Delta Air Lines Inc (DAL) — Q1 2016 Earnings Call Transcript

Thanks, Kelly Ann. 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 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 it over to Ed.

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 result as the business continues to benefit from low fuel prices and solid demand. We held our top line roughly flat, and realized substantial fuel savings which allowed us to expand operating margins by nearly 10 points to 18.5% and generate $1.4 billion in operating cash flows. These are outstanding results and 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 a non-time arrival rate of 86.5%. We had 49 perfect main line completion days and six additional days where the only cancelled flights in our network were to Brussels. It’s now more rare to have cancellations than not on our mainline product. We also had eight 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 system level performance and working hard to improve on this basis. With these results, the Delta team proved yet again they are the best in the industry. 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 will always be a trusted friend and advisor and we all benefit from his leadership as the Executive Chairman of our board. Our strategy is working and our team is fully in place. We’ve 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 in revenue transformation over the last decade. Steve Sear has taken us to 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 are 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 we ensure that the margins and cash flows that we are producing are sustainable for 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 for 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 16. I’ve been asked many times over the last couple of months as I take over as CEO about 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 sustainable and 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 it is producing meaningful improvements 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 will 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 GOL, we see the international marketplace as the source of long term profitable growth opportunities. Our goal is to be the best U.S. global airline. Finally, we’ll maintain a balanced approach for 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 amidst the foundation for sustainable performance over the long term. I am excited about the future of Delta Airlines and honored to lead the very best team of airline professionals in the world. I thank our investors for the trust they place in us and assure you we are working hard to be great stewards of your investment. With that, I’m happy to turn the call over to my good friend, Glen Hauenstein.

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 every day has resulted in another record quarterly performance. I am honored and humble to be taking on the role of President at this 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 and a $5 million impact from the recent events in Brussels. We also maintain 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 yields. The outlook for corporate demand remains favorable with 82% of respondents to our latest corporate travel manager survey indicating 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+ growth at 45% and first class revenue growth of 12%. Basic economy drove roughly $20 million in incremental revenue and we began our broad city level expansion initiative 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 card acquisitions are at record levels and up substantially from 2015. Spend on our cards is up double digits. We continue to work with our great partners at AmEx to produce innovative program offerings for our customers and continue to grow our portfolio. Our passenger unit revenues declined 4.6% with roughly two points of the decline attributable to currency. This result was at the low end of our initial guidance as we continued to see choppiness in the domestic gross and yield environment during the quarter. Focusing on our domestic business, unit revenues declined 5% on 6% more capacity with one point of that growth attributable to leap 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 Trans-Atlantic entity saw unit revenue decline by 6% on a 3.5% reduction in capacity, driven by a four points headwind 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, U.S. point of sale demand was strong and recovered quickly following the events in Brussels. Conversely, European point of sales for America 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. Paris unit revenues improved year-over-year as travel to the region rebounded following the events of last November. In Latin America, unit revenues 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 remained 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 moderated with the unit revenues down 5% including roughly 8 points of impact from FX and fuel surcharges. The Yen was a $35 million headwind in the quarter, $30 million of which was driven by a lower year-over-year hedge case. While the recent appreciation of the yen is a positive for our business we will see roughly a four-point headwind to Trans-Pacific RASM from lower hedge 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 do our partnerships with China Eastern and China Southern. Today, between 15% and 20% of our customers are traveling beyond Shanghai and Beijing through our partners' networks. We expect that number to steadily increase over time. Demand in China and 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%. The sequential improvement from our first quarter revenue results, on a 2% year-on-year capacity increase. While we are not there yet, we understand the importance of getting back to positive revenue. Volatility and weaker yields and challenges in Europe may mean we achieve our goal a few months later than we previously expected, but we continue to target reaching the inflection point this year. We have a good line of sight getting there in domestic, encouraged by the recent yield trends which are now beginning to turn positive after being down for roughly a year. In addition to our domestic capacity, our domestic capacity growth moderates with each successive quarter during the year. In Latin America and the Pacific, our capacity actions and restructuring efforts will continue to benefit us, while currency headwinds are also easing. We continue to expect yield revenues to inflect in both entities in the summertime frame. In the Trans-Atlantic which accounts for 15% to 20% of our revenues is where we have the greatest challenge. Yields remain under pressure as industry capacity growth continues to outstrip demand. Peak season volumes from U.S. to Europe remained very strong and will drive record profits this summer given the lower fuel prices. One positive is that we will get a big help from currency in returns from the 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 positive RASM in 2016 and to stay ahead of our network competitors, if for no other reason than to get Ed off my back. We will have a line of sight to achieving our goal in domestic, the Pacific and Latin America while addressing the headwinds we face in Europe and we will act 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’d like to turn it over to my good friend Paul.

