Delta Air Lines Inc (DAL) — Q4 2017 Earnings Call Transcript

Thanks, Ebony. Good morning, everyone, and thanks for joining us for our December quarter and full year earnings call. Joining us from 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’ll also discuss non-GAAP financial measures. All results exclude special items unless noted otherwise. We’re also providing cost comparisons on a normalized basis as this better matches the retroactive expense we incurred in the fourth quarter of 2016 from our pilot contract to the appropriate quarters of 2016. You can find a reconciliation of our non-GAAP measures on the IR page at ir.delta.com. And with that, I’ll turn the call over to Ed.

Well, thanks, Jill. Good morning, everyone. We appreciate you joining the call this morning. Earlier today Delta reported December quarter and full year results, including a December quarter pre-tax profit of $1 billion and an EPS of $0.96 ahead of consensus, which sat at $0.88. These round out the year with a $5.5 billion pre-tax profit and a 14.4% operating margin. Operationally, the month of December presented us with several unique challenges: a significant southeastern snowstorm and the Atlanta Airport power outage. Together these events drove a $60 million impact and roughly 2,900 cancellations. And thus far in January, our teams have persevered through the storm that hit the East Coast earlier in the month and the water main break at JFK this past weekend. I want to thank the Delta people for their incredible work in taking care of our customers while recovering from these difficult events. Once again, they demonstrated that our people and our culture are Delta’s strongest competitive advantage. But it also reflects the importance of the significant airport infrastructure investments that we are making to enhance the tools available to our employees to improve our customers’ experience. For their outstanding work, we are pleased to recognize the Delta team with over $1 billion in profit sharing this year, which will be the fourth consecutive year of paying $1 billion. With our culture as the foundation, we are focused on the ways to improve our operational performance. We are running the best operation in the industry and ended 2017 with 242 days of no mainline cancellations, including a 50-day streak, 5-0, without a single mainline cancellation, while keeping domestic mainline on-time arrivals at 85.4%. We also had 90 days in 2017 with no system cancellations on the entire Delta platform or brand perfect days, as we call them, over 10% more than last year. The extraordinary work by our entire operations team resulted in Delta being named 2017’s Most On-Time Global Airline by FlightGlobal, the first time a U.S. airline has earned this distinction. And in today’s paper, we are pleased to see Delta named as the top airline of 2017, as determined by a thorough analysis conducted by the Wall Street Journal. Running a great operation not only drives customer satisfaction but also cost efficiency. Our operating performance combined with the investments we’ve made in our people, fleet, products, and facilities have driven a 2-point improvement in our net promoter score this year, including reaching an all-time high of 46.9% for the month of November. So while 2017 certainly had its challenges, it was a very successful year. Customer and employee satisfaction remains strong, and we produced solid financial results, enabling significant investment in Delta’s future. And as we laid out at Investor Day last month, we are entering 2018 with solid momentum. However, we are mindful of rising jet fuel prices. Our fuel expense rose by nearly $350 million in the December quarter and current market jet fuel prices are 30% higher than last year. While higher fuel prices helped create greater stability for the industry over the long run, in the short-term it does take time for our business to recalibrate and recover those costs through our revenues. But, with a solid demand environment and economic backdrop combined with the flexibility that we’ve built into our business, we feel well positioned to address this higher fuel environment. Glen and Paul will take you through the details, but I’d like to spend a couple of minutes on our path to strengthen our company and grow earnings in 2018. First, we have to keep our top line growing. We’re targeting a 4% to 6% revenue increase while maintaining prudent 2% to 3% system capacity growth. We are currently seeing the best revenue momentum we’ve had in five years and the December quarter was the first time all entities were positive since early 2013. We are gaining ground with our commercial initiatives and demand remains very strong. In fact, we set a new number one system and domestic revenue record on the Sunday after Thanksgiving. Second, we’ll leverage our international opportunities through our own growth, as well as through our partner relationships. After several years of shrinking our international capacity in response to economic weakness and the strong dollar, we’re in a good position to benefit from the improved global outlook. Our portfolio of investments is essentially complete and we have built a $2 billion asset that includes some of the leading airline brands around the globe. We’ll drive enhanced value over the coming years through deeper integration of the Air France-KLM and Virgin Atlantic joint ventures, and we will be building out our JVs with Aeromexico, Korean, and WestJet. Third, we must change the trajectory on unit costs and deliver on our zero to 2% non-fuel CASM growth guide for the year. It is the top priority for our finance team. Our decisions to invest in the business and restrain capacity in 2017 were the right ones, but they also contributed to unit cost growing over 4% for the year. This is not sustainable. With 60 new aircraft to be delivered this year, our up-gauging strategy is set to produce some of the greatest efficiency gains in Delta’s history and will play a key role in returning our cost to a better level. And finally, we are focused on making technology an improving source of competitive advantage. We are in the midst of a significant digital transformation, which will enhance our customer interactions and deliver more personalized service, further strengthening our brand and revenue premium. With a pipeline of initiatives that we laid out at Investor Day supporting these themes, we have a path to grow earnings this year and now expect to produce $6.35 to $6.70 per share in 2018, an improvement from our earlier guidance based on the additional benefits from tax reform. And as we think about the business long-term, we will continue to build upon and leverage our key economic moats, those competitive differentiators that will ensure our future success: our culture, our industry-leading operational reliability, our unrivaled domestic network, our customer loyalty and brand, and our investment-grade balance sheet. Put together, these are Delta’s unique advantages that provide the foundation to not only sustain our performance but also improve upon our results. It’s a powerful combination. It’s why I have confidence and optimism for the year ahead. With that, I’ll turn the call over to Glen.

