Delta Air Lines Inc (DAL) — Q3 2015 Earnings Call Transcript

Good morning, everyone, and thanks for joining us for our September quarter call. Speaking on the call from Atlanta today are Delta's CEO, Richard Anderson; our President, Ed Bastian; and our CFO, Paul Jacobson. We have the entire leadership team here with us for the Q&A. 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. 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 Chief Executive Officer, Richard Anderson.

Thanks, Jill. This morning, Delta reported a $2.2 billion pretax profit for the September quarter, a 33% improvement year-on-year, as our business continues to perform exceptionally well. We delivered earnings per share of $1.74 versus consensus estimates of $1.71. As demand is good, we essentially held revenues flat against a steep decline in fuel which allows Delta to bring about two-thirds of our fuel savings to the bottom line for our owners. Therefore, despite economic uncertainty in some international markets such as Brazil and Japan, and the impact of a strong dollar, we were able to expand operating margins by 5 points to 21%, and improve earnings per share by 45%. We generated $2.4 billion in operating cash flow and $1.4 billion in free cash flow in the quarter, and we have delivered a return on invested capital of 26.3% for the last 12 months. We reduced our net debt by $1 billion year-on-year, held our non-fuel CASM growth to 0.9% in the quarter, and we have returned over $2 billion of cash to our owners year-to-date. These types of results investors expect from a high-quality industrial company like Delta, our metrics rank among the top 10% of S&P Industrials. Our free cash flow performance puts Delta in the company of companies like 3M and Lockheed Martin. Our work over the past decade has produced a strong and durable foundation. We have consistently hit our EPS and cash flow commitments over the years. We will leverage that foundation in order to consistently produce strong and dependable earnings and cash flows throughout the business cycle. At the base of that foundation are the people of Delta, and our unique employee culture. Our outstanding results this quarter were made possible by the dedication of our employees who work hard every day to provide the best operation and service in the industry. Last month, we took steps to improve wages for our employees and announced a 14.5% base pay rise for our ground and flight attendant groups that will take effect December 1. This will be accompanied by a change to our profit-sharing program starting in 2016 in response to feedback from our employees who want more certainty in their base pay while maintaining a variable component of compensation that is tied to the company's profitability and aligns all of our incentives across the enterprise. We continue to run by far the industry's best operation. In the September quarter, we delivered a record 99.9% completion factor, including 40 days with zero cancellations, and our on-time rate improved to 86.1%. In the month of September alone, we canceled only 13 flights out of more than 83,000 performance; our competitors will not match that, and I actually have to repeat that. In September alone, we canceled only 13 flights out of more than 83,000 flights, and our competitors can't match it. This type of performance and the investments we have made in our network and products are driving the best revenue generation in the industry as our domestic premium stands at 14%. We continue to benefit from the decline of fuel prices, which provided more than $1 billion of benefit this quarter, and at current prices will drive a $750 million benefit in Q4. As a result, we are uniquely positioned among global industrial peers to drive record earnings in the face of a strong dollar and economic uncertainty in some international markets. The level of cash we expect to generate from these earnings will put us in the top 10% of the S&P 500. While industrial revenue is currently weaker because of the strong dollar and the runoff of fuel surcharges, we still have strong margins overall because of lower fuel, and we see good opportunity over the long term internationally. To this end, two of our major initiatives over the past several years have been investing in our Latin network and restructuring our Pacific franchise. During the quarter, we increased our stake in GOL Aereos down in Brazil, the largest Brazilian domestic carrier, to just under 10% and also entered into a long-term exclusive partnership with China Eastern to build a hub in Shanghai, which includes our taking a 3.5% ownership position in China Eastern. Ultimately, JVs will give us the foundation to build the leading U.S. gateways to China and Brazil, including hubs in Shanghai and Sao Paulo with our great partners China Eastern, China Southern, and GOL. Our partnerships with these carriers, alongside Virgin and Aeromexico, will further our efforts in these regions and in Western Europe and Mexico and provide significant long-term upside for Delta. Delta is quite unique in these investment strategies as we are the only U.S. carrier with equity investments coupled with long-term JVs and commercial cooperation with airlines in Asia, the United Kingdom, and Latin America. We've proven with Air France-KLM and Virgin Atlantic that we have a unique model that creates huge value for our owners. The cash we are generating allows us to fortify our balance sheet. We've reduced our net debt by more than $10 billion over the last several years and we're on track to reach $4 billion in net debt by 2017. This progress has been recognized by the rating agencies, and today we are just one notch away from investment grade, as we run this company on investment grade metrics. At the same time, we accelerate capital returns to our owners; we repurchased 8% of our equity since buying our first share just 26 months ago. We expect to return $2.5 billion of cash to our owners this year and we will continue returning more than 50% of free cash flow to our owners going forward. We have a significant opportunity ahead, as fuel prices remain low, and we continue to push forward to achieve positive RASM. RASM growth remains a key component of how we drive margin improvement over time and we remain committed to improving our unit revenue trajectory. Our plan is to manage the business tightly and preserve the fuel savings to drive margin expansion. In May, we outlined the key metrics specific long-term targets for our business to attain. These include delivering annual EPS growth of greater than 15%, achieving returns on capital of 20% to 25%, and generating operating and free cash flow in the range of $7 billion to $8 billion and $4 billion to $5 billion respectively. We have consistently achieved our long-term goals and will continue to do so regardless of the direction of fuel prices. For the fourth quarter, our system capacity will be flat year-on-year, with fuel down about 40% year-on-year. We expect another record quarter with operating margins in Q4 of 16% to 18%. In addition, strong cost discipline is imperative since 2008. We have kept our non-fuel cost growth below a 2% compounded annual growth rate. We're using the current environment to evaluate and improve costs across all parts of the business, including our overhead functions, making sure that we're investing in the right parts of the business and at levels we can sustain over time, regardless of fuel prices and the economic cycle. As we lay out the framework for 2016, we are not recasting our business to low fuel prices; instead, we budget fuel prices significantly higher than the forward curve because fuel remains volatile, and we will be prudent in how we manage our expense, capital, and our capacity. Our initial plan is for 2016 capacity to be in the range of flat to up 2%. We believe that this is an appropriate level of growth to balance capital investment, supply, and demand and ensure the momentum in our business continues. By prudently managing all aspects of our business, we can make strong progress against our financial targets and continue to work towards earning the premium valuation of other high-quality industrials who produce similar results to Delta's the results we announced today. But with that said, Delta today trades at a 40% discount to our S&P peer group. So before I turn the call over to Ed and Paul to go through the details of the quarter, I want to congratulate Jill Greer on her promotion to Vice President, very well deserved, and thank you for all your contributions to Delta. With that, Ed.

