Delta Air Lines Inc (DAL) — Q2 2017 Earnings Call Transcript

Thanks, Michelle. Good morning, everyone and thanks for joining us for our June quarter call. Joining us in Atlanta today are CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Paul Jacobson. Our entire leadership team is here in the room for the Q&A session. Ed will open the call and give an overview of Delta’s financial performance, Glen will then address the revenue environment and Paul will conclude with a review of our cost performance and cash flow. To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up. Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta’s SEC filings. We will discuss non-GAAP financial measures. All results exclude special items, unless otherwise noted. We are also providing cost comparisons on a normalized basis as it better matches the retroactive expense we incurred in the fourth quarter 2016 from our pilot contract to the appropriate quarters of 2016. You can find the reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I’ll turn the call over to Ed.

Thank you, Jill, and good morning. I appreciate everyone joining us on the call this morning. Earlier today, we reported the June quarter pre-tax profit of $1.85 billion and earnings per share of $1.64, largely in line with consensus. This was the best June quarter in Delta’s history. We generated an 18.4% operating margin, a 14% after-tax return on invested capital and returned $750 million to our shareholders. We also grew our topline by 3% this quarter, the first year-on-year increase we have reported in two years. The quarter could have been even better. We absorbed a $125 million pre-tax loss from the operational disruption following a severe storm that hit Atlanta in early April. While we can’t control the weather, we can improve our recovery. We had accelerated technology investments and implemented process improvements for the summer that incorporate what we learned from the April event. In true Delta form, our people bounced back to deliver the strong operations we’re known for. For the first half of this year, we’ve had 129 days of no mainline cancellations and 35 days without a system-wide cancellation. This is an improvement of 8% and 13%, respectively, versus last year and substantially better than our competition. The great work of our people, supported by the continued investment in our business was evident in the results from the recent J.D. Power survey. In that survey, Delta’s customer satisfaction score improved 33 points to the highest level in our history and we narrowed the gap to first place to 7 points. It’s truly an honor to recognize our employees with $338 million accrued in profit sharing this quarter and $70 million in shared rewards. They are the very best in our business. Looking ahead to the remainder of the year, our unit revenues are improving and tracking in line with the plan we laid out at our December Investor Day. The same is true for our non-fuel cost. However, fuel prices are lower and this gives us increasing confidence in our ability to drive margin expansion in the back half of the year. And while 2017 has been a financial transition year, as pricing catches up to the rest of the cost growth we’ve seen, our performance is setting up well to achieve the lower end of the long-term targets that we updated in May. Specifically, in each of the next three years, we’re targeting operating margins in the range of 16% to 18%, EPS growth of 15% and $4.5 billion to $5.5 billion of free cash flow. Our financial path forward focuses on four key themes. First, delivering topline and unit revenue growth, we’ll continue to invest in our network, our product, and our partnerships for the future. That’s what drives our revenue and Brand Premium, as well as strong customer loyalty to create a durable topline. Glen will spend more time on this in a moment. Second, is maintaining measured and disciplined capacity growth. Strong financially healthy companies grow and we believe keeping our capacity at or below GDP over time is the appropriate level to ensure we can deliver consistent net revenue growth. This should allow us to balance capital investment, supply and demand, and ensure the momentum in the business continues. Third, is driving cost productivity to keep our non-fuel cost growth below 2% over the long-term. This allows the bulk of the benefits of our commercial initiatives to fall to the bottom line, so we can deliver on the margin and cash flow targets. And, finally, being disciplined about our capital allocation, our goal is to invest roughly half of our operating cash flow back into the business, while the other half being put towards achieving our balance sheet goals and targeted returns to our owners. Paul will spend some time on both our cost and capital initiatives. Operating our business with this long-term perspective has proven very beneficial for all of Delta’s stakeholders. It’s allowed us to invest in our employees through wage increases each year since the Delta-Northwest merger, while paying more than $5 billion in profit sharing. For our customers, we have invested $15 billion in capital projects in the last five years, including the replacement of nearly 25% of our total fleet, undertaken significant facility upgrades and enabled investments in new technology. And for our shareholders, we’ve returned over $8 billion since 2013, while reducing our debt by over $10 billion to create an investment-grade balance sheet and our stock has recently hit all-time highs with a market cap of over $40 billion. Our work over the last decade has produced a durable foundation. We intend to leverage it in order to consistently produce strong and dependable earnings and cash flow growth through the business cycle. I’m incredibly proud of the great work of our 80,000 people that has established Delta as one of the strongest airlines in the global industry and even more excited about the future ahead for our business as we continue to execute on our long-term plans. And with that, I’ll turn the call over to Glen and Paul to go through more details on the quarter.