Thanks, Glen, and good morning everyone and thank you for joining us today. While lower fuel costs are providing huge benefits for our business, there is a lot of uncertainty in the global environment and we know fuel won’t stay low permanently. As a result, we remain 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 at 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 ten older main line aircraft including nine 757s and one 767-300, and we removed six 50 seaters from our schedule also during the quarter. We continue to expect our re-fleeting 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 investments. CASM growth in the second quarter will be well below 1Q levels due to 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 onto 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 the 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%, a roughly 5 point improvement from the prior year. On cash flow, we are using our strong cash generation to 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-offs to employees for 2015 and $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 in the plans 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 into 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 will 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. The decision we made to stay on track for a 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’ve made significant progress on de-levering our business over the last decade and we are pleased to have this recognized with an upgrade by Moody’s to investment grade during the quarter. In closing, I’d like to thank and congratulate the entire Delta team not only for another record quarter but also for achieving our long-held goal of returning as an investment grade company. These accomplishments would not have been possible without your determination, dedication, and hard work each and every day. Jill, back to you.

Kelly Ann, we are now ready for questions from the analysts, if you could give instructions.

Hey guys, good morning. Thanks for the time.

Good morning, Duane.

As we look towards the inflection to positive revenue later this year and you touched on some of this, can you just expand your thoughts on kind of domestic versus international? And which international region you might expect that first, specifically Latin America there's been a lot of capacity cuts. Are you any more instructive on getting back to positive unit revenue in that region?

Duane, this is Glen. I think we are very constructive because not only do we have some positive results in Brazil, both for the first time in many years our close-in bookings have actually provided positive momentum as opposed to negative momentum. We are coming off of a very low base in Brazil and as we start to lapse the currency changes I think we are pushing well with the capacity down towards an inflection point later this year.

And so would that be your guess in terms of getting back positive RASM first?

No. I think we are already in positive RASM in some of our entities including Mexico now in Japan and domestically I think we have a good line of sight for peak summer. So I think we have a lot of the network that’s doing better, that’s also facing some very dramatic decreases in certain geographic areas including Brazil.

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 narrow body re-fleeting needs relative to the $3 billion core CapEx level that you've outlined?

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

Good morning. This is Ed. Let me add a little more to Paul's comments. Our 2016 CapEx guidance remains in line with what we gave you and there are no changes there. We are in good shape as we look out on our international wide bodies, so there's nothing on that horizon that's changing. The focus we're in the midst of currently is the domestic fleet renewal over the next five years. It's not a short-term need. It's a medium-term need, because MD-88s do need to retire. We have roughly 115 of them currently. And we also need to continue to upgauge our regional flying to the main line which we've had a lot of success in and there is much more to go. I think we can do it cost effectively. There's been a lot of media reports. We have nothing to report at this time. There are no decisions taken, so I will not comment on 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 here at Delta is that we will stay disciplined on capital deployment as always. That will never change.

Thanks very much.

Hey, good morning.

Good morning.

Regarding the domestic capacity, I understand that in the first quarter there was an increase due to the extra day, but it's still around 5.5% to 6%. Looking at the second quarter, it seems to be around 4% to 5%. Are you still anticipating growth of 1% to 3% for the domestic market, which would suggest growth in the second half could be around 1% to 2%? Is that still the outlook?

That is still the thinking and we do see a deceleration of that growth throughout the year. Thanks to Gil and the team, one of the other good benefits we have in the first quarter with a much higher completion factor than we have previously. That was included in the higher number of spend for this quarter as well as the Leap Day. So we do see that number decelerating throughout the year.

Understood. And then just on the fleet question, just wondering if you're still finding attractive rates for aircraft to part out and even in midlife aircraft replacement or as you look to your narrow body replacement, are you focusing more on newer aircraft to kind of keep that barbell average age going?

Savi, as we said, we have nothing to report on any speculation in the media and we'll wait till we have something to tell, so we can layout what we're doing. But yes, absolutely, we continue to see good opportunities in the part-out space and Gil and his team have created a new entity called Delta Material Services where we're going in and saving literally hundreds of millions of dollars in our tech ops and maintenance costs.