Thanks, Richard. Good morning everyone. Thanks for joining us. We delivered the best quarter ever posted in the industry, the September quarter, with pretax income increasing 33% to $2.2 billion. Thanks to the Delta employees for their contributions to an outstanding quarter, a performance that drove our profit sharing accrual of more than $560 million. This brings our profit sharing total to $1.1 billion year-to-date. We have already surpassed the total profit sharing paid last year, so the upcoming Valentine's Day will be especially sweet for our Delta team. We expanded our operating margin more than 5 points to 21%, which is at the high end of our initial guidance range. Our revenues were roughly flat despite facing a $235 million headwind from foreign exchange. Our commercial initiatives are producing great revenue momentum. Corporate demand remains solid with volume growth of 5%. In the domestic entity, corporate growth was notably strong in the Transcons and West Coast markets as we successfully leverage our investments in New York, LA, and Seattle. We saw meaningful improvements in our healthcare, financial services, and media sectors, offsetting declines in energy and manufacturing. We have rolled out branded fares in 462 markets and the initiative continues to go well delivering an additional $75 million in high-margin revenue for the quarter. We are especially pleased with sales in Comfort+ which increased 42% and First Class upsell where we increased our paid first class load factor to 56%, up 8 points year-over-year on a base of 5% more First Class seats. Our agreement with American Express produced over $100 million in incremental value this quarter. As you may recall, we renewed our contract with American Express at the end of last year. We have a great partner in American Express and continue to expect the revenue benefits will double over the next few years as we work together to enhance our leading co-brand offering for customers. Our cargo business is facing a similar dynamic to our passenger business with domestic performing well, while the international business is facing significant currency and related demand headwinds. For the September quarter, passenger unit revenues declined 4.9%, which was in the upper half of our initial guidance range of down 4.5% to down 6.5%. Domestic unit revenues declined 3%, as yield pressures continue in a fashion similar to previous quarters. Despite the yield decline, we are quite pleased with the profitability of the domestic business. We've been able to expand our domestic revenue premium while growing our top-line cost-effectively through higher gauge and strategically expanding service in our hubs in New York, Seattle, and Los Angeles. Our Seattle domestic RASM was on par with the entity average despite a 24% increase in capacity. Our significant investment in the city has grown regional connectivity and local traffic, and yield strength is outpacing capacity growth. The RASM performance in New York and Los Angeles was both above system average as the benefits of our investments continue to mature. JFK-LAX saw RASM improvement and load factors up 3 points. Our international business continued to face headwinds from foreign exchange and lower fuel surcharges. We are actively addressing these areas of weakness by making sizeable capacity reductions in the winter schedule. The TransAtlantic entity was challenged by currency pressure and industry capacity growth outpacing past year demand. Currency pressures in the quarter were partially offset by improved U.S. dollar point of sale. As a result, unit revenues in the TransAtlantic declined 9.5% with 6.5 points of that income impact coming from FX which represented $120 million from that entity alone. Core European market demand remained strong though but we are addressing the headwinds in Africa, Middle East, and Russia. Our TransAtlantic JVs with Air France-KLM and Virgin Atlantic saw margins expand once again despite these continued currency pressures. We are using the success of these joint ventures as the model as we deepen our partnerships with carriers in other parts of the world. We also acquired six additional pairs of slots in London, Heathrow which will further strengthen our position in the most important business market in Europe. In Latin America, our unit revenues were down 5% driven entirely by currency, primarily in Brazil. Our capacity