Thanks, Ed, and good morning, everyone. This quarter, we produced a record total revenue of just under $11 billion, an increase of nearly $350 million or 3% over last year, with solid improvements across passenger, cargo, and other revenue. This result includes a $115 million revenue headwind from the April storm disruption. I want to add my thanks to the Delta people for their focus every day on taking great care of our customers, that is what sets Delta apart from the industry. Our initiatives to give customers a more efficient global network and innovative experience, and more choice through segmentation are driving continued revenue growth, and premiums to the industry, which now stand at 110% through the first half. Before I go through our future opportunities with these initiatives, let me quickly highlight the details of the June quarter. Passenger revenues increased 3% or $260 million, driven by improvements in business yields and our commercial initiatives with $100 million of this increase from Branded Fares. Cargo sales were up 11% in the first year-on-year improvement in 10 quarters; Kudos to the cargo team for delivering this very strong result. Other revenue grew 4% ex-refinery driven by a strong 8% improvement in loyalty, partially offset by lower MRO revenues. Our partnership with American Express produced $70 million of incremental value this quarter and we are on pace to deliver $300 million of incremental value in 2017, including another record year for card acquisitions. This tremendous demand for our co-brand card is a testament to the strength of our brand and great partnership with American Express. Turning to unit revenues, the improvement in passenger revenue equated to a PRASM growth of 2.5%, including 1 point of pressure from the April storms. We saw particular strength in business yields, which improved 3 points versus the March quarter and drove our result to the high end of our initial guidance. Corporate revenues turned positive in mid-April as volumes increased year-over-year and yields continued to improve sequentially. Our recent survey of travel managers confirms this momentum, with 83% projecting their spend will be maintained or increased for the remainder of 2017, that’s up 2 points from last year’s survey. Our domestic entity saw the greatest benefit from the business yield improvement. Domestic unit revenues increased 3% versus last year, up 4 points sequentially, with two-thirds of the entity now realizing positive unit revenue growth. We expect that to expand to 75% of our domestic network in the third quarter. Our PRASM result combined with 2% higher capacity produced 4% domestic revenue growth for the quarter. After two years of underperformance, we believe we can keep these revenues growing at or above GDP due to two factors. First, Business Fares, while improving, remain well below historical levels. Second, we expect Branded Fares will deliver an incremental $1 billion in revenue through 2019. With domestic accounting for roughly two-thirds of our revenue base, this type of performance is key to driving further topline revenue growth. Turning to Latin America, we realized positive unit revenue growth of 11%, our fourth consecutive quarter of positive PRASM for the region. Brazil was again the outperformer, with RASM up nearly 15% driven by a stronger real, solid business demand, and our partnership with GOL. In the Pacific, our unit revenues declined 2%, a slight improvement over last quarter. Tokyo saw revenue improvements in Haneda and Narita on both load factor and yield versus the quarter, while China RASM declined 2% on a 2-point improvement sequentially. Strong business traffic offset softness in leisure demand driven by industry capacity increases. We are excited to have signed a JV agreement with Korean which provides our customers with an industry-leading intra-Asian network and connectivity to over 80 destinations beyond Seoul. And finally, in the Transatlantic, unit revenues declined 2%, including 1.5 points of currency pressure. RASM in the quarter was bolstered by a focus on U.S. point-of-sale, which stood at 70% this quarter, 4 points above last year. We also saw strength in business cabin, which offset pressure on leisure yields from high industry capacity levels. The U.K. was a bright spot achieving a 7% unit revenue growth and we see this strength continuing throughout the summer. To summarize, we are very pleased with a healthy demand environment and the progress we’ve made on our commercial strategy. This drove our first positive RASM result since late 2014 and a solid 2.7% improvement in TRASM. And with three consecutive months of positive RASM, and that’s actually four, we’re going to hold Ed to his deal and we will no longer be reporting our monthly revenue results. Looking ahead to the third quarter, we expect PRASM to be up in the 2.5% to 4.5% range. As for capacity, we are forecasting growth of about 2% in the third quarter. That includes a 0.5 point from last year’s technology adage and 1 point from stage length. Seats in the third quarter will be up approximately 1%. As we think about what’s going to drive our commercial performance going forward, I break our initiatives into three broad categories. First, creating a more global and efficient network, making sure we not only have the right overall level of capacity, but also we’re putting the right number of seats in the right aircraft at the right places. Our domestic growth is being driven by a multiyear upgauging initiative, which is producing over 70% of our incremental seats this year. In 2017, we will continue to add more A321s and 737-900s to replace older narrow bodies and take out additional 50 seat regional jets. With larger aircraft, we can offer more Premium product, supporting our revenue strategy, while being more cost-efficient. Internationally, we’re focused on reorienting our network around our partners’ hubs. In Latin, we’re moving quickly to implement our JV with Aeromexico, optimizing our schedules to maximize connecting opportunities for customers via hubs in Mexico City and Monterey. In the Pacific, between the Korean joint venture and our strong alliance with China Eastern, we have two partners with leading Asia hubs in Seoul and Shanghai, and soon we’ll be adding a hub in Beijing. The combination of these partners in our wide-body fleet initiatives will allow us to reduce our alliance on Tokyo-Narita and enhance our profitability in the Pacific moving forward. In Transatlantic almost 60% of our capacity this quarter was deployed in partner hubs where efficiency and connectivity drive superior margins. We are also focused on increasing seasonal flying to better align capacity with demand and to that end we added five new seasonal routes for this summer and are encouraged by the solid margins we are producing. The second broad group of initiatives is focused on providing an innovative customer experience, making sure that we’re investing in products and services our customers value. This along with industry-leading reliability and the best people in the industry is what drives higher net promoter scores and ultimately leads to sustained revenue premiums. Onboard, we’re investing in reliable high-speed Wi-Fi, upgraded interiors, in-seat entertainment and improved food and snacks. In our terminals, we have multiple projects across our system to bring the airport of the future to our customers today. And we continue to lead the industry on innovative customer solutions like RFID bag checking, biometric self-service bag drop kiosks, and biometric boarding passes. We are focused on continuing to make our customers’ flying experience better. Finally, the third category is giving our customers more choice through better segmentation. Branded Fares drove 40% of the improvement in passenger revenues this quarter, as we expanded into more markets, improved our distribution, and made products easier to buy. We’re adding more flexibility for customers to upgrade to Comfort+ and first class with both cash and miles options post purchase. We remain in the early stages of marketing the value of segmentation and with 200 million customers a year, you only need small improvements in this category to drive material topline revenue growth. When we combine the building blocks we have in place across our network with the unmatched style and service of the 80,000 Delta people worldwide, we are confident we can execute on our commercial initiatives. This will drive value for our customers and our shareholders, not only in the back half of 2017 but into the future. And now I’m happy to turn the call over to Paul.

