Delta Air Lines, Inc. (DAL)

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Delta Air Lines, Inc. (DAL)

Investor Day Conference Call

December 12, 2012, 08:30 am ET

Executives

Jill Greer - Managing Director, Investor Relations

Richard Anderson - CEO

Ed Bastian - President

Steve Gorman - EVP & Chief Operating Officer

Glen Hauenstein - EVP, Network Planning & Revenue Management

Paul Jacobson - CFO

Analysts

Jamie Baker – JPMorgan

Michael Linenberg - Deutsche Bank

Dan McKenzie – Buckingham Research

Jim Parker - Raymond James

John Godyn - Morgan Stanley

Helane Becker - Dahlman Rose

Hunter Keay - Wolfe Trahan

Glenn Engel - Bank of America-Merrill Lynch

Duane Pfennigwerth - Evercore Partners

Presentation

Jill Greer

Good morning everyone. If you can all take your seats it is time for us to get started. I want to thank everybody for coming and welcome you to Delta’s 2012 Investor Day. For those I haven't had a chance to meet, I'm Jill Greer, Managing Director of Investor Relations for Delta. We have a great day planned so I'm just going to get you a couple of quick housekeeping items before we get going.

For those of you here in New York you should have a copy of the presentation in front of you and for those on the webcast the slides were filed on the Form 8K just a few minutes ago and they are also posted on the Investor Relations page at delta.com. We are going to follow a similar format that we have for the last few years where we have presentations, a couple of presenters and then we do a longer Q&A session with groups of presenters. When we get to the Q&A for those in the room I would just ask that you wait until the microphone comes to you so that the people on the webcast can hear your question.

After the final Q&A we are going to go down to the arcade for lunch and at lunch we will have our annual drawing for some really great gift. Our gift this year are, a model of the flagship of Delta Suite of 747 and also a chance to, an opportunity to experience the best of Delta at the Diamond Medallion for a year. So make sure you get a chance to drop your business card in the bowl and you can get a chance to win.

We do have a great team from Delta here with us today. We have Richard Anderson, our CEO; Ed Bastian, our President; Steve Gorman, our Chief Operating Officer; Glen Hauenstein, our EVP of Network, Planning, Revenue Management, Marketing and Alliances; Paul Jacobson, our Chief Financial Officer; Ken Morge, our Treasurer; Gary Chase, our Senior Vice President of Financial Planning and Investor Relations; Gail Grimmett, our Senior Vice President for New York; Holden Shannon, our Senior Vice President for Strategy and Corporate Real Estate; Ned Walker, our Chief Communications Officer and Ben Hirst, our General Counsel.

From the Delta Air Lines Pilots Association we have our incoming MEC Chairman, Captain Kingsley Roberts and joining him are Captain Doug Ross and Dino Atsalis. We have members of the Delta Board Counsel and then finally, last but not least, we have Amy Martin and [Irena Brume] from our fantastic IR team and given the sound of my voice right now you will probably be hearing a lot more from them later today.

So before we get into the presentations, I do have to tell you that today's presentation does contain forward-looking statements and the risk factors that could cause those results to differ materially from our statements are included in Delta’s SEC filings. We also have non-GAAP financial measures in the presentation today and a reconciliation of those measures is included as an appendix to your presentation and they are also posted on the Investor Relations page of delta.com.

So now with all the important business out of the way, I am happy to turn the stage over to Richard.

Richard Anderson

Well, thanks a lot for being here. You know, we started doing these in 2007 and we plotted a steady course every December and if you look back over that timeframe, our goal has been to build a long term sustainable franchise at Delta and if you just gauge our success and our progress, I think you would agree with me that we're well down that path and we’ll continue to innovate and make prudent investment to be certain that we're a strong airline for our investors, a really good airline for our customers and a very good place to work for our employees.

So when you think about what that path has been and where the path is headed, we're going to talk a bit about where we’ve been and then talk quite a lot about where we are headed, because if you think about the industry and the sort of cash flows that we developed and the kinds of sustainable cash flows we can have, we have to continue to progress both the multiples in the industry and the confidence in our investor base that these cash flows are long-term sustainable cash flows and that the investment cycle that we see in the industry is a long-term investment cycle for our equity holders because we derisk the business and given you a confidence level that quarter in, quarter out, year-to-year we can continue to produce the kinds of returns that our capital owners deserve.

So if we think about it, the first step when we go all the way back to 2007 was the importance of industry consolidation and we will, I believe shortly have the U.S. Air American transaction concluded and I don’t have any, you may all have better inside information than I do, but we've been vocal supporters of that transaction and further consolidation both domestically and around the world. And for Delta, its given Delta, having concluded our mergers quite successfully has given us a significant lead in the industry and it's a lead that we don’t intend on relinquishing.

Consolidation will continue, and that consolidation is both domestically and internationally and it’s not just in transactions, it’s also asset transactions like the one we concluded with US Air for New York City, it’s cross-border investment as we announced yesterday with Virgin, as we did a year ago with GOL and earlier this year with Aeroméxico and with the joint venture that we have with Air France KLM.