Thank you, Ed, and good morning, everyone. As we head into 2018, we have a favorable revenue environment compared to previous years, with an 8% increase in quarterly revenues driven by modest capacity growth, widespread revenue improvement, and solid ancillary contributions. These results reflect a $45 million impact from Winter Storm Benji and the Atlanta power outage. I want to express my gratitude to the entire team for their dedication to our customers during operational challenges; it's our staff that truly makes a difference. This quarter, passenger revenues rose by $527 million or 7%, supported by strong demand and better business yields. Our efforts to attract corporate travelers have paid off, as Delta was recognized as the Best Airline in the Business Travel News survey for the seventh consecutive year. Our corporate revenue growth in the fourth quarter was the highest since 2014, with improvements in both passenger volume and average fares. Looking ahead, we anticipate continued corporate growth. According to our latest survey, over 88% of corporate travel managers expect to maintain or increase their spending in 2018, a 3-point increase from last year and the most optimistic outlook we’ve seen in three years. Additionally, we have consistently strong cargo and other revenues, with cargo experiencing double-digit growth for the third straight quarter, up 14% in December. This marks the first year of increased cargo revenue in six years. Our partnership with American Express added an additional $19 million in value this quarter. In 2017, we achieved a record enrollment of over 1 million new SkyMiles credit card accounts, with a 12% increase in co-brand spending compared to the previous year, surpassing industry growth through the third quarter. We expect another strong growth year, anticipating an additional $300 million from our American Express agreement in 2018. Looking at unit revenues, our system PRASM in the fourth quarter was up 4.2%, with all entities ending the year positively. This includes a slight 0.5-point gain from a one-time revenue adjustment. The domestic segment has now recorded three consecutive quarters of year-over-year positive PRASM, driven by solid demand from both business and leisure travelers. All hubs also reported positive unit revenue results. We have seen improvements in business markets, with 81 of the top 100 markets now reporting positive yields, an increase from 50% at the end of the third quarter. Our domestic revenue premium is currently at 117% of the industry average, which we expect to maintain, even as we manage the highest increase in stage length and gauge in the industry. Internationally, unit revenues again outperformed domestic results this quarter, benefiting from a 0.2-point boost from foreign exchange. After three years of currency pressures, we are set to gain from favorable exchange rates in 2018. In the transatlantic market, unit revenues rose 7.4%, fueled by strong business class bookings and foreign exchange benefits. Our branded fare products are leading the industry, offering customers a customized travel experience, with basic economy now representing over 50% of our routes in Europe. We plan to launch our premium select product in the transatlantic market in March. The Latin American market saw a 4% increase in unit revenues, marking six consecutive quarters of positive growth despite challenges from a disruptive hurricane season. We are seeing strong demand here and progressing well with our alliance integration with Aeromexico as we enter a full year of our joint venture, revealing exciting opportunities ahead. The Pacific market achieved positive PRASM for the first time in four and a half years, which is encouraging, especially with a 7% year-over-year increase in trans-Pacific stage length. We reached several significant milestones this year, including U.S. DOT approval of our joint venture with Korean Airlines and the retirement of our 747s, supplemented by six new A350 deliveries. The A350 has seen considerable success, with high demand and yields for our Delta One suite and Delta Premium select offerings. In the first quarter of 2018, we will introduce the A350 on more routes, including Detroit-Beijing and Atlanta-Seoul. Our four primary hubs provide the best connection structure to drive volume. Looking ahead, the global economy shows promise. Demand remains robust, and we expect all four geographic segments to maintain momentum in the first quarter. With fuel prices having risen 30% year-over-year, we must ensure our revenues can offset these costs. Historically, the industry has managed to recapture these increases, and we are confident we can achieve this in the medium to long term. We aim to expedite this process. For the March quarter, we anticipate TRASM to increase by 2.5% to 4.5% with a 3% capacity growth, which includes a 1-point rise in stage length and a 2-point boost in gauge. We foresee a favorable demand environment alongside benefits from our initiatives that will sustain TRASM around this level throughout the year, despite more challenging comparisons. As outlined during Investor Day, we are enthusiastic about the 2018 outlook based on three key platforms that will drive Delta’s revenue and earnings growth. First, we will work on building a more efficient and global airline. Our four core domestic hubs are optimally structured for connections, reducing employment costs and facilitating continued up-gauging, which will serve as the foundation for our domestic margin growth. The opportunities ahead remain strong, with A321neos expected to start arriving in 2020, offering 40% more fuel efficiency over the current MD88s. By 2023, over 45% of our domestic seat departures will utilize the most efficient large gauge, narrow-body aircraft type. Our globalization strategies are finally taking shape, and we are on track to leverage our existing partnerships, potentially generating an extra $100 million in value in 2018 with more upside in the future. Second, we aim to enhance our brand and customer experience. We have over $12 billion allocated for airport facility projects in Atlanta, LaGuardia, Los Angeles, Salt Lake City, and Seattle over the next decade. We are proactively planning for future travel trends and technologies as we work on building the airport of the future to enhance the Delta experience. Finally, we will continue to offer customer choices as our fleet evolution aligns with our segmentation strategies. Our branded fare initiative generated an additional $200 million this quarter, and revenue from First Class upsell and Comfort+ grew between 25% to 30%. The launch of our post-purchase capabilities generated $80 million in revenue in 2017 following its mid-year introduction. In 2018, we anticipate a $350 million increase from our branded fare initiatives, contributing up to $2.2 billion annually, fueled by a 5% growth in premium seating from new aircraft and expanded basic economy offerings. With the favorable economic climate, international opportunities, and advantages from our commercial strategies, along with the exceptional service from the Delta team, we are poised for substantial top-line growth in 2018 and beyond. Now, I’ll hand the call over to my colleague, Paul Jacobson.