All right. Great. Thank you.

Thanks very much, operator. Hi everybody. Thank you for the time. So, I was wondering if you could explain a little more, flush out a little more the trans-Atlantic to comment about overcapacity in the market. And I'm asking that within the context of the fact that there are three large JVs that seem to be able to adjust capacity. So, are you seeing other entities outside of the JVs, increase capacity in those regions that are you seeing then back-selling what you are taking out. So maybe you could just kind of flush that out a little more for me?

Helane, this is Glen. One of the big contributors of course are the ME3, because they are included in our trans-Atlantic capacity. So for example here in Atlanta we have Turkish Airlines starting non-stop services into Istanbul this spring. We also have Qatar flying from here to Doha this spring. And the Atlanta to Doha market is less than ten people a day, so they're going to need to fill up on some flow. We don't think they'll be successful, but those are capacities that we are facing here locally that I think describe the type of capacity that's in the trans-Atlantic. On the other side in Europe itself, you have some of the growth from the ultra-low-cost carriers that are attempting now to fly in the trans-Atlantic such as Norwegian, as well as some of the majors like Air Canada. So when you add all that together we get a trans-Atlantic capacity increase in the high single digits, low double digits through peak summer season given the economic outlook for the United States and for Europe, we think demand will grow in the 4%, 5% range and so there is more capacity can be absorbed by the increase in natural demand.

So, just a follow-up on that, are you seeing that pricing being more aggressive in that market and are you concern that if oil prices continue to move up it will pressure margins?

I think those are always concerns. I think that the demand that is strong particularly ex-U.S. and it's been a little bit weaker ex-Europe. But if these elevated levels stay and fuel goes up and economies don't grow, I think that would be an indication that the industry would need to pull capacity in order to maintain margins.

Thanks. Good morning. Glen, just on the domestic side kind of given the slowdown in capacity expected throughout the year. Where are the investments being made now and what market is going to underpin the capacity reductions for the year?

Well, I don't think it's necessarily capacity reduction, but it’s a lapsing of the investments we made last year. So, as we get through the year, our capacity in Seattle grew dramatically last year. Our capacity in Europe grew significantly last year. As we get to the second half of the year those capacity additions start lapping each other.

Okay. Thanks. And then Paul, just on some of the deferral and acceleration transactions you've made with the hedge book, I think that's kind of complicated the cash flows this year and into next year, so I'm just wondering if you can comment on where the book stands right now, with net cash flows and outflows for this year and next?

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

Hey, good morning everybody.

Hi, Jamie.

First one for whoever might want to take it. The second quarter margin guide is healthy, no question about that. But whether or not we include fuel, you know there's traditionally been more improvement from the first quarter to the second, historically for Delta anywhere from call it 500 to 800 basis points. So today's guide is obviously below that range. Shouldn't 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?

Hey, Jamie, it's Paul. I'll start and let anybody else chime in that wants to. I think when you look at just where we are in this particular quarter to quarter you've got a move in fuel that, if you just look at our mid point of our guide for 2Q against our 1Q, actually 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 just on the volatility of where we are. Despite that move in fuel we're sitting roughly at where we ended up at year-end. So I think there's a little bit of intraquarter noise movement going on with the market generation.

Okay. That's helpful. Second for Glen, I'm trying to better understand what happened in the last couple of weeks with multi-segment, itinerary construction domestically. Its 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 firmer RASM on multi-segment fares, the type that I would often use if I would jump it around the country on Delta. Can you share any background on this?

Jamie, as always we don't really comment on fares on this call, so I would like to just – if you have another question we could answer?

No. But I'll end with this. We are with and believing you should be compared against high quality industrial transports, but you listen to the earnings calls from those companies this quarter or any other, most of them are going to talk openly about pricing revenue. So high quality industrial transports don't duck and weave in this topic. So just something I would point out I'll pass the mic to somebody else.

Thank you very much. I appreciate it. Ed, I'm curious to know what you expect from Richard as his level of involvement as Chairman, how much is enough, how much is too much I should say and how much is not enough and what are your expectations from him and how much are you guys going to communicate maybe between board meetings?

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 seven or eight years. Richard and I obviously are very close and we speak a lot. I would leave it at that.