Thanks, Glen, and good morning, everyone. Thank you for joining us today. To echo Ed and Glen’s comments, let me begin by saying thanks to the Delta people worldwide for the great service they provide to our customers. Their hard work has built a durable business model that is delivering consistent results. For the June quarter, operating expenses increased roughly $65 million, as lower fuel costs due to last year’s hedge settlements offset investments in our people, our customer experience, and our fleet. These investments drove an increase in non-fuel CASM of 5.5%, which included about a point of pressure from the April operational disruption. Moving into the back half of the year, we’ll see CASM headwinds ease despite continued pressures from wage increases and higher depreciation. First, we’ll lap the technology outage which drove about a 0.5 point of CASM in last year’s third quarter. Second, our planned capacity growth for the year was weighted to the back half after keeping capacity flat in the first half of the year, which will benefit CASM. Third, we’ll annualize higher levels of product, maintenance, and technology investments from the back half of 2016, such as enhanced snacks and additional meal services that were added last fall. Finally, our upgauging initiatives will deliver benefits at a slightly faster pace as compared to first half of the year due to our aircraft delivery schedule and into service. This initiative is already delivering solid productivity savings; in the first half of the year, we produced 1.6 higher domestic ASMs on 1% fewer departures. As a result of these four factors, we expect unit cost growth in the September quarter to be up roughly 2% on a normalized basis, which puts us on the right trajectory to achieve our full year 2% to 3% non-fuel CASM growth. Looking at fuel, while market prices increased by 10% in the June quarter, Delta’s all-in fuel price declined by 16% as we lapped last year’s early hedge settlements. We realized a $6 million profit from the refinery despite a significant increase in the cost of RIN’s compliance. While fuel prices continue to be volatile, rent prices remain below $50 a barrel and are roughly 15% below the highs of February. For the third quarter, we’re expecting year-over-year market fuel price to be slightly higher than last year, though due to some hedge settlements in the quarter and are currently forecasting our all-in fuel price in the range of $1.55 per gallon to $1.60 per gallon. For the second quarter, we delivered an 18.4% operating margin, up 1 point versus last year’s reported 17.4% margin. We expect margin expansion in the back half of the year as the revenue recovery continues to gain traction, non-fuel cost pressures ease and fuel prices remain stable. For the September quarter specifically, we expect our operating margin to be in the range of 18% to 20% compared to last year’s normalized 17.6% and reported 19%. Turning to the balance sheet and cash flow, our strong margins and profit performance resulted in $2.8 billion of operating cash flow in the quarter, adjusted for the remaining $500 million in cash from the unsecured debt transaction we contributed to the pension plan in early April. At the end of the quarter, our adjusted net debt was $8.4 billion and our unfunded pension liability was $6.9 billion together a reduction of $1.4 billion versus year end. This is solid progress as we continue to strengthen our balance sheet. We spent $1 billion on capital expenditures this quarter, of which nearly $500 million was related to new aircraft and the remainder for fleet modifications, facility upgrades, and technology improvements and initiatives. For the September quarter, we again expect capital expenditures of approximately $1 billion, including $175 million to complete the purchase of 49% of Aeromexico. During the June quarter, we generated $1.9 billion of free cash flow and used that to repurchase $600 million of shares and pay $150 million in dividends. We also recently announced a 50% dividend increase, which will begin in the September quarter. This is the fourth consecutive 50% increase to the dividend since we initiated it in 2013 and as yesterday’s closing price represents a 2.2% dividend yield. With this increase, our annualized dividend will be $875 million, which demonstrates our conviction on the durability and sustainability of the Delta business model. In closing, we believe we are on track to deliver topline growth and margin expansion in the back half of the year, while we continue to be prudent with our capital. This will allow us to produce durable earnings and cash flows and unlock additional value for our owners. With that, I’d like to turn the call back over to Jill to begin the Q&A.