Thanks, Glen. Good morning, everyone, and thank you for joining us. I’d like to start by echoing Ed and Glen in thanking the Delta team for all they’ve done to take care of our customers and each other through some pretty unprecedented challenges in the last year. For the December quarter, total operating expenses increased $1 billion, driven by higher fuel and continued investments in our business. Non-fuel unit costs were up 5.6% for the December quarter and up 4.3% for the full year. This includes $85 million of accelerated depreciation, which hit in the back half of the year and pressured our full year CASM by about three-tenths of a point. The investments we made in our product, operation, fleet, and our people were important and are already driving benefits. But as we mentioned before, we cannot sustain unit cost growth at this elevated level over time. We expect the March quarter to be our peak cost growth of the year, with unit costs up 2% to 4%. The majority of our non-fuel expense growth should happen in the front half of the year, and we are on a path to achieve zero to 2% non-fuel CASM growth for the full year. To get there, first, we will lap costs we began incurring last year with a 6% April employee pay increase. Second, depreciation expense will trail off markedly in the back half of the year, as we annualize the accelerated depreciation on our fleet and facilities. To give some perspective on this, depreciation for 2018 is expected to be up $250 million, with $200 million of that increase in the first half of the year alone. Finally, our maintenance expense has been weighted towards the front half of the year as we gear up for summer flying and some aircraft extensions that have been required as a result of the delays and deliveries of the C Series. To meet our remaining cost targets, we’ll look primarily to our up-gauging and efficiency initiatives. As Ed said, the delivery of 60 aircraft in 2018 will drive some of the greatest efficiency gains in Delta’s history, with over $100 million in expected non-fuel savings this year alone. Then, as I detailed at Investor Day, we have launched an enterprise-level project to drive efficiencies across the organization and leverage our scale. We will be looking at things differently and changing the rules on how we manage the business. On a cost base of $27 billion, we believe $200 million of savings this year is definitely achievable. For example, we’re optimizing how we manage fleet complexity in our network. In January, markets with four or more equipment types have been reduced by 60% year-over-year. We will also have all MD88s based in Atlanta by this summer, driving approximately $25 million in staffing and maintenance efficiencies alone. Additionally, we have identified other opportunities in network scheduling, hotel spend, and transportation. These are just some examples of the opportunities we have ahead of us and we feel good about where we are at this stage in the process. Turning to fuel, our total fuel expense increased $349 million in the quarter, as market prices were 10% higher than the third quarter and 23% higher than the prior year. Some of that pressure was offset by the refinery, which contributed $24 million in the quarter and $110 million for the full year. Importantly, the fourth quarter marks the last quarter of the legacy hedge losses, so we are really going to be able to see the benefit that’s being generated by our fuel team. Furthermore, our new aircraft deliveries will drive a 2% fuel efficiency gain in 2018. For the March quarter, we expect our all-in fuel price to be $2.05 to $2.10, which includes the recent run-up in fuel prices. Now turning to EPS for 2018, our improved non-fuel cost trajectory along with the top-line growth highlighted by Glen will allow us to deliver solid earnings growth this year, with further improvement from the benefits of a significantly lower corporate tax rate, as we discussed at Investor Day. This takes our full-year forecasted EPS to $6.35 to $6.70, up 20% to 30% versus 2017. However, the March quarter will see both the peak of our non-fuel CASM growth and the recent run-up in fuel prices, which will impact our ability to grow earnings during the quarter. We therefore expect EPS in the range of $0.60 per share to $0.80 per share. This equates to a pre-tax margin of 6% to 8%. And finally, our strong cash generation and investment-grade balance sheet allow Delta to execute on our investment opportunities. We generated $1.7 billion of operating cash flow for the quarter, which allowed for reinvestment in the business through $1 billion in CapEx related to aircraft, technology, and ground. We also invested $450 million to purchase a 10% stake in Air France-KLM. Looking at the full year, we expect capital spending in 2018 of roughly $4 billion and continue to target CapEx at 50% of our operating cash flow. During the quarter, we generated $435 million of free cash flow used towards the repurchase of $325 million of our own shares and to pay $216 million in dividends. We remain strongly committed to shareholder capital returns and returned a total of $2.4 billion in 2017, the third consecutive year we returned at least 70% of our free cash flow to our owners, and we continue to target that level going forward. We also ended the year with $8.8 billion in adjusted net debt and our unfunded pension liability was $7 billion, down $3.6 billion year-over-year. With our pension funded status at 68%, that’s our highest level since 2001, we are well on the path to achieving our pension funding target as we continue to strengthen our balance sheet and remain committed to maintaining our investment-grade rating that we worked so hard to achieve. Looking back on 2017, we had a tremendous year for our people, for our customers, for our shareholders, and the communities that we serve. We’re poised to build on that success in 2018. And with that, I’ll turn the call back over to Jill, so we can begin the Q&A.

