Delta Air Lines Inc (DAL) — Q2 2016 Earnings Call Transcript

Good morning, everyone and thanks for joining us for our June quarter call. Joining us in Atlanta today are Ed Bastian, our CEO; our President, Glen Hauenstein and our CFO, Paul Jacobson. Ed will open the call. Glen will then address our financial and revenue performance and Paul will conclude with a review of 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 will also discuss non-GAAP financial measures. All results exclude special items, unless otherwise noted. And you can find the reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I will turn the call over to our Chief Executive Officer, Ed Bastian.

Thanks, Jill. Good morning. Thanks to everyone for joining us. For the June quarter, we reported a $1.7 billion pre-tax profit and we generated $1.6 billion in free cash flow. We grew our earnings per share 16% to $1.47, beating consensus by $0.05. Strong cost execution and lower fuel prices allowed us to offset a decline in revenues as we continue to face persistent unit revenue headwinds. In this challenging revenue environment, it’s more important than ever that we differentiate ourselves on service. And in this area, the Delta people have truly risen to the top. We continue to run the industry’s best operation. We delivered a 99.95% completion factor for the June quarter, including 71 of the 90 days with zero mainline cancellations. More importantly, we had 23 days of zero system cancellations on any Delta carrier, nearly 6,000 flights a day or 1 out of every 4 days for the entire quarter. Our mainline on-time rate improved 1.5 points year-over-year to 86.9%. This operational result is contributing to continued solid increases in customer satisfaction. We have achieved all-time highs in our net promoter scores and our customer complaint rate has decreased by 14% so far this year. These high levels of customer satisfaction are widening our revenue lead relative to the industry, with our system RASM index reaching 110% as of the March quarter. Congratulations to the entire Delta team, and thank you. We recognize your outstanding efforts with another $324 million accrued towards our profit sharing program, bringing us to $596 million accrued already this year. Despite our strong results, we continue to face persistent headwinds on our unit revenues on a number of fronts that we are working hard to combat. Capacity is one of the biggest levers we have to move the needle on our unit revenue performance. In May, we announced that we plan to take one point of capacity out of the fourth quarter, bringing our second half capacity growth plan below 2%. Now, with the foreign currency pressure from the steep drop in the pound, the economic uncertainty from Brexit and continuing yield pressures in the North Atlantic, we have decided to take an additional 6 points of capacity out of the UK for the winter IATA season. We have also been working closely with our partner Virgin Atlantic, who will be making their own capacity changes. Combined, our overall UK capacity this winter will be down 2% to 4% compared to the prior year. For Delta, these changes along with other network actions will take roughly 1 point of capacity out of the system, and we now expect our fourth quarter capacity to grow by only 1% year-over-year. Glen will take you through the details. But I want to stress to you that the company is very focused on getting back to positive RASM growth. While admittedly, we have done a poor job forecasting when unit revenues will turn positive, we are working hard to achieve our goal, hopefully by the end of the year. And even if ultimately it takes a little bit longer than year-end, we are confident we are on the right path. We expect July and August monthly RASM results to be weak. However, we anticipate a market improvement in our September monthly numbers as we implement our capacity changes and see benefits from our domestic revenue management initiatives, easing of foreign exchange headwinds, and an improvement in the overall pricing environment as we hit the traditional 9-month period that it takes for revenues to catch up to higher fuel prices that we began experiencing earlier this year. If we do not see the right progress in our results as we move through the fall, we are prepared to take additional actions as you saw us announce this morning. Because the reality is that the large year-on-year savings driven by lower fuel are now behind us, and market prices are essentially flat for the third quarter and likely to be higher year-over-year in the fourth quarter for the first time since 2012. All that said, our results for the third quarter should be a record as we expect to generate a pre-tax margin of 20%, consistent with what we posted a year ago. Demonstrating the sustainability of our performance is key to delivering the margin, cash flow, and return targets that we outlined for you in May. As we look to drive that performance longer term for the business, we will continue to execute on the strategy that has already delivered tremendous value for all of our stakeholders. First, we will continue to strengthen our brand around the world. The strong brand improves customer loyalty while driving a sustainable revenue premium and higher margins. Second, we will maintain a rigorous discipline around cost and capital. This provides the solid foundation for the business, day in and day out. With our sustainable revenue premium, a solid cost foundation, and modest capacity growth, we have the engine for consistent 15% plus long-term earnings growth. Finally, we will use our strong cash flows to reinvest in the business for the long-term, fortify our balance sheet through debt and pension reductions while also returning at least 70% of our free cash flow to our owners. To conclude, our second quarter results were strong. However, we need to get unit revenues back on a positive track, and Glen and the commercial team are executing on our plan. Longer term, our revenue premium, solid cost base, balance sheet, and cash flows provide the foundation for the earnings growth and substantial capital returns for our owners that we believe will drive value long into the future. And with that, I am happy to turn the call now over to Glen.