Thanks Ed, Glen and Paul. Michelle, we’re ready for Q&A with the analysts if you could give them instructions.

Hey. Good morning, everybody. Thanks. I guess, Paul, first question here is, just on the stock buyback in the second quarter and the first quarter. I think you guys have bought back $800 million in shares that the share count was flat, so this is kind of a house cleaning question. I’m just wondering what drove the incremental buyback in the second quarter and if you could just help us understand what the share count is today?

Sure. Good morning, Dan. Thanks for joining us. The share count as reported is a weighted average calculation and as we repurchased stock through the quarter, the weighted average was impacted by the fact that we had contributed $350 million of equity to the pension plan at the end of March. So if you’re looking for the benefit of the buyback, if you look to the quarter end shares outstanding, it was actually down about 12 million shares. It was just a nuance with the weighted calculation due to the timing of that contribution.

Understood. And then I guess the second follow-up question here for you, Glen. I know that Delta has a number of initiatives in the back half of the year that I think to drive or improve revenue on that particular entity. I’m just wondering if you can just remind us what those initiatives are and how you think they might contribute in the back half of the year relative to the first half?

Sure. Great question. We continue on the path, and really it’s not new initiatives. It’s doing the initiatives we’ve already announced in a better way and bringing them to a broader audience. Just within this quarter, for example, we expanded the ability in post purchase; that was in May, to actually buy a ticket and then say if you’re a business customer and you want to sit in a different cabin than you’re allowed to by your company, you can purchase that in a post-purchase transaction. We’ve seen about an $80 million uptick for that on an annual run rate basis. Starting this month or this past month in June, we now for elites are allowing them to use their miles to sit in the cabins they want, and we believe that will contribute another $50 million to $100 million on a run rate basis as we continue to expand those types of programs. I think that when you think about it, these are new and innovative programs that require a lot of programming, because you have to distribute them through a lot of different means, and our ability to continue to focus on bringing the products and services that we have in the market to a broader audience is going to drive our ability to monetize our Premium products more in the next year.