Ebony, we’re now ready for questions from the analysts, if you could give them instructions.

Good morning, everyone, and thank you for your questions. Glen, previously you mentioned that your corporate contracted business was around 20% below the levels of 2014. Could you provide an update on their current status and what kind of impact you expect from the recovery of business travel demand due to the tax cuts in your first quarter PRASM guidance?

Well, we are very excited about the potential for increased business demand with the tax cuts. We haven’t seen that materialize yet, but we expect that to happen in the first quarter, and our guide does not have that because we can’t see it yet. So the fare levels have stabilized and started to improve. But fare levels are only a few percentage points higher than they were in the trough. So, I think, there’s a lot of opportunity moving forward as demand continues to improve.

Great. And then, second question is just for Paul, two on the cost side. I guess, one, what is your Brent assumption in your new EPS guidance and did that change from Investor Day? And then, secondly, just the timing of maintenance costs, why is 1Q different from other first quarters in terms of maintenance spend ahead of a busy summer period, are you just expecting to run the network harder or is there something else I am missing there? Thanks.

Sure. Good morning, Andrew. Thanks for those questions. On the maintenance question, I would say it’s a little bit higher than traditional first quarters. As you know, with the mitigation of the C Series delays that we’ve seen, we’ve got a little bit more work to do on the existing fleet versus expecting that the new aircraft we’re going to deliver for the summer schedule. So I would say it’s a little bit disproportionately weighted from that perspective and if you wouldn’t mind, repeat your first question, sorry?

No. I was just curious what your assumption for Brent was in your full year guide and did it change since your Investor Day? Thanks.

Yeah. Yeah. Sorry about that. We haven’t changed the full year guide. It’s obviously very early in the year. I would say we’re slightly ahead of what our expectations were for 2018 in terms of the rapid pace of the price appreciation. But we have a long way to go and we know that, that is volatile, but we did assume the forward curve as we always do. But we feel okay about where it is right now, but we’re obviously watching it closely.

Yeah. Hey. Just a question to Glen, you talked about FX showing up in the international unit revenue having a positive impact. What about the return of fuel surcharges? It looks like that they’re now coming back into the Pacific, are you seeing that, have they increased recently, can you just give us some update on that?

Yes. Clearly, internationally, we’ve seen fuel surcharge increases due to the higher level of fuel and we expect that to continue if fuel stabilizes at this or higher level.

Just a question to Paul, can you tell us about your ownership stake in the Republic bankruptcy and what percentage that is? Is it being accounted for under the equity method?

No. All the changes in value there flow through equity, so the ownership itself doesn’t have an impact on the P&L.

Okay. But you own 25% of that, I believe?

Yes, yeah. It’s in the 20%-ish range.

Hey. Good morning, everybody. First, Paul, I know your trailing view on hedging, but as you’re obviously aware, the market has returned to backwardation now for the first time in, I don’t know, two and a half years, if memory serves. Just wondering if this might influence your thinking on this topic, the hedging topic?

No. Jamie, thanks for the question. There’s no change. As I’ve said, I am relieved to be able to say the legacy losses are behind us and we feel good about where we are competitively.

Okay.