Thanks, Ed and good morning, everyone. While the overall revenue environment continues to present challenges, we expect to outperform our network peers on unit revenues once again in the second quarter. This is truly a testament to our entire team who continue to provide industry-leading revenues by delivering an unparalleled level of reliability and great customer service every day. Turning to our June quarter performance, revenues declined 2% compared to last year, including roughly $65 million of pressure from currency. We continue to see deteriorating domestic yield on stable corporate ticket volumes, producing domestic corporate unit revenue trends that are down in the high single-digits. This pressure, combined with continued foreign currency impacts and supply-demand imbalances primarily in the Trans-Atlantic and China regions, drove a 4.9% decline in system passenger revenues. Despite facing a number of headwinds in the quarter, the expansion of our ancillary revenue initiative remains a significant positive for us. Our branded fare initiative continues to see strong momentum. Total merchandising revenues for the quarter increased by more than $40 million or 13% year-over-year. Comfort+ paid load factor increased by 15 points to 46% as we began selling this product in the purchase path in mid-May. We now expect Comfort+ to generate nearly $300 million of up-sell revenues in the second half of 2016 with further upside in 2017 as we begin the international rollout scheduled to complete by the end of 2017. We have now rolled out our basic economy product to over 7,000 domestic markets or about 50% of our domestic revenue base. We anticipate that we will have full domestic coverage sometime in 2017. Our international rollout of this product has begun and we are testing the product in over 50 international markets. Our intent is to have this in all international markets during the year 2018. Our partnership with American Express produced $90 million of incremental value in this quarter and we expect over $300 million for the year. New current acquisitions are on pace for another record year and have increased 30% year-to-date over our record 2015. A special thanks to the SkyMiles and American Express teams for the great success we have had in enrolling new members this year. We have a great partner in American Express and look forward to our continued efforts to provide the leading co-brand offering to our mutual customers. While there are areas of the business that have great momentum, there are others that require additional work. Our entire commercial team is focused on changing the revenue trajectory and getting back to positive RASM by year-end. Let me outline for you some significant initiatives we have underway by region to ensure that we can achieve our goal. Domestically, our unit revenues declined 6% on 5% capacity growth for the June quarter, and while absolute volumes for business traffic remained solid, they simply haven’t kept pace with sales growth. Yields were further pressured as traditional AP and minimum stay requirements were absent in many major U.S. markets. On the other hand, leisure yields are strengthening, and demand remained strong. So going forward, our path to improving domestic RASM starts by moderating our domestic capacity growth. This will begin in our post-summer schedule that starts late August. With continued strength in leisure demand and yields, reduced capacity growth should allow us to position our inventory towards higher yielding, long AP leisure fares. This should provide a cushion for unit revenues that will more than offset stubbornly low business fares that are largely sold within the month. July and August should post strong domestic margins and cash flow as we run out the remainder of our summer schedule. We are confident that we will then see substantial RASM improvement in the September timeframe and may even achieve positive domestic revenue as early as September. In Latin America, unit revenues were down 5% in the quarter, but June achieved our first positive unit revenue results in 26 months. This result was achieved as Brazil unit revenue declines moderated to just 4% on strengthening currency and capacity reductions. Delta has removed 25% of capacity in Brazil to deal with the economic crisis. Mexico continued to be strong for us on both leisure and business demand, and RASM during the quarter was up 4 points. Caribbean demand remained solid, and we expect favorable unit revenues beginning in the third quarter as we lap our own and industry capacity increases. For the remainder of the year, our Latin capacity will decline 2 to 3 points, and we expect this entity to consistently inflect in RASM as early as the September quarter on reduced currency pressures, strengthening demand, and reduced capacity offering. Moving to the