Thanks so much. Appreciate it.

Hey. Thanks. Good morning.

Good morning.

So you guys sound really, yeah, hi. You sound great. Ed, obviously, you feel like you’re sounding better and better about how things are going. I know that you’ve said that the initial guide for this year on margin was down about 150 basis points, but is it safe to assume that now the 16% to 18% margin target is in play for this year and maybe even step further, might we be looking at, putting aside this whole normalization stuff for a second, might we be looking at year-on-year margin expansion on reported margins from 2016 this year?

Is your question, Hunter, will we actually expand reported margins in 2017 over 2016 essentially?

Yeah. Or if you don’t want to answer that or are you going to be in the 16% to 18% range this year, because I know you referred to it as the transition year and you originally you said you’re going to be down, but obviously things are getting better by the day. So I was just trying to sort of categorize how you’re thinking about the full year?

Got it. Yes. We are, I think, I said such in my prepared remarks that we’re anticipating being in the low end of that 16% to 18% this year.

Oh! Okay. Sorry. I must have missed that. Okay. And then let’s talk for a second about the international investment you’re making and how you see these evolving over the next three years to five years. Is this sort of, a big picture question here, is this sort of a view on how you may see foreign ownership rules potentially being relaxed by other countries, maybe if you look at the success and stability of U.S. airlines here relative to the rest of the world? There might be some angle where foreign airlines which are far more volatile businesses might be interested in having maybe majority ownership from some of the more strong U.S. airlines, Delta included. Is this just merely a JV play or is there something bigger picture down the road that you’re thinking about cross-border consolidation that you’re setting up for today?

We’re not angling to get in and control any of our foreign investors or vestiges or partnerships. What we’ve got here, Hunter is historically through the JVs and the partnerships they’ve been contractual commercial arrangements and what we have seen is our ability to drive value is much greater once you get inside the boardroom than it is through a pure contract in terms of aligning ownership and driving value in a consistent manner and being able to invest truly for the long-term together. We’ve seen that in Aeromexico, which drove the higher-level investment. We’ve seen that in GOL. We’ve seen that in Virgin Atlantic, certainly. And so I think over time, you might see us continue to go down that path, but no, I don’t think in our future, certainly, not in the next five years to 10 years I don’t see the foreign ownership rules changing dramatically.

Okay. Thank you.

Thanks, Operator. Hi, team. Thanks for taking the question. Ed, I know that there’s this proposal in Congress to privatize, I guess for lack of a better word or separate out air traffic control and I know Delta in the past has been opposed to it. And I was just kind of wondering if you guys are going to try to be involved in what goes on so that your views are clearly expressed in the process and that what works best for you gets actually implemented?

Thanks, Helane. Yeah. There’s been a lot of work that’s being done in Washington around the ATC reform topic and, yes, we are at the table. We are working constructively with Chairman Shuster. We’re not philosophically opposed to privatization for privatization's sake. What we want to do is make certain that we have the proper governance, transparency, and cost efficiency to drive the reforms needed in the next air traffic control system that gets modernized and we’re in full support of the President’s agenda to invest and modernize the systems.

Okay. Great. Thank you very much and actually that was my only question.

Hey. Good morning, Delta. Question for Glen, just a couple of demand-related issues. First on the Atlantic, after the summer peak, how profound a shift is there in point-of-sale? I’m just wondering how the currency impact of that is potentially going to impact the trajectory of Atlantic RASM kind of going forward in the second half?

Jamie, I think I’m pretty enthusiastic about how the first half of the year has shaped up relative to the capacity levels that are in the Transatlantic. And what we’ve seen is really a higher demand in the business cabin on a year-over-year basis and it’s not insignificant; it’s a relatively significant increase. So we read a lot about the European business sector picking up and we’re really seeing that in the travel to and from Europe. So we have a couple of things that are developing that are positive for us. The euro is at a multi-year high here. We have business demand and a very, very solid position. As you know, July and August are not very big business months in Europe, so we’ve been able to offset that with higher U.S. point-of-sale. But I’m relatively encouraged at the trends that we see as we go into the fall that those should be quite beneficial, higher euro, higher business demand as you get into more business-oriented months.