growth in the regions slowed to 2% this quarter after eight consecutive quarters of growth that was materially above the system average. Mexico and the Caribbean are mostly U.S. dollar point of sale and as a result continue to do well. During the quarter, we increased our ownership stake in GOL to just under 10% and we continue to work closely with them to address the economic uncertainties in Brazil. We expect Open Skies with Brazil in the next year and intend to file for an antitrust immunity shortly thereafter. We also expect to receive the antitrust immunity and establish a joint venture with Aeromexico in the coming months. Ultimately we expect to have immunized profit-sharing joint ventures with the leading carriers in the two largest markets in Latin America. In the Pacific, the revenue environment remains challenging, with unit revenues down 9% during the peak resort market season on 4 points of lower capacity. Currency and fuel surcharges were a 14 point drag on unit revenue in the quarter. Specifically the end revenue headwind was $55 million net of hedges. As we've outlined previously, restructuring our Pacific network is one of our biggest opportunities for margin improvement going forward. We are pleased with the initial results we are achieving. Our Narita hub margins expanded by 7 points, excluding hedges over the last 12 months, and we have restored the hub to profitability. There is certainly more work to get to our targeted return levels but this is an important milestone with the entity. And we have taken the next step forward by making a $450 million investment in China Eastern and establishing a long-term commercial partnership. China Eastern is one of the largest Chinese airlines and the home carrier in Shanghai, the commercial capital of China. This relationship will allow Delta to broaden its reach in Asia. Now, looking ahead to the December quarter, we will continue to leverage opportunities in our network while reducing capacity in areas most affected by currency, macro, and geopolitical uncertainties. Our domestic pretax margins improved 8 points excluding hedges to 22% in the September quarter, with our largest hubs delivering margins well above this level. As a result of the continued strong performance in the domestic market, we are planning for 3% growth in this region for the fourth quarter in line with how we see demand and economic growth in the U.S. Our domestic growth is focused on areas where past investments will now allow us to offer a superior network, product, and service which is enhancing profitability and returns and driving the expansion in our domestic unit revenue premium to the industry. We will reduce international capacity by 4.5% this quarter, with cuts of 20% or more in places like Japan, Brazil, Russia, and the Middle East, while we continue to invest in certain parts of our international network like Mexico and China. The combination of domestic growth and international reductions will result in our capacity being flat at the system level for the fourth quarter and we expect these actions to help drive improvement in our unit revenue performance which we forecast will decline 2.5% to 4.5% for the December quarter. This forecast includes a 2 point headwind from currency. The quarter will be a bit choppy. November is expected to post the best monthly result and December the weakest due to the Thanksgiving holiday shift, with October somewhere in between. This conservative growth profile in an environment where we expect fuel prices will be down by almost half demonstrates our commitment to getting RASM on a positive trajectory. While we set it as the goal early this year to get RASM flat to positive by year-end, the continued low fuel price environment, and steeper FX headwinds have made the achievement of our goal more challenging. In fact, fuel prices have declined 25% further from when we initially set this goal in early June. But it's still an important goal for our commercial team, even if it happens on a slightly longer timeline. While we may see pressure for RASM for longer, we are getting significantly larger cost savings from fuel and therefore margin and cash flow benefits. So as a result, we expect a record fourth quarter with an operating margin of 16% to 18%, up 4.5 points on a year-over-year basis. Now, I will turn the call over to Paul to go through details on cost and cash flows.