Pacific, the 5% unit revenue decline in the June quarter was the result of a 4-point headwind from lower year-on-year hedge gains. Additionally, there were 2 points of negative impact from lower fuel surcharges, partly offset by the appreciation of the end spot rate. As is standard business practice, we hedge at least 50% of our net yen exposure in any given quarter. However, in 2015, we held more significant positions in place at more favorable rates than we do currently. In fact, we expect to recognize a $5 million hedge loss in the back half of this year compared to a $90 million gain last year. $70 million of that headwind will occur in the September quarter alone, accounting for nearly 1 point of negative system PRASM and more than 7 points of impact on the Pacific unit revenues. Excluding hedges, we achieved flat RASM in Japan in the June quarter, driven by our capacity adjustments, focus on higher yielding U.S. point of sales traffic, and recovery in the Japan point of sale resort markets, supported by a stronger yen. The strength in Japan was firmly offset by yield pressures in China. Passenger growth in China was up 7% in the quarter, and we continue to see increasing demand for connecting traffic with our partners China Eastern and China Southern. However, industry capacity to and from the U.S. increased nearly 25% in the second quarter, which pressured yields. This capacity is expected to continue in the second half. For the remainder of the year in the Pacific, we are accelerating our capacity reductions and expect to be down roughly 7.5% in the third quarter and 5% for the winter season. We anticipate that the combination of our planned capacity reductions, along with the stronger yen, will result in positive RASM growth later this year, excluding the hedge impact. Finally, in the Trans-Atlantic segment, Delta’s second quarter capacity growth was in line with traffic trends at 2%, while the industry increased capacity by 10%, pressuring yields. Although this drove our unit revenues down 4.5% for the quarter, the Trans-Atlantic is still on track to produce one of the most profitable summers in history. That said, this area continues to be where we face the greatest challenge in our efforts to get back to positive RASM and we are now facing additional pressures from Brexit. In our Continental European markets, customer growth nearly matched capacity growth at 5%, but double-digit low-cost carrier growth pressured yields. In the second quarter, Delta and Air France KLM began a code-share agreement with Jet Airways, and we are very optimistic about this opportunity to feed Paris, Amsterdam, and London going forward. Given the contra-seasonal nature of the India market, we expect to have a positive impact on fourth-quarter Trans-Atlantic revenues. In the UK, Delta’s British pound denominated revenue is roughly $350 million on an annual basis. When the pound devalued 12% versus the pre-Brexit levels, our revenues were reduced by $40 million from currency alone. Since the leave decision, we haven’t seen a material impact on volumes, but as Ed mentioned, along with our partner, Virgin Atlantic, we are taking additional capacity out of the UK for winter to address the regional headwinds. The reduction is focused on UK origin leisure markets. These changes, combined with other actions we are taking, will result in our winter IATA scheduled capacity in the Trans-Atlantic being down for the second consecutive year. Even with these capacity actions, we do not expect RASM in the Trans-Atlantic to inflect until sometime in 2017. At a system level, with these plans in place across all our entities and the trends that we see today for the September quarter, we are forecasting system unit revenues to be down between 4% and 6% with a 1% to 2% year-over-year capacity increase. We expect July and August to be at or slightly below the bottom end of that range, with September markedly better than both of those months. Calendar placement creates noise between the months and will be a 2-point headwind in August and a 2-point benefit to September. Additionally, September should see benefits as currency and fuel surcharge headwinds ease, and the fall capacity changes begin to be implemented. So, to wrap everything up, while the current environment remains challenging, we continue to outperform our peer set. We have plans in place to address the challenges we face, and we are executing against those plans. Where we haven’t seen the desired traction in our unit revenues, we are taking actions with revenue management strategies and capacity levels. If necessary, we will take further actions to make sure that we maintain the momentum to achieve our goal of getting to positive unit revenue by year-end and ahead of our network peers. And with that, I would like to turn it over to my good friend, Paul Jacobson.