Okay. That helps. And second, in terms of Basic Economy, I’m wondering as your primary competitors roll out similar programs at a pretty rapid pace, has that had any impact on the returns that you’re generating and also has there been any change since last quarter in terms of the, I guess, the percentage of your corporate accounts that all those fares off from employee use.

Well, I’m going to let Steve speak to the corporate sector, and the other focus we have is not only to ensure that our customers are getting the right seats, but the corporations can sell up into Comfort+ and even first class. I think that’s where we’re seeing a bit, even more success as we move forward.

Yeah. That’s exactly right, Glen. You’re seeing the - at the individual level, the capability to be able to buy into the Comfort+ cabin, which that new functionality is increasing the corporate revenue base. And we’re also seeing more and more corporations from a policy perspective enable their traveler to also purchase those types of products. So you’re seeing it both at the individual level and at the policy level.

Okay. Terrific. Thanks for the color. Appreciate it.

Hi. Thanks. Maybe I missed it, but did you say what your expectation was for domestic unit revenue growth in the third quarter?

Duane, we don’t typically get that level of forecasting detail.

Okay. Fair to say that you expect sequential improvement?

Yes.

Yes.

And sorry for a modeling question, but I think there’s a little investor confusion on the normalization of non-fuel CASM. Can you talk about much we should be adding to 3Q cost of last year to normalize and then correspondingly, how much should we be subtracting from 4Q cost of last year to normalize, and is it clear that we should be thinking about 2% growth in the fourth quarter off of that lower cost base?

Hey, Duane. It’s Paul. Good morning. What we’ve said is the normalization effect was about $130 million per quarter. So, give or take, so that if you assume that was all out there, you’d be left with about $125 million to $130 million of cost remaining in the fourth quarter. Keep in mind that this doesn’t really impact the second half conversation overall; we’re just trying to take out some of the volatility between those two quarters, given the discrepancy in the retroactive piece.

So that implies CASM down sort of mid singles in the fourth quarter.

Yeah. No.

No.

No, no, no, no. On a reported basis…

On an actual.

On an actual basis it would be down significantly because of the $475 million charge that we took in the 4Q last year.

Thank you.

Yeah. Hey. Just two questions related to the Pacific here for Glen. So, look unit revenue has been running down in that region, better, obviously in the June quarter than March quarter, so we’re seeing the sequential improvement. But still on a sizable capacity decline, 10%, 11%, how much of what’s impacting that is it demand or is it structural or is it, you’re transitioning from the 74s to smaller wide bodies? At what point do we get to positive territory there? What are you seeing in that market?

That’s a great question. We’re very excited about our 2018 results in the Pacific. This marks the final year of a multiyear transition, and thanks to our Pacific team and Ed’s leadership, we have established what we need with the Korean joint venture to create a competitive and improving operation in the Pacific over the next couple of years. At the time of the merger with Northwest, 100% of our capacity was routed through Tokyo and Narita. Now, as we look ahead, we have a diversified portfolio with multiple hubs, and we are nearing the completion of the restructuring, anticipating a significantly improved 2018 in the Pacific.

Great. Glen, you mentioned the Beijing hub in your opening remarks, which I assume is referring to the new airport?

Yeah.

When does that come online?

2019.

Hey. Good morning, everyone. Just one question for Glen, obviously, 3Q will be four quarters in a row of accelerating PRASM. I know comps do get a lot tougher in 4Q, so maybe that streak could be broken. But is there anything you’re seeing in your bookings or corporate demand right now that would result in PRASM not being positive in 4Q?

Nothing that would indicate that now.

Okay. Thank you.

Hi, guys. Thanks for the time. Glen, you started selling Premium cabin fares, I think, for travel in the fall. Based on what you’ve seen so far, does this basically look like your expectation based on your experience with Air France, et cetera?

We’re very excited about the cabin expansion, and yes, the fares are aligned with our expectations, and the initial demand is very strong. Keep in mind, we have limited seats available in that category on Delta; however, we have more availability on Air France and KLM. A significant advantage of the programming work is that we can now better showcase our partners’ offerings and provide Comfort+ and Premium Select in most markets.