Thanks, Ed, and good morning, everyone. Thank you for joining us. I will start by highlighting another strong cost performance at Delta this quarter. Lower fuel prices and strong cost controls contributed to a roughly $650 million decline in total operating expenses, despite 3% higher capacity. Non-fuel CASM increased by 1% as we continue to benefit from our re-fleeting and cost reduction initiatives. The benefit accrual related to the recently announced pay increases for Delta employees created about a point of pressure that was not included in our initial outlook, but our performance remained consistent with our stated goal. We have built a good foundation for cost productivity and our up-gauging initiatives are creating operating leverage that will benefit us for years to come. In fact, in 2008, our domestic gauge has increased from about 104 to 118 seats and we expect it will increase further over the next several years. FX also benefitted non-fuel CASM by a little more than a point during the quarter. Looking ahead to the December quarter, we expect non-fuel CASM to be up about 2%. Expenses related to the pay increases that go into effect on December 1 are creating about a point of pressure, while air national capacity reductions are also creating a temporary headwind for CASM as the cost takeout associated with these changes comes at a lag. Turning to fuel, our total fuel expense declined by over $1 billion in the quarter; as well market fuel prices more than offset higher consumption. Our all-in fuel price was $1.80 per gallon down from $2.90 in the same period last year. We expect this will be below the industry average price for the quarter. The refinery made a record $106 million profit this quarter, up from $19 million in the same period last year. Lower crude cost, a favorable crack spread environment, and increased throughput drove the refinery's profit. Our average throughput at the refinery for the quarter was 200,000 barrels per day and we produced over 40,000 barrels per day of jet fuel at the plant. For fourth quarter, we are projecting a profit of approximately $30 million for the refinery, which would bring the full-year contribution to $320 million. The moderation from Q3 profit levels is driven by typical seasonality in crack spread. We currently expect our December quarter fuel expense will be $750 million lower year-over-year. Our December 2015 results are net of roughly $250 million in hedge losses. At a $1.75 to $1.80 per gallon, our fourth quarter fuel price will be $0.85 per gallon below last year's all-in fuel price and we expect again to be below the industry average. For the fourth quarter, we are approximately 40% hedged against an increase in prices with approximately 70% downside participation to Brent prices of $40 per barrel. Moving onto cash flow, we are using our strong cash generation in a balanced, deliberate, and sustainable manner to reinvest in the business for the long term, further strengthen the balance sheet, and return increasing levels of cash to shareholders. This quarter we generated $2.4 billion of operating cash flow which provided us with an ability to fund a strategic investment in China Eastern, a partnership that will drive significant value over time. Capital spending for the third quarter was just over $1 billion including China Eastern and GOL strategic investments made during the quarter. For the December quarter, we are projecting roughly $1 billion in CapEx also which consists of aircraft acquisition, fleet modification, and includes the purchase of the six pairs of slots at Heathrow that Ed mentioned earlier. Free cash flow during the third quarter was $1.4 billion, of which 40% was returned to shareholders including $107 million of dividends and $425 million of buybacks. We expect to return roughly $500 million to shareholders again in the fourth quarter. That will bring us to roughly $2.5 billion in returns this year which equates to 7% of our current market cap and approximately 60% of our free cash flow. We continue to expect to return more than $6 billion through 2017 while also reducing debt to $4 billion while we continue to proactively fund our pension plan. Adjusted net debt at the end of September was $6.4 billion and our debt reduction lowered interest expense by $33 million in the quarter relative to last year. We expect our debt to trend slightly higher in Q4 due to seasonality in cash but will end the year below $7 billion as we remain on track to hit our goal. The improvements in our balance sheet were recognized this quarter with upgrades from S&P and Fitch, which both now have Delta just one notch away from investment grade. That momentum allowed us in August to refinance our senior secured credit facility ahead of its scheduled maturity. The new borrowings included a $1.5 billion undrawn revolver, a $500 million term loan, and a $500 million double EETC with a blended rate of 3.8%. Because of the improved strength of our balance sheet, we were able to lower the overall rate we are paying on this debt, increase our revolver capacity by $275 million, and lowering the outstanding principle by $320 million as we continue to work towards our goals. In closing, I'd like to thank the entire Delta family for another very strong quarter; this was achieved as a result of your contribution.