Thanks, Glen and thanks to the entire team. We all appreciate the efforts and the hard work that they are undergoing. Good morning, everyone and appreciate you joining us this morning. Consistent cost execution again this quarter was a key contributor to Delta delivering an operating margin that was within our initial guidance range, before the 4-point headwind from the early fuels hedge settlements. While we continue to benefit from lower fuel costs, prices remain volatile as does the global environment, and we must remain vigilant of those costs that we can control. At the same time, it is critical that we continue to invest in our product and enhance our performance and service to our customers. Total operating expenses declined by roughly $300 million in the quarter, driven by lower fuel expenses. Non-fuel CASM was essentially flat despite pressure from higher wages and product and service investments. Our strong operational performance, our up-gauging initiatives, and the commitment across the organization to delivering productivity savings drove our solid cost performance again this quarter. I would like to thank the entire Delta team for driving another outstanding result this quarter. We have the best employees in the industry and this strong performance was made possible by their contributions. We expect our non-fuel unit costs, including profit sharing, to be roughly flat again in the September quarter and to increase less than 2% for the full year. Turning to fuel, our total fuel expense declined by over $400 million as lower market fuel prices offset higher consumption and hedge losses. We made the decision in the quarter to early settle all of our remaining 2016 hedges, which brought in an additional $450 million of losses to the quarter. Our all-in fuel price was $1.97 per gallon, including $0.43 from those early settlements. The refinery lost a modest $10 million for the quarter, and we expect a lower crack spread environment, which is a positive for Delta overall, will likely result in a modest loss for the refinery for the full year. Looking ahead, we expect an all-in September quarter fuel price of $1.52 to $1.57 per gallon, which is down 15% from the prior year. With the early hedge settlements complete, we don’t expect to report any additional hedge losses in 2016. Now, let me address our margin outlook. With another quarter of solid cost performance despite persistent RASM headwinds and a moderating fuel environment, we are forecasting a September operating margin in the 19% to 21% range, which is roughly flat to last year. Moving on to cash flow, we generated $2.6 billion of operating cash flow in the quarter. We reinvested over $1 billion back into the business during the quarter, primarily related to aircraft deliveries and modification projects. We expect capital spending will approximate $750 million in the third quarter, as we now expect our Aeromexico tender offer to close in the fourth quarter. We will continue to take a balanced approach to the deployment of our cash as we remain focused on long-term durability and sustainability for the business model. This is what we are driving for with each dollar we spend, whether it’s going back into the business, the balance sheet or return to our owners. We ended the June quarter with net debt of $6.8 billion, down from $7.1 billion a year ago. That debt reduction saved another $34 million in interest expense this quarter. With the additional $135 million we contributed to the pension plan this quarter, we have completed our funding commitment for the year. The progress we have made on de-risking the balance sheet and paying down our debt was recognized by Fitch in the quarter with an upgrade to BBB-. We are now proud that two of the three rating agencies have provided us with this strong endorsement of our commitment to the long-term stability and viability of our business model. With the $1.6 billion of free cash flow we generated during the quarter, we continued on the path of increasing shareholder returns with $103 million of dividends and just over $1 billion of share repurchases. As we announced at our May Analyst Meeting, our dividend will increase to $0.81 per share annually starting in the September quarter. At current stock prices, this represents just over a 2% dividend yield. Additionally, we expect to complete our current $5 billion share repurchase authorization by next May, over 6 months ahead of schedule, which will represent our third consecutive authorization completed ahead of time. We expect to return nearly $3.5 billion to shareholders this year, consistent with our goal of returning at least 70% of free cash flow through dividends and share repurchases. In closing, I want to express my excitement about the opportunities ahead for our business. We will continue to stretch ourselves. We will continue to follow through on our near-term and long-term plans. Our performance is simply remarkable against any measure, and we are focused on remaining a leading S&P 500 company.

