Delta Airlines, Inc. Q3 2008 Earnings Call Transcript

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Delta Airlines, Inc. (DAL)

Q3 2008 Earnings Call

October 15, 2008 10:00 am ET

Executives

Jill Greer – Director, Investor Relations

Richard Anderson – Chief Executive Officer

Edward Bastian – President and Chief Financial Officer

Analysts

Mike Linenberg – Merrill Lynch

Gary Chase – Barclays Capital

Jamie Baker – J. P. Morgan

Ray Neidl – Calyon Securities

William Green – Morgan Stanley

Hunter Keay – Stifel Nicolaus & Co.

Daniel McKenzie – Credit Suisse

Bob McAdoo – Avondale Partners

Kevin Crissey - UBS

Chris Cuomo – Goldman Sachs

Michael Derchin – FTN Midwest Securities

[Bill Torres – Rod Point Capital]

Presentation

Operator

Welcome to the Delta Airlines September 2008 quarter financial results conference call. (Operator Instructions) I would now like to turn the call over to Jill Greer, Director of Investor Relations for Delta Airlines.

Jill Greer

Speaking on today’s call are Richard Anderson, Chief Executive Officer and Ed Bastian, President and Chief Financial Officer. Also joining us for Q&A are Glen Hauenstein, Executive Vice President of Network and Revenue Management; Mike Campbell, Executive Vice President of HR, Labor Relations and Communications; Steve Gorman, Executive Vice President of Operations; [Anne Coulter], Senior Vice President and Controller and Paul Jacobson, Senior Vice President and Treasurer.

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 our SEC filings. We will also discuss certain non-GAAP financial measures. You can find the reconciliation of those non-GAAP measures on our Investor Relations website at www.delta.com.

Finally, I’d like to ask when we get to the Q&A portion of the call we limit each participant to one question plus a follow-up.

With that, I’ll turn the call over to our Chief Executive Officer.

Richard Anderson

It is probably an understatement to say it has been a challenging year with record fuel prices and now we face economic uncertainties in the global markets and some uncertainty in terms of where the economies around the world are going to be performing. Through all of that, our employees have done a really good job and we thank them for their commitment to building the airline and providing good service to our customers and running a good operation. We appreciate that.

For the September quarter we reported a net loss of $26 million excluding special items. While we are never happy to post a loss it is a modest loss considering costs related to fuel prices were more than $800 million higher than last year. On a GAAP basis we recorded a $50 million net loss which included $24 million in special items primarily related to our domestic capacity reductions and merger expenses.

Consistent with what we have talked with you in the past, we posted strong top line growth of 9% and maintained good cost discipline. Through our solid revenue performance, cost initiatives and fuel hedge strategy we were able to cover more than 60% of the impact of costs from higher fuel prices.

On the operational side we are running a good airline. While we definitely faced some challenges this quarter with some severe weather and congestion in the northeast and an air traffic control computer outage, we had a five point improvement in on-time arrivals this quarter and Delta ranked in the top tier for on-time performance during the past twelve months. We also improved the customer experience with more than 50% decline in involuntarily denied boardings in the third quarter. Our baggage performance continues to improve. We had a 40% decline in the number of mishandled bags year-over-year in the September quarter and with more than 30 million bags traveling through our Atlanta hub each year the investments we are making to overhaul the bagging system are critical and we expect to see our baggage numbers continue to improve.

We are making sure to recognize the role that our people play in these improvements. Delta employees received $10 million in shared rewards payments this quarter. I note that our good, on-time performance is coming with the most efficient scheduling in the industry. When you look at the spread between our block time reliability and our arrival performance we are running the most efficient operation in the industry. We are not getting it by adding spare airplanes and padding our schedules.

I want to focus on a topic that has dominated headlines in recent weeks; the credit crisis and how it is impacting Delta. The turbulence in the market coupled with a soft economy and high fuel prices have created a pretty significant financial storm, the effects of which have rippled through the economy in every market around the world and touched almost every consumer and business. I just want you to know we are well positioned to weather the turmoil in the market.

Last winter and last February/March we led the industry by announcing significant domestic capacity reductions in response to high fuel prices and signs of economic softening. When fuel prices continued to climb we responded quickly and decisively with additional capacity cuts. Those reductions are all in place now. Our domestic capacity was down 10% this quarter and will be down 12-14% in the fourth quarter. We are continuing to trim capacity market-by-market as we watch demand.

We were first out of the box with capacity cuts. If you’ll recall we had a staff reduction of almost 4,400 people this last year. We will continue to manage that closely because we have a flexible, cost efficient fleet. We have a lot of airplanes that are paid for and the ability to change capacity and response demand is effectively a cashless exercise for us. We’re going to be doing that both domestically and internationally. I think Glen and Ed will be talking about a bit more international trimming we are doing in the fourth quarter.

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