... especially the work that we’ve put into the supply side of it, both harvesting the benefits of the refinery, but also looking across self-supply at multiple stations and feel good about where our position is and I think the industry is at a parity level on fuel input costs that it hasn’t seen in quite some time.

Okay. And second for Glen, I thought Mike’s question on fuel surcharges was a good one. They’re not permitted domestically. I think it was the legion that took a stab a couple of years back unsuccessfully at that to potentially revise that. It does make me wonder and thanks, Mike, I only began to wonder this in about the last 90 seconds, given the current political and regulatory climate, perhaps you would have a more receptive year in Washington on the topic of domestic fuel surcharges, is that anything we should be thinking about?

I think I am going to toss that to Peter Carter, our General Counsel because…

And Jamie, hi. Good morning. I would say we haven’t given that particular issue much thought, but there is no question that the Trump administration has been very open to the airline industry in general and I think, frankly, business. So interesting question and I appreciate it.

Hi, thanks. Good morning. Glen, could you elaborate on your comment regarding maintaining unit revenue growth rates at the level of your March guidance despite facing tougher comparisons? How do you anticipate that will unfold? Also, if I missed it, would you be able to rank the regions based on the unit revenue growth rates you expect for the March quarter?

Sure. Let me start with the second one first because I think it’s the easiest. I think we would expect the transatlantic to be number one, Latin to be number two, domestic to be number three, and Pacific to be number four. So that’s a pretty easy question and the second question was, what again, I am sorry?

I think you made a comment in the prepared…

Our business plan is based on achieving 6.5% to 7% total revenue growth, which corresponds to passenger growth and leads to a capacity increase of about 2% to 3%. We anticipate around 3.8% to nearly 4% unit revenue. We are on track to meet our revenue targets for the year, and we feel more confident about our current position compared to last year. At this time last year, we were experiencing negative growth when we reported our fourth-quarter results, and it took significant effort to turn it into positive momentum. This year, our focus is on maintaining our baseline and moving forward, although we acknowledge there will be challenges and unforeseen factors until December next year. Overall, we feel cautiously optimistic about our ability to progress from where we are now to where we need to be, shifting from negative to positive unit revenue growth.

Thanks, Glen. And if I could sneak one more in on Paul, your operating cash flow was up materially year-over-year in the fourth quarter. Looks like you had about a $700 million working capital benefit, can you talk about what drove that? Thanks for taking the questions.

Well, it was a number of things, but I think it also bears mentioning that as a result of our investment-grade balance sheet. We have done an initiative with the supply chain to go out and work proactively with our vendors to extend some of our payment terms and do other things to drive working capital in the business. So we were focusing on that very consciously.

Sorry. Can you guys hear me?

We can now.

We hear you, Hunter.

Sorry. I apologize for that. Are you expecting a headwind from the change in frequent flyer revenue recognition around the airline for the prevailing market rate or whatever it’s called, I think, I had heard about $100 million, is that factored in to the EPS guide or is that a static number, can it change, how are you thinking about that?

Hey, Hunter. This is Paul. So, yeah, as we talked about at Investor Day, we don’t expect materially year-over-year changes from revenue recognition on a full-year basis.

Okay. Thank you. And then…

Yeah.

… on the 2018 guide, pardon, sorry, Paul, what?

No…

Sorry. On the 2018…

I was just supplementing that. Go ahead, Hunter, appreciate…

I’m not sure if there’s an issue with my phone or if I can’t hear you clearly. Regarding the 2018 earnings guidance, if you happen to fall below the lower end of the range for any reason, where do you see the greatest potential to get back within it? Is it through managing non-fuel costs, increasing revenue, or through another means?

Hunter, this is Ed. I’ll take that. It’s really too early to speculate on how 2018 will unfold. We feel optimistic based on our guidance and our commitment to keeping non-fuel costs stable at flat with zero to 2%. However, my expectation leans more towards zero than 2%. The demand environment is the strongest we have seen in years. Fuel prices, though, are a bit unpredictable, and we'll see how that develops. It appears the market has become overheated in recent months, and we’ll find out where it settles. Overall, we feel confident that a 20% to 30% increase year-over-year in EPS is our best estimate, but I wouldn’t go into specifics on managing the various factors at this stage.

Hi, guys. Thanks for the time. At your Investor Day, you had suggested that perhaps if passed, if Tax Reform were to be passed, that there would be some incremental pension contributions. Is that something that you’re looking at for 2018 or would that basically be on hold until 2019 when the cash tax savings kind of starts to appear?

That’s right, Darryl. We obviously are not going to see any cash savings in 2018 from Tax Reform since we weren’t anticipating paying any taxes and we still don’t anticipate paying taxes in ’18. But as we become a taxpayer between ’19 and ’20, the reduced level of taxes that we ordinarily would pay, one of the sources for those proceeds would be to continue to fund and hopefully get as close to a fully-funded status in pension over the next several years as possible. So that to me would be high on the priority list.