Yes, hey. Just two quick ones. Can you just give us the breakout between domestic and international capacity growth for the third and fourth quarters?

For the fourth quarter, we will be up about 2 to 2.5 domestic and down about 2 to 2.5 internationally.

Okay. And then do you have that for the third quarter, Glen?

For the third quarter, I do not have that. I estimate it’s about plus 3.5 for domestic and minus 1 for international.

Okay, that’s perfect. And then just quick question on the Virgin Atlantic, the 49% stake, I know that runs to the non-op. In your June quarter, does that reflect their June quarter or is that a lag? I know sometimes with private companies there is a quarter lag. I just want to clarify that.

Yes, that’s current, Mike.

So, it is the June quarter Virgin’s numbers in your June quarter?

Yes, they count just like we can.

Good morning, Paul. Just on the guidance, given the 2Q CASM results and the 3Q guide, is there anything from a timing or maintenance perspective in 4Q that would prevent you from coming in significantly below your sub 2% long-term CASM goal this year?

Good morning, Andrew. We haven’t given any guidance on the fourth quarter. There isn’t anything on the horizon in terms of maintenance that would cause us to deviate from that. I think we continue to run a great operation and manage through that. Our goal is still to keep it below 2%. We are not going to give any forward guidance on 4Q.

Okay. And then I guess secondly, Paul, obviously, there has been a lot of movement in the bond market since the Brexit vote, and the 10-year treasuries are at record lows. Are there any significant pension implications that could end up creating a bit of the CASM headwind over the next year or so, or is it too small?

It’s a little bit too soon to tell. Our balance sheet liability is impacted by rates. Assuming rates don’t revert back higher, we could see a higher balance sheet liability, but that has little impact on expense and no impact at all on our minimum funding requirements for our strategy going forward, which is much longer term based.

Hey, thanks. Good morning. Glen, I wonder if you could playback for us what you were expecting to see with respect to the June quarter monthly. How that was different from what you expected to see and how that maybe is impacting your forecast here into the third quarter, because I thought the idea was peak demand July, August would sort of soak up those excess seats and fix the close-in yield problem. But now it sounds like we are dependent much more on September and maybe a return to corporate.

What we didn’t expect in the beginning of the year was the continuation and acceleration of the declines in the business traffic sector. What we had anticipated was strong demand leisure, and that has borne out. The demand set for leisure is quite good and in line with our capacity offering, but it has not offset the close-in yield weakness that we have seen. And so that’s how it played out, and that leaves us with really no other choice but to decrease the capacity levels moving forward. We can’t count on it to be as we have said in the earnings call, the stubbornly low close-in yields to go away. So, we need to not go into a month flat because if we go into a month with flat RASM, we come out with a RASM that’s in the minus 4, 5 range. So we have to hit that up 3 to 4 to 5 as we come into the month knowing we are going to give away some of that yield within the month. So, that’s kind of how it played out. That’s how we are looking toward September. When we planned the summer capacity back in the February/March period, it will be an incredibly profitable record summer for us. So, it’s not as disastrous as some people are characterizing it, but it’s really robust, and we are going to take the necessary actions to fix it moving forward.

Good morning. Thanks for taking my question. Glen, I just want to clarify on the PRASM cadence for the third quarter. You mentioned that July and August were looking weak, and just to help calibrate expectations, should we expect to see July RASM worsen from June’s down 5%, and then improve steadily with September being the best month of the quarter?

I think that’s probably exactly how you would read it.