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

This is Gil. Thanks for the question. I mean there's a number of variables that drive on-time. I would argue that execution is the biggest of those including focused around that. Block time plays a role in it, of course the ground time also plays a role. We run the tightest ground times in the industry and we try to bias ground time to the tightest for a number of reasons and block time averages now with the industry maybe a little bit higher. But we also try to not just blanket block time, we're more surgical about it, I think that's a next level that we continue to drive. But our connections are also a metric and variable that we look at, we run less than a 1% misconnect rate as well, while balancing all of that.

And Hunter, this is Paul. I'll just add there. We're not going to degrade the customer experience, put the customer experience at risk in chasing after CASM goals, nor are we going to add capacity to manage costs. Capacity is the responsibility of the commercial organization to match the demand and where we see that opportunity. CASM has to be driven by productivity and we're going to continue to do that, and if we're successful with that it's not going to impact the customer, only enhance their experience.

Hi, everyone. Thanks for the time.

Hi, Darryl.

I want to revisit the topic of CapEx. Paul mentioned a $3 billion figure, and I want to clarify whether you are reaffirming your stated upper limit of $3 billion on CapEx, regardless of the decision regarding the MD-80 replacement.

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

Okay. Thanks. And then bigger picture question for Ed or Glen, I appreciate and I'm sure most equity investors on this call probably appreciate your admirable goal of getting back to positive year-over-year unit revenue growth. I guess what I'm less certain of is whether sustained unit revenue growth is actually achievable over the next few years with returns running as high as they are 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 of kind of low single-digit GDP growth, fuel and kind of the low to mid-40s per barrel, and then continued mid-single digit domestic supply growth across the industry, how do you really establish any confidence that, you know, that you can get this sustained unit revenue growth? And understandably demand is going to kind of ebb and flow and 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.

You know if you look back over the last several years we had seven years of unit revenue expansion all of which looks like about two years of contraction. It will be those two years of contraction which were caused really by fuel prices being cut in less than half. I think if you look at the correlation to fuel and unit revenues over time you'll see a very tight correlation in the longer term. So depending on what your fuel assumption is if you see fuel bottoming at $27 in the 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're relatively confident that we will get to our unit revenue in the back half of the year than we did in the first half of the year. We couple that with the foreign exchanges moving from a negative to positive, and I think that shows where we can get to. Back to the domestic arena I do think that most of this decline has been caused by the decrease in fuel.

Okay. Maybe just to play devil's advocate, understanding all the historical metrics that you just laid out, I don't think we've really ever seen a sustained period of time where the airline industry was putting up roughly 20% unlevered return like it is today, right. So, I think most would agree that's well above the industry's capital and looking across other industries that with that type of excess return would typically lead to outsized growth, right. 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 return backdrop and the likely supply trends that it would drive?

I just would comment, I think we have the very best revenue team in the business and I think that we are very confident that we have a path forward and there is more revenue for us to garner 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; it's about getting a fair price for the high quality of services that we buy in this national transportation network. So, if you spend some time I will walk you through some of the initiatives in more detail, but we really do think that we are poised to separate from the pack here.

And Darryl, this is Ed. Just to what Glen was saying. This is a different business and this is a different company and you also have to keep in to account the level of cash that we're generating and putting back into product and services and producing a product that customers want to buy and investing in segmentation technologies and merchandising opportunities in corporate volume and volumes have stayed strong throughout this period. So, I'm optimistic we'll continue to produce the results that we talk about and we'll have – it’s a good question, we'll talk more in the spring meeting about that.

Hey, good morning. Thanks. Looking out this summer, Europe really strikes me as a wild card, the best case scenario under our Brexit looks pretty dim, so I'm guessing the unit revenue outlook for the second quarter doesn't factor in Brexit, but I believe the demand trends were weaken even before the Brussels attack. So I'm wondering if you can provide some additional color about what's factored into the outlook exactly on this entity, so perhaps a trend line of continued decay, and then just remind what percent of the revenue is tied to the U.K. specifically?

U.K. specifically 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 was because of the currency devaluation, but now we are lapping that. So as we move forward from this point we should see actually a tailwind from the euro exchange rate. So, your question kind of indicates doom and gloom. We will confidently say that we have record profits in the trans-Atlantic this summer that's with a high degree of confidence that our profits will be at historic highs trans-Atlantic this summer. And as we get to June and as we usually do we'll assess what demand trends we 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 fall and winter.