We don’t anticipate that being a significant issue. As you mentioned, the Airbus-Bombardier deal we’re supportive of and we think that will enhance the ability for the C Series to come to market. With respect to further supplier consolidation within the OEMs, we have conversations with all those OEMs and we are certain that we set expectations around performance for them, and ensure that Delta is not harmed from any of that, and we’ve received their commitments that this is actually only going to enhance their service levels to Delta, not put us at a competitive disadvantage.

Great. Thanks very much.

Good morning, everyone, and thanks for taking my question. So, Ed, I wanted to come back to one of your prepared remarks talking about how fuel can drive greater stability in the long run for the industry, I think you were saying higher fuel prices. But then, Glen, also talked about accelerating revenue recapture that the industry historically has done. So, I guess, it’s not the same as Hunter’s question, but we do know fuel costs are higher here, so what are some of the things that Delta can do specifically to help drive that revenue recapture and really push down fuel volatility for your investors?

Well, our ability to push down fuel volatility is, I think, that’s a little outside our control. We do our best to manage the fuel environment that’s in front of us. I think the biggest thing we have going in our favor in 2018 is a strong economy with a lot of optimism. We’ve got a significant list of commercial initiatives that are coming to fruition. We have a strong international environment, which we haven’t seen in a number of years. So that’s the main focus in terms of being able to recover and recapture fuel. Historically, the industry has always managed spikes in fuel by offsetting reductions in capacity. I think it’s premature and early yet to start to adjust our 2018 capacity plans. But we will look as the next few months unfold, as fuel prices continue on this tear, it certainly will have an impact, and we’ll be prepared to deal with that going forward; we know how to do that well. But I think the economy is the biggest benefit and I think that’s the lever we’ll be using to manage the fuel environment.

Okay. I appreciate that. And, Glen, it might just be my phone is not too good here either, but you were talking about three platforms for revenue expansion. I think what I heard was up-gauging and airport investments, but maybe I am simplifying that. So can you come back to some of those longer-term revenue initiatives and really focus us in on what are the keys there?

Sure. The main focus for us domestically is our strategy of increasing the quality of our offerings, which allows us to provide more premium products and services that have performed well in the market. Over the years, we have evolved from offering First Class to enhancing our Economy products, and while these offerings are now more established, they remain relatively new, only being around for three to five years. We have exciting plans for different purchasing options for these products and services. For instance, if a company’s travel policy doesn't permit premium seating, we enabled the ability to purchase upgrades post-booking this year, generating nearly $100 million in sales within the first six months. By this summer, we hope to also offer post-purchase upgrades in miles, which will enhance the travel experience for customers interested in premium options. This will be crucial for driving future revenue. In 2018, our fleet is expected to provide a 5% increase in seat availability for premium offerings by year-end. We now have the foundational products along with premium options and various purchasing methods. As we advance our digital capabilities, we aim to reach customers more effectively. Our upcoming initiatives will cater to discerning travelers who prefer premium products and services, rather than competing solely on basic offerings. We have a strong understanding of how this will develop over the next few years, which is essential for continuing to boost our premium revenue at Delta.

Thank you.

Thank you very much. Glen, you mentioned the strength of the AMEX partnership and record card acquisitions. I remember a couple of years ago you set a target of $2 billion to $4 billion by 2021. Based on the strong recent trends, is there potential for that target to be exceeded?

Joe, this is Ed. I… yeah, I think there’s potential upside too. I’d say again, we got close to $1 billion to go to get there yet and we’re having good success, and we’ve got a great partner at AMEX who is fully committed to that trajectory as well. So we’ll see over the next several years. But it’s safe to say from when we did the deal a couple of years ago we’re running ahead of expectations.

Got it. Okay. And then, Paul, just on the guidance for the year, is there anything explicitly in the EPS guidance related to mark-to-market adjustments for your equity investments?

No. That’s all timing and out of period, so we wouldn’t be putting that in.

Good morning, everyone. Thanks for taking my questions. Ed, if I could ask you sort of a conceptual question about Tax Reform. I guess, the question I’ve been getting a good bit from investors is around potential for this to get competed away over time. And so when you think about the P&L savings from the lower book tax rate related to the Corporate Tax Reform, how do you think about the airline industry potentially competing that away over the next several years and I would have thought given that most U.S. airlines are not cash taxpayers that perhaps it would take some more time to do that, but we’re already seeing some of the airlines not Delta, but others who are not cash taxpayers giving cash bonuses. So I am just curious to get your thoughts on the potential for this book tax savings to get competed away over the next couple of years.