Okay, understood. And then just to reconcile, I mean domestic is now the worst performing entity and that’s where capacity growth is still the highest, how do we get confidence on the level of sequential improvement we need to see in order to write the PRASM trajectory to get to positive by year-end?

This is also where on an absolute basis, we are decreasing our rate of growth the most. We are going to be coming down about 300 basis points to 350 basis points from where we are in peak summer versus international, which is going down about 100 basis points. So I think if we have to go further, we will, but this is the next step, and seeing if we can get the numbers to where we need them to be to continue to expand our margin into next year.

Domestic results are incredibly strong in aggregate. I realize the RASM numbers have been weak, but the bottom line results have been phenomenal. The premium we continue to generate versus the competition for domestic is about 1.20. The team is doing a great job domestically. We realize in order to get RASM improvement to match the increasing fuel prices we are going to be paying, we need to make the adjustments that Glen talked about.

Hi, just wondering, could you update us on where you are with respect to aircraft retirements in the Pacific and how that affects capacity growth in that market for the back half of the year?

We still have six 747-400s that are flying in the Pacific that are on schedule to be retired by the year-end of 2017. We are trying to accelerate that closer to September. But that would likely in and of itself have a negative bias on Pacific capacity through the year and next year. It will also be a significant improvement to our P&L as we replace the aging airplanes with much more efficient equipment.

Okay. And is that included in that system capacity guidance of down 1% that you are referring to in the comments today?

You may have misinterpreted what I said. The last six don’t come out until the fourth quarter of next year, not this year.

Thank you very much. Good morning.

Good morning, Hunter.

So Ed, I think the last year has proven out that investors probably care more about fundamental behavior from airlines rather than traditional business metrics like profit, for example. So as you think about - you have the long-term financial goals that you guys have laid out relating to ROIC, cash flow, debt and earnings growth. I am kind of curious why you still think earnings growth is a fact. Do your investors tell you that that is something they still want? Because it’s certainly not something that other transport or industrial companies achieve or even strive for, that's rated multiples that are much higher than airlines right now. So I guess the question is why is that one metric still included in the bunch?

We hear from our long-term investors that improving all of our financial metrics, whether it’s our ROIC or our earnings potential, are all important. We realize we sit in a volatile industry in a volatile space. Our goal is to prove the sustainability and durability of the model. We think earnings growth is important, yes.

I think we have talked about this before. It’s more about the approach to the time value for time-sensitive customers. It’s are you getting what people are willing to pay for their time versus what the market was charging. Business fares are below where they have been historically. In a lot of markets where there have been little capacity, even negative capacity changes over the medium term, it has to do with lower fuel prices. As our fuel costs rise, there will be more focus on it, but our share is a small percentage in the industry. We don’t have that kind of power or predictions to go out and make those claims.

Hi, good morning, everybody.

Hi, Jamie.

Glen, other revenue declined slightly from the first quarter, which seems a bit inconsistent with seasonality. I know there’s stuff in that category other than ancillary revenue. I am just wondering what the moving pieces were that drove the decline, especially since Comfort+ turned on in the month of May?

One of the big items in that was lower year-over-year third-party sales from the refinery, so there is a piece of that that has to flow through gross up revenues and net it out of expense. With the lower crude oil prices, the product values are substantially down. So, that was about $65 million of that number.

So this is a reflection of the seasonality and dynamics at play in various underlying markets, and different products that can often impact one another. What I can tell you is that we have seen these ebbs and flows and adapt to the overall market conditions over the year.

We didn’t give the monthly capacity breakdown. You can roughly estimate that we are at today as the September numbers start to take down as we get out of this summer season. We haven’t given guidance for 2017, but again, if you look at our Q4, I would expect our Q1 to be in that same range.

Hey, good morning. Thanks for the time. When we speak specifically about the capacity actions that you are taking, both those announced in May and those announced this morning, can you quantify specifically how those actions will impact PRASM? Can you sort of bracket that in terms of impacts?