Thanks, Richard, Ed, and Paul. And with that, Melody, we're ready for Q&A with the analysts, so if you could give them instructions on how to get into the queue.

Hi, good morning everyone. I guess my first question, Ed can you maybe provide what your flat to up 2 capacity looks like next year broken out on a domestic and international basis? And then just from a domestic perspective are there any specific markets where this growth will be concentrated or any specific market or markets you plan to build out a larger presence in like you've done in Seattle this year?

Andrew, we will provide more detail at our Investor Day in December on 2016 plans. Obviously, the shape of 2016 is following what you're seeing in the fourth quarter with domestic up in line with general economic growth in the U.S. and international down in the areas with the greatest FX and demand weakness.

Got it. And then just a follow-up for Paul. I guess at this level of flat to up 2% capacity do you still feel like you can keep unit cost growth at or below 2% next year outside of any new pilots agreement?

Yes, we do Andrew. I think the capacity is going to put a little bit of pressure on unit costs but given the productivity goals that we have and the continued benefits of the leverage that we're driving in the operation, we feel good about our ability to hit that goal for the year.

Hi guys, thanks for taking the time. So may be first on the 2016 capacity guide, if I look at your first-quarter published flight schedules it looks like you've scheduled kind of 4% capacity growth or so. Would you expect a downward revision there or are you essentially just implying a very front-end loaded year?

That's very preliminary, Darryl. Yes, we really haven't got and made the final revisions to Q1 or for that matter any part of '16. And I just want to let you know; traditionally we've reduced the schedule as we get closer in.

Okay. Regarding the domestic unit revenue performance in the quarter, the 3% decline you reported, would the number reflect a smaller decline if I look only at domestic itineraries? Is there also an impact from how domestic connections on international itineraries are accounted for that could be affecting the domestic number as reported?

There's a little bit less than 1 point of domestic itineraries that are related to the international O&D.

Okay. So you're saying 1% of RASM headwind or 1% is kind of the mix?

Of the 3 points a little less than 1 point is an international operational itinerary that's related to the FX change.

Great, thank you. And then if I could just squeeze one last one in for Paul, Paul, the comment that you made a few minutes ago about still seeing unit cost growth trending below 2% next year I assume that would be inclusive of profit sharing, is that correct?

Yes, that's how we look at it. We'll have some geography changes in 2016. We'll highlight all that in Investor Day.

Hey, good morning everybody and Richard you beat me to it. I thought I caught a new title for Jill in the opening remarks, so my congratulations there as well. A question for Glen. I do understand, I think we all understand the issues that are impacting international RASM. What I'm really having difficulty with is reconciling the domestic weakness. I mean, if you or I had been in a coma for five years and somebody just handed us the A4A revenue report, or even your Q3 domestic RASM print, my first guess would be crap, we're in a recession again. But the fact is we aren't and other consumer sectors don't suggest this level of demand weakness. So what sort of explanation, and you highlighted DPIJ in Darryl's question, but what further explanation can you provide as to why domestic RASM quite frankly stinks and more importantly what you think has to happen either at Delta or the industry level to improve upon it?

Yes, Jamie, as a rule we don't discuss the industry; we focus on Delta. I think Ed pointed out that we see strong demand, including robust business travel, with short stay travel and corporate contracted travel reaching record levels. However, we are not achieving the yields we had in the past. I'll just leave it at that.

Okay. Second, not sure if this is for Ed or for Richard, but I know you don't tend to comment publicly on pilot negotiations, but when we think about profit sharing going forward what's management's tolerance for operating two succinct profit sharing schemes, one being more generous than the other? And also and I suppose I should know this but are the Air Canada E190s still up for grabs? The one that initially had been part of the fleet plan assuming a ratified TA?

And you asked and answered the first question which is we don't generally comment on the status of pilot negotiations. We respect the process and we respect the relationship. We're perfectly inclined to run two profit-sharing programs. Our regular employees have been very pleased with a 14.5% raise and I think they'll still have one of the most if not the most lucrative profit-sharing program in the industry. And so that's on the profit sharing and what was your second question?

Just whether the E190s, the Boeing/Air Canada E190s are still up for grab. I think Boeing had made that part of your initial aircraft agreement.

I don’t know whether they are or not. We had signed agreement with Boeing and when the TA was rejected we had the right to terminate it and then we terminated it and all the deposits were returned to Delta, and so you have to ask Boeing about what the status of those airplanes are.

Good morning. Thanks for taking my question. Last quarter I believe you guys called out three specific cities that were driving the bulk of the weakness in the domestic market. Is that yield weakness in Q3 still limited to a small number of markets or has it spread to be more broad-based?

Hi, Julie, it's Ed. Yes, it's still relatively restricted. The commentary from the second quarter is consistent with the third quarter, but it's still largely restricted.

Okay. And then on the capacity you're pulling down internationally are those planes being retired or reallocated or is this a reduction primarily through utilization?

Combination of all of those. Some are being retired, some are getting lower utilization and some are moving into the domestic marketplace. For example, as United exits the JFK-LA and JFK San Francisco market, we are moving a couple of our wide bodies to fill out patterns in those key markets that are the largest markets in the United States.