Okay. And then you had provided a longer-term forecast for Branded Fares at one of your Investor Days. It sounds like you picked up about $100 million or so this quarter or about $400 million on an annual run rate basis. First of all, are those the right numbers? And then secondly, with the rollout of Premium Economy and the adoption of Basic Economy by some of your peers, would you expect that that Branded Fares revenue growth accelerates or decelerates or holds steady from here? Is there just a basic outlook on where that goes?

We believe we are in the early stages of optimizing our approach. When introducing new products and services, there are numerous factors to navigate, such as distribution, pricing, and customer adoption. These products are still relatively new in the broader context of how airlines have historically sold tickets, and we anticipate that there are several years of growth potential ahead that will likely accelerate at a different pace compared to standard passenger revenues.

Great. Thanks very much. Appreciate the time.

Hey. Good morning. Glen, maybe a question for you. As you continue to compete on product and you’ve been ahead of your competition on operational reliability and things like that, and you’re seeing them starting to catch up, as you continue to improve the product, does at any point Delta’s kind of older fleet start to hinder the competitive advantage, or is this going to mix new versus mid-life something that can continue and not something that holds back from a customer appreciation standpoint?

Savi, hi. This is Ed. It’s a good question. It's interesting; while we see the competition improving, which we view positively, we are also making progress. The standards continue to rise, and one factor that will contribute to Delta's ongoing improvement is our investment in a new fleet over the next few years. We’ve replaced 25% of our total fleet over the last five years, and we expect to replace another 20% to 25% in the next three years as we retire the MD88s by 2020 and reduce our dependence on older fleet types. The 747 will also be retired this year. We anticipate benefits not only from a reliability standpoint but also from the financial performance of the new aircraft. We’re introducing the 321s, and the 739s are meeting or exceeding expectations, which will provide significant additional margin contribution for us going forward.

Got it. Thanks, Ed. So, I’m assuming that you will still be able to sustain that volume at less than 50% of your free cash flow, which is around the current level of capital expenditures, is that correct?

That’s right.

Okay. Great. And then if I might just ask a quick modeling question, has there been any change in outlook on the contribution from the refinery?

Good morning, Savi. It’s Paul. I think that we had said previously that the refinery was expected to be about $100 million for the year. That’s probably down slightly based on the environmental compliance. I think we’ve got about $30 million to date. I would say it’s probably going to be down slightly from that $100 million, but we’re still expecting it to be profitable for the rest of the year.

Okay. All right. Thanks, guys.

Hi. Good morning. Thanks for the time. I just I wanted to come back to some of the comments you were making on growth and margins. You’ve obviously done a good job bringing margins to within targeted levels. With that occurring, what’s the approach going to be on capacity relative to the cap that you put in place for ‘17 and beyond? Obviously, as we look at the schedules beyond 3Q, it seems like you’re going to maybe move above that 1% level but your thoughts would be great?

Sure, Rajeev. We’re still following our plan for 2017, which targets overall growth of 1% for the year. I understand that there may be some additional capacity later in the year that will be adjusted as we move forward, leading to a more solidified schedule and some reductions. However, our goal remains the 1% growth for the year. At the end of the year, we will assess our margins, and I anticipate we will be at the lower end of our long-term guidance of 16% to 18%. After that, we will review the capacity schedule for 2018.

Great. Thanks. And then, Glen, a question for you, on the international front there appears to be a bit more stability on the pricing front and your comments going forward to support that as well. Does that maybe change your growth priority to move from domestic to international or is domestic still where the focus will be?

We notice that there are still more opportunities in the domestic market for the short term, and we'll keep assessing the trends. The stability in the international market, excluding Latin America which has been the most stable, is a relatively new development, so we’ll be keeping an eye on that. As Ed mentioned, our achievements in 2017 will help inform our objectives for 2018.

Yeah. Thanks. Good morning. Glen, thanks for the color regarding the Amex contribution and the card acquisitions. I guess the question is you guys provide the expectation that Amex is going to contribute $4 billion by 2021. Problem with that chart is no one knows what that means, what to do with it, because it’s quantified as value or contribution. So can you convert that to sort of EBIT number or cash? I think it’s pretty obvious that that value there is being lost as being currently communicated?

