that Delta is considering regarding Go and its aircraft?

Ed Bastian:

Well, Michael, there is no decisions taken yet because GOL is still working through the impact with its lessors and creditors down there. But GOL has been public that there is a considerable amount of their capacity that they are reducing and we, as a number of stakeholders in GOL are looking at it, whether there are some opportunities to take some used aircraft in either to enter into services and induct or to part out, there is opportunities in both spaces.

Michal Sasso:

Any specific types of aircraft you might look at?

Ed Bastian:

They only fly 737s.

Michal Sasso:

Okay, alright.

Operator:

And from The Street, we will move to Ted Reed.

Ted Reed: The Street:

Thank you. Glen, did you say between Atlanta and Doha there is only five O&D passengers a day. So I think you said that. Do you any routes like that? And secondly, you guys feel there is a resolution coming in this dispute with the Mid-East carriers?

Glen Hauenstein:

Well, Ted, I would -- we don't have any markets that we fly half way across the world that have less than 10 people and I don't think you will find any carriers in the world. So, I don't know what the latest is may be, I'll turn that over to Peter and on what's latest is and

Peter Carter:

I will tell you, this is Peter, this is our number one priority in Washington we have reason to believe that the US government is going to do the right thing and having said that because this is fundamentally a diplomatic process, it will take some time.

Ted Reed:

So nothing to from the US government?

Glen Hauenstein:

Not that we are aware of.

DAL:

Not that we are aware in fact we do have some markets that we have four to five passengers and we call that Delta private Jets.

Ted Reed:

Alright. Thank you.

Glen Hauenstein:

Thanks --

Operator:

Kelly Yamanouchi with The Atlanta Journal Constitution has our next question.

Kelly Yamanouchi: Atlanta Journal Constitution:

Hi I was just interest in filling out how the current environment in your outlook as it stands effects the pilot contract negotiation as you go into mediation and any time frame that you might have for reaching your deal there?

Glen Hauenstein:

We are not going to comment publicly Kelly on the status of the negotiations we're at the table we are working hard our pilots are the best and we want our pilot to be pay to best and that's our commitment to them.

Kelly Yamanouchi:

Okay. Thank you.

Operator:

And from Waiters we will move to Jeffery Baston.

Analyst:

Thanks very much, has -- consider starting direct flights into China's and -- now that more of its customers are traveling beyond Beijing and Shanghai?

Glen Hauenstein:

We have some great partners in China with China Eastern and China Southern and similar to how we transfer customers to our European partners -- we think that the next few years is about continuing to develop those primary gateways in Beijing and in Shanghai and as you may know we have applied for new services starting this December from Los Angeles to Beijing and that's going to be our focus for '16 and '17 is our work to get that right and initiate it successfully.

Analyst:

Thank you a brief follow up regarding the region this Delta have an update on Korean strengthen its partnership with --.

Glen Hauenstein:

We are always in discussions with our partners to strengthen and a no exception and as the landscape in the Pacific continuous to evolve and the geographies change we think Korean is a very important partner of our success in that region in the future and I know that they feel the same way about Delta.

Analyst:

Thank you very much.

Glen Hauenstein:

And we have time for one more question.

Operator:

And that will be from Edward Russel was --.

Analyst:

Oh yes could you comment on the and this Delta plan to seek all of them as they are available in the preceding later this year?

DAL:

As you may note in our prior daylight frequencies available to you as carriers we are in a process of filing our and that will become public here in the next couple of weeks before that happens we will probably work with from commenting on.

Analyst:

One follow up. What opening to due to hub considering your earlier comments on -.

Glen Hauenstein:

We have continue to deemphasize the over the last several years and we will continue on that process and probably accelerating that process by a little bit as we look through the first schedule period.

Analyst:

Thank you.

DAL:

And thank you, that will conclude our earnings conference call. Thanks to everyone for listening.

Operator:

Again that will conclude today's conference we thank you all for joining us.