That's good color. Thanks, Glen. Following up, the GBTA forecast for corporate travel spends was revised downward this week. So I'm wondering if you can provide some color around this revenue bucket for Delta. Has the spend deteriorated somewhat, or are you expecting spend to perhaps trend a little bit more strongly this year? Just wondering what color you can share along those lines.

Dan, this is Ed. The GBTA report as I recall, I'd look at quickly the other night indicated that demand continues to grow, volume continues to grow and that's what we're seeing in our corporate space, our volumes were up in Q1 and our forecast through the summer and rest of the year for volumes still continue to grow. I think the numbers that they've revised down were more reflective of the current pricing environment in which fares are lower than were previously anticipated in the closing space. But we're not seeing any trend lines to give us pause.

Good morning guys. Thanks for the time.

Welcome.

As it relates to rising fuel prices, I'm just curious how quickly may you'll be able to pass that through higher fares. What sort of lag before that's reflected RASM?

That's hard to speculate on. Historically there's been a lag and I think it's anywhere from one to two quarters before RASM and volume adjustments get made to keep track of rising fuel price itself. The current environment is different than anything we've seen before at the same time, so it would be hard to speculate.

Okay. Then specifically with regard to the second quarter PRASM guide, what sort of FX impact is baked in there? If you could share that, that would be helpful.

I think it's one point.

Hi, gentlemen, thanks for the time. Just as it relates to the June guide are you assuming the margin 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?

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 trend lines that we closed out the first quarter at.

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?

Well, for many months and quarters now we've had advanced domestic yields and as they sit on the books for the out months in negative territory and as we get to summer of this year, peak summer of this year for the first time and quite a while the advanced bookings and advanced yield trends are favorable to the baseline of a year ago. So, that is optimistic and now we have to do is get through that whole booking cycle all the way down to the day of departure and keep in the positive territory. When you're sitting out at 30, 60, and 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're on and seeing a much more favorable advance book than we've had in the past.

Okay. Thanks for the time and congrats on all the new roles.

Thank you.

Hey, everyone. It's actually Richa Talwar on behalf of Mike. Good morning.

Good morning.

So first, we would be curious to hear Delta's stance on slot restrictions at Newark airport being lifted in October. Does that represent a growth opportunity for you? And how do you think it will impact the New York market maybe more broadly and fit into your New York strategy?

New York is a very congested area in terms of capabilities, in terms of aerospace and it’s a very complex and incredibly expensive environment to operate in. So, while we are enthusiastic about Newark's slot restrictions being lifted, we are also realistic that their airport does not have an infinite number of or infinite capability to handle traffic. So we will examine the options very carefully and see what we do to improve our position in Newark, but I don't see a significant amount for us in Newark.

Okay, great. Thanks. And then second, regarding the financial difficulties your Brazilian Partner is going through, we know GOL has a number of fairly young aircraft that it's looking to restructure with lessons. And it's been reported that Delta is in the market right now, as you've commented multiple times for narrow-body jets. So is there a happy harmony on the table where you consider using some of their lift? Is that an outcome you would consider? Or are you really just opting for new aircraft or a different avenue as you consider your replacement needs?

This is Ed. We are working very closely with our good partners down in Brazil and they are certainly going through a 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 out opportunities, but we're in dialogue with them. We're not the only individuals at the table because there are a number of lessors who are also talking about sending aircraft back as well.

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

Good morning. Thanks for taking my question.

Good morning, Julie.

Glen, is there any color you can provide geographically on domestic RASM, pockets of strength and weakness? I think last year you called out three specific markets as driving the bulk of the weakness. Is it still a similar story, or was the weakness in Q1 more widespread?

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

Okay, great. Can you quantify that just in terms of the number of top 10 markets that are affected or?

I think what we can do is we can get back to you on that in terms of more specifics because it is a much more widespread phenomenon than it was. Last year was really just in some key business markets and now it has broader implications. The good news is that the numbers haven't gotten worse, so they tend to balance out in demand, but it is different than it was a year ago.

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

As we get through the peak summer we do expect domestic to improve from where we are sitting in March. May may be a choppy month, but I think June and July will be very solid, and we do get one point reduction or point and a half on the currency headwinds as well. So I think we have some good visibility to peak summer, the second quarter isn't the peak for domestic. July is really the peak, and that's really where we headed to try and get a positive RASM in domestic, we'll see if we can get there.

Thanks, Julie.

