Delta Air Lines (DAL)
Q2 2011 Earnings Call
July 27, 2011 10:00 am ET
Edward Bastian - President and Director
Jill Greer - Director Investor Relations
Richard Anderson - Chief Executive Officer and Director
Glen Hauenstein - Executive Vice President of Revenue Management & Network Planning
Hank Halter - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
William Greene - Morgan Stanley
Kevin Crissey - UBS Investment Bank
Garrett Chase - Barclays Capital
Kelly Yamanouchi - Denver Post
Mary Jane Credeur - Bloomberg News
Daniel McKenzie - Rodman & Renshaw, LLC
Joshua Freed - The Associated Press
Duane Pfennigwerth - Evercore Partners Inc.
Glenn Engel - BofA Merrill Lynch
Jamie Baker - JP Morgan Chase & Co
Bob McAdoo - Avondale Partners, LLC
Raymond Neidl - Calyon Securities
Unknown Analyst -
Helane Becker - Dahlman Rose & Company, LLC
Michael Linenberg - Deutsche Bank AG
Previous Statements by DAL
» Delta Air Lines Inc. Q4 2009 Earnings Call Transcript
» Delta Airlines Q2 2009 Earnings Call Transcript
» Delta Air Lines, Inc. Q1 2009 Earnings Call Transcript
Thanks, Cindy. Good morning, everyone, and thanks for joining us on our June quarter call. Joining us from Atlanta today are Richard Anderson, Delta's CEO; Ed Bastian, our President; Hank Halter, our CFO; Glen Hauenstein, our EVP of Network & Revenue Management; Steve Gorman, our Chief Operating Officer; Mike Campbell, our EVP of HR and Labor Relations; Paul Jacobson, our Treasurer; and Ben Hirst, our general counsel.
Richard, Ed and Hank will open the call with remarks on the quarter's performance and we'll then move to the Q&A session. To get in as many questions as possible during the Q&A, please limit yourselves to 2 questions.
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 discuss non-GAAP financial measures today. All results exclude special items unless otherwise noted, and you can find a reconciliation of our non-GAAP measures on the Investor Relations page at delta.com.
And with that, I will turn the call over to Richard.
Thank you. We reported $366 million profit for the June quarter with $1 billion higher fuel expense and a 7% operating margin. The strength of our strategic plan and the dedication of our employees are evident in this performance in that we produced solid profit in the face of a steep challenge from higher fuel prices. We appreciate the hard work of our people.
We had solid revenue performance for the quarter, growing the top line by 12% and generating a revenue premium to the industry. We believe the high-fuel environment is here to stay and the permanency of that condition must be a reality for Delta. While revenue gains offset 70% of our total cost increase, we must increase revenues, make further capacity reductions and nonfuel cost reductions, continue to be very disciplined about capital spending, and continue our march toward $10 billion in net debt.
First, our primary means of recovering fuel increase is should be through higher revenues. Our prices at delta have to reflect the cost of goods sold. We built good revenue momentum from our revenue initiatives, corporate contract gains, and revenues from new products and services.
Second, we've got to reduce capacity in markets where revenue has not kept pace with rising fuel costs. There are some markets, including a number of small markets we serve, that simply are not profitable at these fuel prices that at capacity will exit permanently.
Previously, our December quarter capacity plan has been a 4-point reduction given the economic uncertainty. We believe it prudent to reduce capacity further as a hedge against the economy and higher fuel prices. Therefore, our fourth quarter capacity will be down 4% to 5% versus last year and down 20% versus the summer schedule.
In the trans-Atlantic, we saw the weakest revenue performance last winter. Delta and our JV partners, who represent 1/3 of the capacity across the Atlantic, established our winter capacity levels as a single entity, leading to a combined 7% to 9% reduction in the December quarter.
Third, we're committed to bring in our nonfuel CASM down to 2010 levels by the end of the year. With our fall capacity reduction, we will resize the airline's new flying levels and reduce the size of our fleet staff and facilities. We will retire 140 of our least efficient aircraft by the end of 2012, with half leaving the fleet this year. 2,000 employees elected to participate in voluntary exit programs. Those exits will begin when we begin pulling down flying in September and be completed by the end of the year. We're consolidating facilities in Atlanta, Minneapolis, Cincinnati and Memphis that will reduce our facilities' footprint by 1.2 million square feet.
Finally, we will hit our $7 billion debt reduction target to get to $10 billion in net debt. We generated $700 million of free cash flow this quarter and reduced our adjusted net debt to $13.8 billion. In 18 months, we've used our cash flow to reduce our net debt by over $3 billion and making modest but prudent investments in our fleet product facilities and technology.
We will hold our capital spending to $1.2 billion this year, including all airplane acquisitions, and we'll hold to that number for the foreseeable future. Our goal is to consistently generate a 10% return on invested capital. We have the right foundation in place, generating an 8.5% return on invested capital for the last 12 months with more than $2 billion of fuel increases during that time.