Hey, Joe. It’s Paul. I'll address that as well. Keep in mind that when we discuss that value, we are referring to it in a cash context. The confusion arises from how frequent flyer miles are recognized in the profit and loss statement, where part of it is recognized now and part has to be deferred over time. That value primarily comes from revenue generated by selling miles to third parties, but also from efficiencies we gain as a significant partner. We acknowledge this point and are continually looking for ways to present and disclose it more clearly and in a balanced manner, but the value is indeed cash value.

Hey, Joe. This is Ed. I just want to emphasize that our projections are based on expected volume growth and encompass various factors. It's important to note that this is not a binding agreement, and there are many assumptions involved in the estimation process. If we achieve our goals and Amex meets theirs, which we are working towards, that would result in the expected outcome.

Okay. That’s helpful. So, Paul, just to clarify, that $4 billion, that’s an expectation that Amex is contributing $4 billion in cash by 2021?

It’s across all the programs but yes anyway.

Okay. I mean…

…and also just...

…Okay.

…keep in mind too that that’s both on the revenue and the cost line. It’s not all coming through sales.

Okay. Great. We appreciate the time.

Good morning, guys. And thanks for taking the time to fit in the question. I wanted to see if you could comment a little bit about the C Series and how that will be implemented in the network, whether it’s going to be put into upgauging existing sort of regional routes or whether you’re also going to be putting aircraft into markets that maybe you don’t serve on a direct basis today?

The answer is a bit of both. For high demand in the 76-seat long-range RJ markets, that will likely be the first choice. This will allow the two-class RJs to replace 50-seat airplanes that are phasing out of the fleet, and we will definitely explore some new markets next year. While we don’t have many new airplanes coming in, having a 100-seat long-range jet does create some new market opportunities that we currently do not have.

As we consider the initial rollout, should we anticipate it to occur in more controlled airports where we can take advantage of that upgauge benefit with lower fares? Should we expect the newer market to be part of the early rollout?

Well, the first one’s going to go to New York. I won’t tell you where it’s going to go, but it’ll start New York.

Thanks, Dave. That’s going to conclude the analyst portion of the call and I’m happy to turn the call over to Ned Walker, our Chief Communications Officer.

Hey. Thanks very much, Jill, and good morning. Michelle, would you please review the process that members of the media can use to ask a question? Also, I’d like to ask the media if they could limit themselves to one question and a brief follow-up. That should allow us to get in as many questions as possible. Michelle?

…taking the question. You guys noticed there’s been a lot of controversy over the Qatar Airways CEO’s comments about U.S. flight attendants and U.S. airlines. Do you have any reaction to those comments?

I was shocked to hear Akbar’s remarks about our people. I understand he has apologized, but that seems insufficient locally. There is a recurring issue where he seems to want to bypass the rules and operate independently. I’m pleased that the employee, not only from Delta but all U.S. carriers, united to voice their disapproval, marking it as unacceptable and inappropriate. We have the best flight attendants in the world at Delta, and I take great pride in them.

Okay. Thank you. Second question for Glen briefly, you said that European business yields are up or the leisure yield is being affected by the explosion in low fare carriers to Transatlantic?

That’s what we’ve said in the comments, is that the strength in business demand has offset most of the leisure yield weakness.

Hi. Good morning, everybody. Thanks so much for taking the question. So I wanted to ask quickly about the Boeing-Bombardier spat that’s going on. I’m curious to know what impact of the decision by the ITC to impose tariffs on the C Series have on your order from Bombardier? And as a follow up, has Boeing’s antidumping petition delayed or had any other impact on potential conversions, sorry, Delta for C Series options to confirmed orders? Thank you.

We cannot comment on the dispute between Bombardier and Boeing at this time. We will let that unfold. However, I can assure you that we do not intend to slow down any of our planned deliveries for the C Series. We will be taking our first delivery this coming spring, and we look forward to welcoming that aircraft. Beyond that, we will see how the situation between those two companies develops.

Okay. Right now we don’t have anybody else in the queue for the moment. We’ll pause a second to see if anybody wants to do a follow-up. We’ll pause just for a second. And if not, I want to say thank you, Ed, Glen, Paul, Steve, and Jill. That concludes the June Quarter 2017 Earnings Call. We’ll be back in October for the 3Q Earnings Call. Appreciate everybody’s time today and hope everyone has a pleasant day. Thanks so much.