But then on top of that, Julie, we have 757s retiring. So we have a significant number of 757, 200s that are leaving the fleet.

Okay, great. And then lastly any update on Open Skies with Brazil and Mexico and timing there? I think Brazil was supposed to happen sometime in October.

There is no update; we expect sometime in 2016 to get those ratified.

Thanks very much, Operator. Hi guys, thank you very much for the time. Just two questions. One is can you comment at all on the type of competition you're seeing in some of your bigger cities like Atlanta and perhaps in LA specifically from low-fare airlines?

You know, Helane, let me go at it from a macro perspective which is we have record margins in all of our hubs in the U.S. and virtually every part of the domestic business is performing at new record levels or at above record levels and that includes Seattle and LA and New York and Minneapolis and Detroit and Cincinnati and Salt Lake and Atlanta. And on top of that, the focus city flying we do in places like Raleigh-Durham and Indianapolis is performing extraordinarily well. I think what the marketplace misses is that we are able to keep, if just look at the revenue picture at Delta, our revenue is relatively flat year-to-year and we're putting two-thirds of the fuel savings on the bottom line for the owners. And our focus is to manage the business for margin and cash flow. And we have a lot of leverage to do that. A fantastic product that no one in the industry can match, happy employees that are working very hard to be the best in the industry, a smart revenue management team, a very smart network planning team, the lowest capital cost in the industry on the fleet, and the maximum flexibility to manage our capacity to move back to positive RASM.

So, Richard, thank you for that. I really appreciate your answer. And I kind of wonder at the fact that the market seems to continually miss the fact that you are delivering the best product in the industry and continues to ask what do you do for an encore; you continue to deliver yet your stock price doesn't reflect it.

Our market cap and stock price align with the industry. Our nearest domestic competitor has a market cap that's $10 billion lower. Our opportunity lies in continuing to strengthen our balance sheet, enhance our business model, maintain the best employee relations in the industry, achieve an investment-grade balance sheet, and work on improving our P/E ratio to reflect our performance against the S&P Industrials. We will keep making progress quietly on this front.

Yes, hey, good morning everybody. Hey, I just, I want to go back to in the non-op area some of your investments. I believe you account for Virgin Atlantic under the equity method. Can you just maybe give us a feel for how much better that's running this year versus last year? And then just with the changes in your investments in some of these other carriers are they still accounted for as investments or say like a goal are you going to run that through under the equity method given your Board seat and your increased ownership stake?

Hi, Mike, it's Ed. On Virgin, the Q3 results they had were fairly comparable to what they had a year ago, little bit better. They had some fairly large fuel hedging losses, so they haven't gotten as much of the pass-through on the lower fuel savings. But we expect that's going to get increasingly better next year. And the answer to your second question is no, we treat the China Eastern and GOL and Aeromexico investments still on the cost method. So we don't take the share profit or loss in the quarter.

Good. And then just one other and this is either for Ed or Paul. Your earnings progression has been fantastic on one hand. On the other hand it does get you closer to the point where you will start paying cash taxes. When I look at sort of where the numbers are in our forecast for next year it seems like sometime next year you may be a cash taxpayer maybe in the latter part of the year. Is that right or do we still have enough NOLs that maybe we get into 2017? What's your thoughts on that?

Hi, good morning, Mike, it's Paul. Going back to what we have talked about in May when we laid out our long-term plan, we anticipate that we will have some cash taxes until 2017 at our current trajectory but wouldn't become a full payer until 2018. That's consistent and you've got to be careful with the differences between GAAP and tax accounting for large areas like depreciation on fleet, etc.

We will provide an update on our tax rate for 2016 at Investor Day. This aspect differentiates Delta, particularly due to our focus on international operations and minority equity investments globally as part of our joint venture strategies. This positions us favorably in terms of tax advantages compared to our domestic competitors, and we will share more details at Investor Day in December.

Hey, good morning everyone. A question for Glen. On the international side particularly Pacific obviously there's currency, there's probably demand as you highlighted, there's also surcharges that in some cases had to come out really quick. As you start to overlap that and you get into '16, do some of that surcharge revenue can you take that back into base pricing as you go along? Or is that something we should just think is sort of gone until oil comes back?

Well we have the currency headwinds which will as forward curves go from about $700 million this year to about $150 million next year. And then, as fuel stabilizes, we will of course attempt to raise fares as we always do but that will depend on what the market is, and that's based on individual market performance. So we see strong demand, we see strong demand through the winter and into the spring already, and our load factors are running ahead in every entity including domestic throughout rest of the year. So hopefully who knows what's going to happen in the future, but it looks like it's shaping up to be pretty good year in '16.

