Delta Air Lines, Inc. (DAL)

Q2 2012 Earnings Call

July 25, 2012 10:00 AM ET

Executives

Jill Greer – Managing Director, IR

Richard Anderson – CEO

Ed Bastian – President

Paul Jacobson – SVP and CFO

Glen Hauenstein – EVP, Network Planning & Revenue Management

Mike Campbell – EVP, Human Resources & Labor Relations

John Walker – SVP, Corporate Communications

Analysts

Glenn Engel – Bank of America

Savanthi Syth – Raymond James

Jamie Baker – JP Morgan

Dave Fintzen – Barclays

Mike Linenberg – Deutsche Bank

John Godyn – Morgan Stanley

Dan McKenzie – Rodman & Renshaw

Helane Becker – Dahlman Rose & Company

Kevin Crissey – UBS

Hunter Keay – Wolfe Trahan

Mary Schlangenstein – Bloomberg News

Andy Compart – Aviation Week

Josh Freed – The Associated Press

Kelly Yamanouchi – The Atlanta Journal-Constitution

Edward Russell – Flight Global

Linda Loyd – The Philadelphia Inquirer

Presentation

Operator

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Good morning ladies and gentlemen and welcome to the Delta Air Lines June 2012 Quarter Financial Results Conference Call. My name is Vicky and I will be your coordinator. (Operator Instructions) I would now like to turn the call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta. Please go ahead.

Jill Greer

Thanks, Vicky. Good morning everyone and thanks for joining us on our June quarter call. Speaking on the call today are Richard Anderson, Delta’s Chief Executive Officer; our President, Ed Bastian; and our Chief Financial Officer, Paul Jacobson. We have the remainder of the management team here in the room with us for the Q&A. Richard will open the call. Ed then will address our financial and revenue performance and Paul will conclude with a review with a review of cost performance and liquidity. 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 and all results exclude special items unless otherwise noted. You can find the reconciliation of our non-GAAP measures on the Investor Relations page at delta.com.

And with that I’ll turn the call over to Richard.

Richard Anderson

Thanks Jill. Good morning and thank you for joining us. This morning we announced a $586 million profit for the June quarter excluding special items, which is a $220 million improvement over last year. This represents EPS of $0.69 compared to consensus estimates of $0.68. Top line revenue grew 6%. Passenger unit revenues improved 8.5%.

Delta has now produced a unit revenue premium to the industry for 15 consecutive months, and we intend to continue doing so. Our 9.1% operating margin improved more than 200 basis points over last year and we have now achieved $5 billion of our $7 billion net debt reduction target. We will continue to reduce our debt and expect to get below $10 billion in net debt by the end of 2013.

Delta’s operational performance for the quarter was exceptional. For the quarter, our completion factor was 99.7% and 87.5% of our flights arrived on time, an 8 point improvement over last year and our best ever June quarter operational performance. On top of that, our DOT mishandled baggage rate decreased 30% and our DOT customer complaints fell 20%. These results, combined with our international operational performance put Delta at the very top of the industry for operating performance and customer service.

By all measures these are some of the best financial and operational results in Delta’s history, and I am thankful for the Delta team that has produced them. It is their commitment and dedication to this airline and our customers that differentiates Delta.

Looking forward, we are expecting to achieve a 10% to 12% operating margin in the September quarter, with system capacity forecast to be down 1% to 3% year-on-year. The revenue environment remains solid for Delta as July unit revenues are expected to increase 4% to 5% in each of our entities, Domestic, Latin, Pacific and Atlantic have good bookings in the third quarter. Capacity discipline is our key lever. We will continue to actively manage our capacity, including a 5% Trans-Atlantic capacity reduction for this fall. We will remain diligent in our efforts to have our fares fully reflect our costs and we will further reduce capacity if necessary to be certain we properly match our capacity with demand.

We’re pleased with this quarter results and our outlook for 2012. We now have a unique opportunity to lay the foundation for Delta’s future with the continuing a number of strategic investments. These investments in our fleet network and facilities will pressure our costs in the near-term, but they are the right path to future margin gains as we have shown 2010, 2011 and 2012 with our financial performance.

The first investment we are making is to restructure our domestic fleet by eliminating a substantial portion of our 50-seat regional jet fleet. We’ve already completely retired our propeller fleet. We will ultimately replace 75% of our 50-seat flying with more cost-effective mainline aircraft and two-class regional jets. Our 50-seaters peaked at more than 500 in 2008 and we intend to reduce it to less than 125 aircraft over the next two years.

With the benefits achieved with our new pilot agreement, we have the flexibility we need to both accelerate our fleet restructuring and improve pilot productivity as we vary our capacity by season. The agreement enables us to up-gauge our domestic fleet by acquiring 717s and two-class regional jets which will replace more than 200 50-seat aircraft over the next few years.

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