Well, Jack, we have no intent to compete away the tax savings. We will certainly use the tax savings to reinvest in the business to strengthen the balance sheet. I mentioned pension is one of the things that we’re focused on. But the core of your question is right. There’s very little cash tax being paid by the U.S. airline industry at this moment. So it’s hard to compete away something you don’t have. I won’t comment on the other airlines giving away cash bonuses to their employees. That’s great for the employees and I am glad to see that. We have a sustainable profit-sharing plan over the long term that has been far superior to any cash bonuses that any of the others have given out and that’s how we pay our employees. So I understand the question. I understand the concern. But it’s pretty hard to compete with what you don’t have.

Yeah. No. That’s definitely fair. One other high-level question, would a U.S. withdrawal from NAFTA impact your partnerships with WestJet or Aeromexico?

I am not going to get into speculation. I don’t know.

Hey. Good morning. Just on the entities, I was kind of curious if you could share, one, the capacity growth expectations by entity for the year, and then, two, with the JVs that have kind of recently been strengthened, when should we see that kind of start to flow through and drive more of the revenue upside?

So, Savi, good morning. We don’t give into capacity by region on that detailed level. But on the JV benefits, we’re seeing some of that building in now; you see it coming through both on the revenue lines with the sharing, but also inherent in the Delta P&L with the synergies that we get from the network. There’s a ramp-up period, obviously, as we work through those issues. But I think the international team has done a terrific job and we’ll start seeing some of those benefits in 2018.

Got it. And Paul, if I might just a quick question on the refinery, what’s your expectations there for 2018?

So, on the refinery, so 2018 is a turnaround year. We’re currently expecting to have a similar year, but obviously, it’s still very early in the year. But we’ll have some down period especially towards the back end of 2018, but we expect a small contribution from it this quarter based on where cracks are and continue to provide that kind of $0.02 to $0.03 benefit quarter-by-quarter when it’s running.

Got it. All right. Thank you.

Thanks, Operator. Hi, team. Thanks very much for taking the time. I have just two questions. One is when you talk about up-gauging; are you talking, is that 100% mainline aircraft that you’re talking about or is there a percentage that’s mainline and a percentage that’s regional?

It’s mostly mainline at this point, Helane.

And not just that, Helane, as you know, we’ve been shrinking the fleet at the regionals, which has also contributed to that. If you think about the mix of where our fleet evolution, we had I believe almost 800 regional jets at one point in time and we’re down to less than half of that now. So it’s not only growing the gauge at the mainline but reducing the reliance on the regional fleet.

The significant change we have coming in the next few years is the retirement of the MD80s. We still have over 100 of those in operation, and we plan to retire them by 2020, replacing them with 321s and 739s, along with some MD90s. This will account for the majority of the upgrade.

Okay. Perfect. Yeah. I think at one point you guys were the largest operator of RJs in the world. And then my second question is with respect to air traffic control delays in the Northeast and maybe, Ed, this is a question for you, as you plan for the summer months, because I feel like that was the biggest problem last year here in our New York markets, are you thinking about adjusting capacity in this New York, maybe Boston corridor to allow for those delays that we get, what are they, ground stops on a daily basis?

We do, Helane, as you know we take our operational integrity incredibly important, it’s at the core of what we deliver to our customers, as well as to our employees and to the extent the Northeast corridor continues to be problematic with respect to delays. We take that into account. It’s hard to predict at some level when the storms occur. But we work very closely with air traffic control and with all of our partners out there to ensure that we’re getting the very best intel, transparency, and throughput as we can. But it’s a challenging environment. It will stay challenging for everybody up there for a period of time.

Okay. Thank you very much for your help. I appreciate it.

Sorry. I can’t be more optimistic.

Hi. Good morning. Thanks for the time. Glen, a couple of questions for you on the international side, what gives you confidence that we’re not at some sort of peak, I mean, I think, we’re going to put in about plus 5 on PRASM? And then just relating to that, where do you have more confidence, is it more on the demand side or the supply side?

Well, I think when you read all the headlines about the synchronized global economic expansion, that’s kind of what we’re seeing manifesting itself. So we’ve seen not only an uptick in the average realized fare of business travel in the international entities but we’ve also seen an increase in core demand there as well. And so I think that when you think about how the U.S. is probably still growing and still accelerating growth, and when you think about Europe, when you think about the economies in the Pacific, it gives you a lot of confidence that as we move through the year, this is going to continue to improve and our advances would substantiate that. So we have a little bit more visibility on international, because it books earlier than domestic generally and so those two combinations give us a pretty good confidence level that it’s accelerating rather than decelerating.

And to the extent that tax reform benefits start to come through from a demand perspective, is it fair to say that the domestic side should do a bit better or do you think international would be able to keep up as well?

Well, I am bullish about international for this year, not the least of which, which I didn’t mention in the earlier answer, is that foreign exchange becomes a tailwind this year. And we’ve been fighting two or three years of a rising dollar, and so now having that also running in our favor is also another great tailwind for international.