Okay, great. That's helpful. And then just in terms of the Q4 RASM guidance would you be willing to split that kind of domestic international or at least kind of speak to does the decline moderate reasonably evenly across different segments or entities? Or is there something that really stands out particularly, does domestic inflect as much?

We're not going to break that out, David. We never do but you see that the trends that we've seen this year and you probably can draw your own conclusions.

Hi, thanks for the time. I just wanted to come back to your capacity guide and maybe just better understand what factors we should look at to get you to maybe a higher end or the lower end of that this year too and whether it's PRASM or margin in the economy? Just some color there would be great.

All of the above.

Okay, easy enough. Then I guess a related question to that, to the extent as we look into next year demand starts to really weaken, etc., be it the economy or otherwise how aggressive do you think you could be with pulling down capacity just to keep the supply-demand balance?

We remain focused on improving our margins and free cash flow. We have various ways to achieve those objectives in our business. One advantage we have at Delta is our reliable fleet, as demonstrated by our cancellation of only 18 flights in September, which speaks to the quality of our operations. Additionally, many of our airplanes are fully paid for. This paid-off status provides us with flexibility; for instance, if we choose to retire a 757, it can serve as a parts source for the rest of the fleet. This strategy not only helps us manage capacity effectively but also enhances our cost management in terms of non-fuel operating expenses.

Great. Thank you.

We have plenty of options, and we value those options across our business. We consider our fleet in the same manner, as many of those assets provide us with flexibility.

Thanks, good morning. Paul, I wanted to ask you about hedging. Have you started adding positions into 2016 and can you tell us what the hedge loss you're baking in for the fourth quarter fuel guide and what the magnitude of the losses are at this point into 2016?

Hey, good morning, Duane, thanks for the question. As we talked about, we are only about 5% hedged for 2016. We obviously have taken this environment and been very cautious and slow about it as we look into the year. We said in our prepared remarks that we got about $250 million of losses in the fourth quarter but about 70% to 80% downside participation all the way down to $40 a barrel in Brent. So as we go into 2016, obviously we have a tailwind behind us on fuel price because of the hedge losses in the first half of this year. But we're pretty cautious on where we go given the forward curve and the option premiums that you have to spend and put hedges on right now.

Okay, and then maybe just a different tack on the same question regarding your desire to control input costs. Have you evaluated expanding your presence in the energy industry beyond just owning a refinery? Have you looked at any potential domestic production assets?

No, we haven't.

Hey, good morning. Just a quick follow-up on some of the 2016 capacity questions. Is it fair to assume just given the current environment that domestic capacity growth would be similar to 2015 and 2016?

I think it's early to comment on the intricacies of what 2016 turns out to be and I think what Richard pointed to earlier is the flexibility that this company has to respond to market demands as they evolve. And so I think we will give more color as to what we think in December as we get to our Investor Day Conference. But we are always moving airplanes around or grounding them or whatever it takes to achieve our margin expansion that we need to. And while we like to say we have a full vision as to what next year's economy is going to be we don't. And so what we can say is we think it's 0 to 2 for next year as we sit down today and we will make those adjustments as we get closer into it capitalize on where we see opportunities.

I think the thing that people don't have a full appreciation for is just how rapidly we adjust to markets. And if you even just think about 2015 and what we said we were going to do in December of '14; in fourth quarter 2015, situations changed, currencies got weak in Brazil, currency got weak in Japan, fuel surcharges ran off, sanctions in Russia, and we've responded very quickly. And that's the wonderful thing about what these assets are. If you own a hotel in Manhattan and something doesn't go well in Manhattan, you can't move the hotel. Right? But we can take our frequencies in Venezuela down to one a week and we could take Russia down to one a week and you don't see all those moves, but the reason why we have ever-expanding margins is at some point the Street just needs to understand that we're going to continue to manage the business to drive margin and free cash flow and we have a lot of leverage to do that.

Good plan. Just specifically on the fuel side I know you mentioned that two-thirds of the fuel declines have been captured to the bottom-line. I wonder if that's despite your kind of fuel hedge drag and is it your contention that maybe if you didn't have the fuel hedge drag you'd still be able to have a similar capture, and so maybe the fare environment is may be stronger than that two-thirds would imply?