It will improve RASM. How is that?

Okay. So, I guess when you think about your desire to get to positive RASM by year-end, will you be willing to go to negative capacity growth year-over-year to get to that level?

No, that’s not our plan.

Hi, guys. Thanks for the time. Ed, Glen, you both mentioned that you think fuel is the biggest driver of higher RASM on a perspective basis. How do you come to that conclusion? Do you mean to imply that this move from the kind of $27 we saw for a short period in January up to $46, $47 today is likely to have driven a negative profit contribution from some flying in the network, Delta or your peers? Is that kind of the thought process?

If you look historically at trends, we started with fuel around $100, got all the way down to $25. Since we have been moving back up into the mid to high $40s, there is a high correlation to airline revenues and the lag time is about 9 months. That’s what we’re counting on as that on the margin when fuel cost $25, players were pricing their products at that marginal cost, which has now gone up substantially.

Thanks for that. I guess maybe to follow-up on Hunter’s question a little bit. With the regards to the close-in yield weakness that we have seen, I would have thought that at this point, the RM systems would be calibrated and thus holding on – that’s not holding on to as much inventory for late bookings. Is that not the case?

Close-in yields are significantly higher than long AP yields. Though the late in the booking curve are depressed, they are now significantly more than early in the booking curve.

Hey, thank you. Glen, the flat PRASM or positive PRASM, is that for fourth or for the month of December? Second question, the capacity actions you are taking today are exclusively focused on the UK and Brexit. If you are seeing weaker close-in yields domestically and softer corporate traffic domestically, why isn’t domestic capacity coming down?

No, I think you misread that. Domestic capacity is coming down significantly. We are decreasing our domestic offering in the fourth quarter versus the current quarter by about 300 basis points, so a very significant decrease in domestic capacity.

Our plan is to see how the performance trends and make adjustments as we go forward. We need both revenue and volume to get to a positive RASM in the sky. And we’re working towards that.

Hey, good morning. Paul, the core cost performance, if you adjust for kind of the labor increased pressures, it’s been quite impressive. I’m guessing FX is going to benefit about 0.5 point, but could you talk a little bit more about what’s driving the declines?

The biggest driver of our cost performance has clearly been the continued upgauging and efficiency created in the business through that. Our upgauging has been accruing at about a rate of about 5% a year, which has had a material benefit on our ability to drive cost efficiencies.

We have seen this sort of flattening and that has helped with operational factors as well, just overarching everything we do. We expect improvements heading into the third quarter; there are typically expectations built in heading into that timeframe.

And we are going to have time for one more question from the analysts.

Okay. Good morning guys. Thanks for squeezing me in here. Glen, how is Delta getting to less capacity exactly from the reduced Atlantic flying? Is it less capacity, with the same number of planes, is it flying being redeployed to other markets, or are some planes potentially being early retired here?

It’s a little bit of all of the above. If you look at our fleet counts for summer of this year versus summer of last year, it is almost flat. The increased capacity has mainly been due to marginal utilization because of lower fuel, and what we are seeing is we are not getting compensated for that, so that’s coming out. We will be doing more cancellations in the off-peak, more cancellations in the ad-hoc world, as well as gauge reductions. We have not committed yet, but some markets will not make it through.

Understood. Okay. And then Glen, in May, you talked about seeing some green shoots in the Latin America region and since then we’ve had a huge move in FX, particularly to Brazil. Just given what’s happening with capacity and foreign exchange to the country and to the region, could you collaborate a little more on the revenue roadmap from here in this entity? Is there a revenue benefit potentially from Aeromexico that could be incremental in the back half of the year?

Indeed, Latin unit revenues were up in June for the first time in 26 months. The strength may be related to Delta and Aeromexico together, and we have had historical success in capturing corporate travel into and from Mexico.

We expect Aeromexico to be approved in the fourth quarter.

Good morning. This is Kevin Shinkle. Welcome to the media portion of the call. We will have about 10 minutes for questions. So please limit yourself to one question and one brief follow-up. Kyle, will you please provide the instructions on how to register and ask the question?