I think it’s also fair to say, Rajeev, that the domestic business should certainly receive a benefit as consumers start to see lower paycheck deductions in terms of lower tax rates as corporations start to invest further to take advantage of the benefits U.S. corporations that the Tax Reform facilitates. I think it’s fair to say that domestic should receive at least as much a benefit as international.

Hey. Thanks, Jill. Ebony, we’re ready for the media Q&A. Would you please review the process for the media to go ahead as a question? Also for the media, we’d request that you limit yourself to one question and a quick follow-up. That way we should be able to accommodate most of your questions. Go ahead, Ebony, please.

Yeah. Hi. To clarify something that Glen said on the analyst portion about the tax law. So even though you think it’s going to increase business travel, that is not in your revised full-year EPS guide and can you say anything more about how the law is going to help you since you don’t pay cash taxes?

David, this is Ed. What Glen mentioned is that we haven't yet observed evidence of increased travel demand since the law has just been introduced in the last couple of weeks. However, we remain hopeful that the law will assist us in achieving our revenue targets, and we have factored improvements from Tax Reform into our revenue expectations for the year. Regarding your second question about competing away the tax benefits, I believe it's not impacting our cash flows.

Well, it is…

What?

No. It was more just if there’s anything else in the law that is going to help you, are you talking about the faster expensing or maybe something else in the other provisions in the law?

Yeah. I mean, the law in addition to providing a stronger economic outlook for our consumers, it’s going to provide a much stronger economic outlook for Delta. We expect the benefit will probably be about $800 million a year at our current earnings level. We are not a cash tax payer today, but we will be a cash tax payer in the next couple of years and so you’ll see that value ramp as we work off the last remaining NOLs that we have. So it will be a significant benefit for Delta and our owners.

Can you provide an update on when you expect to take the C Series? What assumptions are you making for your operations? Also, how are you managing the impacts of not having the C Series? Are you having to postpone or reduce certain planned routes? I understand there are increased maintenance costs due to these delays; can you elaborate on the effects you're experiencing?

We are currently awaiting the results from the International Trade Council, which is expected to rule before the end of January. Therefore, I cannot fully answer your question, Michael, until we receive those results, where Boeing is anticipated to demonstrate harm. I am unsure of what the actual tariff will be, if there is one, and once we have that information, we will adjust our plans accordingly. Regarding the additional impacts we are already facing, we have determined that we will not be taking the C Series as scheduled this spring. Consequently, we have had to invest in maintaining some aircraft, particularly MD88s, to extend their use longer than we initially expected.

We will make those decisions once we know what the rules are.

Good morning, everyone. I have two quick questions. First, is it still the case that your full year ‘18 EPS includes $1 for the tax cuts? And second, there have been discussions about Delta possibly pursuing action against Georgia Power or the airport/City of Atlanta regarding the power outage. Is there any new perspective on that?

Your first question, Susan, yes, $1 is the current estimate on the value of the Tax Reform that we have included in the EPS. Regarding your second question, we are having productive discussions with Georgia Power, the airport authority in Atlanta, and the City of Atlanta. We are aiming to learn from our experience, ensuring that we prevent a recurrence like what happened in December, and we're focused on implementing the right design and structure to protect our power source in both the short and long term concerning any compensation. The impact cost us around $40 million, and we will engage in discussions with those parties at the appropriate time.

Ebony, we’ll have time for two more questions.

Hi. Good morning, everybody. Thanks so much for taking my question. So quickly I just wanted to revisit the question of the C Series. At this point, it doesn’t seem unlikely that the ITC won’t recommend duties of some sort. So I was wondering would Delta, I know you’ve said in the past that you’re not willing to put the bill, but with Tax Reform having passed, I am curious would Delta be willing to use some of this tax savings to put some off the bill? And secondly, previously Delta said that tax savings would not be used for share buybacks and I was just curious if that was still the case? Thanks so much.

The answer to your first question is, no. We are not using Tax Reform to pay tariffs and subsidies. We have no intent to pay any tariffs on the C Series. And the second question is again, given that we are not seeing a cash benefit in the next couple of years from Tax Reform given that we have NOLs, there’s no cash to go buy incremental shares with.

Ebony, we’re going to take a question from one more and that’s from our local hometown newspaper, Kelly Yamanouchi.

Thank you for accommodating my question. I wanted to ask about the effects of the airport outage and winter storm Benji regarding the $60 million. Was $45 million attributed to revenue impact and $15 million related to cost impact?

Kelly, this is Ed. $40 million was the rough impact of the outage and $20 million was the rough impact from the winter storm.

Oh! I see. Okay. And was most of the winter storm impact on the Atlanta hub?

On the Southeast, as you recall, the Atlanta hub took the biggest impact. We had 1,200 cancellations, most of which were in Atlanta that day.

Hey. Thanks, Ed, Glen, Paul, and Peter. That concludes the December Quarter 2017 Earnings Call. We’ll talk again in April. Thanks, everyone. We appreciate it.