Savi, it's Ed. I wouldn't try to draw any correlations to the fuel hedge. The two-thirds we're looking at was really the current quarter the September quarter we did. We had modest hedge losses. It wasn't material and compared to the first two quarters anyway. And you also have to take into account that two-thirds is a bit of a macro estimate; it's much higher on the domestic. I think domestic we were probably capturing 80% to 90% of the fuel savings. But internationally, because of the currency weakness as well as demand weakness that's limiting our ability to capture as much of the fuel. So in total it's about two-thirds but very high domestically, which is where we're growing, and it's weaker internationally, which is where we're shrinking.

Okay, that's very helpful. And if I could just ask one last one, on the regional fleet, I know we saw the complaint filed again against Republic. Should we be concerned with the impact of securing regional fleet on kind of capacity plans or costs?

No, you shouldn't be concerned about that. We're not going to comment specifically on the litigation, but we just like our partners to keep their deals.

And Melody, we're going to have time for one more question from the analysts.

Hi, it's Sam McKelvey on for Joe DeNardi. What sort of pressure is the Gulf carrier issue having on your relationship with Air France-KLM? Are they wanting to add more capacity onto the Atlantic than you view as necessary to offset some of the share they are losing in other markets?

Well first, our relationship with Air France-KLM couldn't be better. Our combined margins in the Transatlantic couldn't be better in terms of the cut; we're setting all-time contribution margins in that joint venture. And it's by far the model of joint ventures in the world. We don't, as Glen said earlier, we're not commenting yet other than zero to two on our network and we're still building our business plan, we will give more color about what our forward capacity is. But in terms of our relationship with Air France-KLM, I mean we're tightly synced in our operations, capacity planning, and distribution.

That's going to conclude the analyst portion of the phone call. Before I turn it over to Kevin and the corp comm team just to have everybody save the date for December 17 for our Annual Investor Day and with that I will turn it over for the media unit.

Good morning. I'm Kevin Shinkle, our Senior Vice President and Chief Communications Officer. Welcome to the media portion of our call. We have about 10 minutes to ask questions. So please limit yourself to one question and one brief follow-up. Melody, could you please try to give any instructions on how to register to ask a question?

Good morning. Yes, I had there's kind of the rumor mill has been hot lately about Delta looking at some 777s coming out of Singapore. Can you just talk about that and is there any truth to that?

Yes, I'd be glad to. Well, we're seeing a huge bubble in excess wide-body airplanes around the world and we've been approached by more than one party. I mean the market appears to be the 777-200s about 9 to 10 years old; the price is about $10 million. And on A330-200, the lease rate is about a fifth of what it would be new. So we do think that the aircraft market is going to be right for Delta and over the course of the next 12 to 36 months and we think that that weakness in that aircraft bubble in wide-bodies is going to spread to narrow-bodies and that there will be some huge buying opportunities because low interest rates really have created a huge wide-body bubble in the world. Singapore Airlines, I think has 70 of these airplanes that are coming off lease or being retired that are 8 to 10 years old.

Just a follow-up. So is there a deal with actually in the works or recently completed for?

There's no deal in progress; it's a relatively small market globally, and there aren't many customers capable of acquiring a dozen 777s. It's a very limited market with high transparency, and we receive inquiries constantly. Currently, there is no deal, and prices are expected to decrease, so it wouldn't be wise to finalize a deal now.

Hi yes. You mentioned the acquisition of six slot pairs at London Heathrow and looking at your schedules in 2016 at here and in Salt Lake City. Could you give some insight on to how well you plan to use those new slot pairs?

We already operate in slot pairs.

A follow-up then, there is replacing slot that you have lease agreements coming up on or?

The slots that we have leased previously for a number of years for Air France-KLM that we're just turning that we're purchasing instead of leasing. We will have more flexibility to slot them around with our partners at Virgin Atlantic.

Hi, thanks. I have a specific question this time. We're waiting for a decision in the Dallas Love Field litigation, and I'm curious if you believe that an unfavorable ruling would set a precedent for other gate or slot-restrained airports, or if the circumstances in Dallas are so unique that it would not.

No. If Love Field is such an anomaly, the city of Dallas will be the first time in modern aviation that an airport and interstate commerce are involved in a situation where the operators are trying to evict an interstate commerce operator. I think it’s actually the opposite and it won't have any effect.

Hi, I have a similar question along those lines at Dallas Love Fields. Can you give any insight into whether you're planning to appeal if the judge in that case does make an adverse ruling for Delta?

This is Peter Carter. We would intend to appeal any adverse ruling.

And we still have administrative actions in front of the Federal Aviation Administration to revoke AIP grants in the PFCs they collect.

Thank you.

You're welcome.

Well, thank you. With that, that was the last question that will conclude our third quarter earnings conference call. Thanks to everyone for listening.