Thank you for taking the question. Might you breakdown why Trans-Atlantic flights will have one of their most profitable summers in history? Is it through which countries and which points of origin are you expecting strong leisure or corporate bookings, that sort of thing?

We don’t provide that level of detail, Jeffrey. The Trans-Atlantic for us has historically been a strong source of profit. We have expanded to the UK with our Virgin relationship, which has only built on that.

Hey, good morning. I am just a little confused about the issue with close-in bookings. It sounds like demand is still okay, but that maybe some of the problems are too much capacity. Is that what I am hearing? Can you explain what specifically is causing those close-in yields to be lower?

Industry pricing is lower year-over-year, and that’s probably the main driver of it. When you have capacity growth and stable demand, that’s also a negative impact to your unit revenues because corporate travel is the highest yielding piece of our yield curve. It’s a combination of too much capacity and too low fares.

Hi, I thought you might touch on this in the last answer in the analyst session. Should we expect you to drop any routes or markets entirely as part of your reduced planned capacity?

We don’t comment on future scheduled changes or future pricing initiatives. We evaluate them all the time and we add routes and delete routes from our network on a regular basis.

Hi there. I am wondering about the UK origin leisure markets that you mentioned the capacity cuts will be targeted at. What kinds of markets are UK origin leisure markets?

London has the biggest market in the UK, but it also has a high business component, representing about 35% of total business traffic to and from the U.S. We are potentially reducing frequencies on off-peak days and down-gauging equipment into regional cities. Manchester tends to have a much higher UK point of origin market, primarily due to leisure travel to and from that region.

We have grown substantially in the UK in the last several years, both us and our partner Virgin Atlantic. I think this is a normal part of the ebb and flow of supply and demand over a longer time horizon. Capacity is up substantially to the UK over a long period of time.

A Brexit question. My impression from what you said was that more Americans are going to the UK in the summer. There is very good summer travel, but in the winter, UK travel to the U.S., the U.S. leisure destinations is what’s declining. Is that fair?

That’s our best estimate, Ted, yes.

Hi, yes. On the UK cuts, are those going to be seasonal just during the winter and the off-peak periods or are they intended to be permanent cuts?

They are just seasonal.

Okay. And what does this mean for the new routes that you have announced for 2017 into the UK, Portland, additional frequencies from Detroit and Atlanta?

There are no changes.

Thank you. Thank you for taking my question. With the Trainer refinery posting a loss for the second quarter, $10 million loss in the latest quarter and a $28 million loss in the first quarter, is the refinery still a benefit to Delta? Are you still glad you bought it?

Absolutely. The Trainer refinery for us has been a huge success, as we talked about the lower crack spread environment that exists for the entire refining complex represents a tremendous benefit to the airline. So we feel very good about that.

Is there a time you envisioned the refinery becoming profitable again as you look forward into future quarters or this year?

We have had profitable years with the refinery; the business is very cyclical. We certainly hope it doesn’t come at the expense of significantly higher fuel for the airline. It’s part of that integrated strategy, and we know we will have good times and bad times. But we are absolutely committed to it, irrespective of profits.

We are very happy with the refinery. They are doing a great job. Yes, we expect they will continue to generate profits as they have historically for Delta over time.

Good morning. Thanks for taking the question. Just building off that last question, can you go through, considering the fact that the refinery will be adding to your fuel costs, what does success look like for that refinery? How do you guys evaluate that refinery as a contributor?

The primary goal of buying that refinery has been to supply jet fuel and increase the supply of jet fuel, which we have done successfully. We measure its success based on operational reliability and cost, and the team has been performing extraordinarily well. The absolute crack spreads and the economics of that have to take into account the airline.

We added 40% more supply of jet fuel into the New York harbor, so that alone was a substantial benefit for Delta.

Kyle, we have time for one last question.

Thank you very much.

With that said, that concludes everything. Thank you for joining us.