Thanks, Julie. And that is going to conclude the analyst portion of the call. I'll hand it over to Kevin Shinkle, our Chief Communications Officer.

Welcome everybody. We've about 10 minutes to take questions from journalists, so please limit yourself to one question and one follow-up. Kelly Anne if you could provide the instruction again on how to register to ask the question.

Hello, everyone. I was wondering if you see any challenges for Delta in Alaska Air's merger with Virgin America? And also, JetBlue announced this week that they are expanding Mint service into Seattle. How will these changes impact Delta?

Your question was high, I didn't fully hear your question, it's high, how does the Alaska/Virgin proposed merger impact Delta?

Yes. Yes, as well as JetBlue expanding Mint service into 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 there. We're not going to comment on proposed transaction. We'll react when we see what happens in the marketplace.

Okay, thanks.

On the Mint product between Seattle and JFK and Boston, we currently have flatbeds on a single flight between our two flights between New York and Seattle. We had already in the plans to make sure that we had a consistent product in terms of flatbeds seats in key time channels between the two markets. That's not all time channels, but on the red eye, certainly we will have a flatbed product in Seattle to New York.

Great.

We were hosting our plans before Mint announced this.

You know basic economy is really designed 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, great operational reliability, great baggage delivery and we already have a lot of things that other ultra-low-cost carriers do not offer for free like charging for space in overhead bins. So if you're stopping for just the lowest possible fare we want to have a 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 designed for. And what we're seeing is when presented with the options and the way we get to the $20 million value is those customers when they were informed of what that product was show something else. And that's how we get to that $20 million value. Remember it's really only in about 400 to 500 markets, we now have over 20,000 domestic markets. So our plan is over the next weeks and months, we will continue to roll it out. We do have a great value proposition for those who are just looking for the lowest possible fare.

Thanks a lot.

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

The first quarter it was 18.5%, Susan.

Thank you. And secondly, there's 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?

We're not anticipating that, Susan.

You think it will be solved then?

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

You already addressed my question about the basic economy. I just want to know how the entry of American and United into that market this year will impact you.

We really don't have the details yet on what American and United's product is, but I think we are consistent in saying whatever that product is, we want to have the best in class for it 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.

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

Well Michael there are no decisions taken yet because GOL is still working through the impact with its 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 whether there are some opportunities to take from used aircraft and either to enter into service with us and then induct, or to part out those opportunities in both spaces.

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

Well Ted, we don't have any markets that we buy from halfway across the world with fewer than 10 people, and I doubt there are many carriers in the world like that. I'm not sure what the latest updates are, so I will pass that to Peter, and he can let you know.

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

So nothing came in from the U.S. government? Nothing we are aware of.

Nothing we are aware of and Ted we do have some markets that we have four or five passengers and we call that Delta private jets.

Hi there, I was just interested in finding out how the current environment in your outlook, as it stands effective, how does contract negotiations as you go into mediation and any time frame that you might have for reaching a deal there?

We are not going to comment publicly on the status of the negotiations. We are at the table. We are working hard, our pilots are the best and we want our pilots to be paid the best and that’s our commitment to them.

Thanks very much. Has Delta considered starting direct flights into China’s interior now that more of its customers are travelling beyond Beijing and Shanghai?

You know we have some great partners in China with China Eastern and China Southern and similar to how we transfer customers to our European partners, AFKL and AZ, we think that the next few years is about continuing to develop those primary gateways in Beijing and Shanghai. And as you may know we’ve applied for our new services during this December from Los Angeles to Beijing and that’s going to be our focus for 2016 and 2017 as we work to get that route initiated successfully.

Thank you. And a brief follow up regarding the region. Does Delta have an update on talks to strengthen its partnership with Korean Air?

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

Hi, yes, could you comment on the Haneda daytime slots and does Delta plan to seek all of them if they are available in the proceeding later this year?

As you may know there are five daylight frequencies available to U.S. carriers. We are in the process of filing our route case and that will become public here in the next couple of weeks, but before that happens we probably would refrain from commenting on it.

Okay, one follow up. What was the opening due to your Narita hub considering your earlier comments on downplaying Narita?

You know we have continued to de-emphasize Narita over the last several years and we will continue on that process. Haneda probably accelerates that process by a little bit as we look through the fall of the scheduled period.

Thank you.

Thank you. And with that we’ll conclude our earnings conference call. Thanks to everyone for listening.