If you think about what I will refer to as normal businesses, normal businesses grow two ways. They grow through organic investments and they grow through transactions. In our industry, as you can see in the US, we are going to get to where we need to be in terms of really four industry participants and when you think about how the regulators have allowed that to occur, Southwest does air trend, Delta does the Northwest transaction, Continental and United merged and then the last piece of that puzzle is American and US Air and it’s been a long journey in the industry to get to a rational industry construct, but we believe that in 2013 we will be in that construct.

And similar activities are occurring around the world and we will continue to participate in those because in a sense these are really the cross-border transactions that we enter into are really about consolidation. It’s just because of foreign ownership restrictions and alike that that has to be done through investment, joint ventures and antitrust amenities and Ed and Glen will speak further to this as we go through the day.

But, this is a really good part of what's happened over the past five years to this industry that gets all of you as our investors confident that these cash flows will continue and the multiple expansions for the kinds of cash flow that we have in this industry will occur. And you can see what progress it has given the industry, when you think about where the industry may have been 15 or 20 years ago and where it is today, you have got management teams that are quite rational about deployment of capital and returns on invested capital.

So let's talk a bit about where we are at Delta, and how we are building that sustainable franchise and developing your confidence and our long term cash flows. As we look out, there are really three important steps that we have undertaken and as we approach 2013, we will be in our fourth year and we think about our shareholders of strong performance. So between 2010, 2011 and 2012 we had $4 billion of free cash flow, we reduced our debt $5.2 billion, our margin is up 800 basis points and importantly, we had a 10% return on invested capital over that timeframe. 2012 will shape up to be quite a good year; we expect the profit of about $1.6 billion which will be about a 30% improvement year-over-year or about $350 million.

So when you look at the progress that we have made since our first session here in New York in 2007, it’s been quite remarkable and its really been about a strategy that's built around solid returns on invested capital which we've hit our 10% ROIC over this timeframe from 2010 and we expect as we go into 2013 that 2013 will be a really solid improvement over 2012.

We've maintained a RASM premium for nearly two years now. Glen will go through in detail why that premium is sustainable and we are going to talk as I get to the last slide on an issue that its been important for everyone which is Delta you've been down a strong path of managing your CapEx, paying down debt and improving free cash flow, and if you look at our margin expansion over since 2010 800 basis points margin expansion, 2013 is 100 basis points margin expansion, and we have a long term macro goal to continue that sort of increased improvement over time.

So being a really good place for shareholders to invest their money and trust that we are going to wisely deploy our capital, as the industry consolidates we can't be a commodity. Customers, the banks you work for, the investors you work for, the decisions that the Fortune 100 companies make around travel is we can't be a commodity. We compete on a global landscape and when you think about what you want as an airline customer or your company wants as an airline customer you want a high quality product and Steve Gorman today will take you through without a doubt Delta is the best operating airline in the world. You can look at our completion factor, on time performance bags but moreover look at our customer survey data.

We win the Business Travel News Award two years in row and that's important. You don't get to the RASM premium that we have without valuing your customers and taking care of your customers and getting them where they want to go on time with a courteous staff, a clean airplane and a premium product. It’s an important part of the strategy and will remain an important part of the strategy, because the commoditization of the industry, no industry does well when its commoditized, purely commoditized and while we compete in all segments of the market, we have and we will continue to provide a superior product to support the revenue gains that you've seen us make over the last several years. And the piece that's been missing in this industry candidly is you can't run this business without good employee relations and morale.

And to think you can otherwise just simply is not the case. This is a service business. We rely on our employees to do really all the work of our business almost on an unsupervised basis when you think about it. And that comes down to training, investment in our people and morale. And when you think about the risk to your returns in this industry some of the biggest risks to your returns in this industry is are you going to be able to operate consistently over time or you are going to slow down, sick-outs and like. That's a big risk lever in this business and at Delta we don't have that risk lever. Because the only way to have a long term sustainable product where domestic and international net promoter scores, Business Travel News Award and the kind of affirmation of our brand that comes from outside third parties that only happens when you really do make it a good place to work for your employees.

That's where those RASM premiums come from and that’s why that investment is important over time. To have your completion factors zigzag from 99% to 92% and have sick-outs, in all the other variation in the operation, that does not build a sustainable franchise in a consumer business and Delta is unique in its ability to have everybody on the same team.

And one of the evolutions that we have to continue to make in this business overtime is there can’t always be a problem that’s solved by going back to employees. The employees are the key people in delivering the product that we provide to consumers. And just to end up a bit on what you would expect, what to expect in 2013, it will be our fourth year of strong profitability. We expect and we've build a plan that improves on the 1.6 billion that we will produce and profit for 2012. We expect quite strong cash flows. We're going to push toward 2 billion in cash flows for 2013, and we're going to continue the net debt reduction and we will discuss as we hit our 10 billion target in 2013, how we continue to reduce our debt but also introduce a cash return program for our share owners.

The net debt reductions is still really important part of the plan because when you think about what improves our multiples overtime, it's the continued derisking of the business. So, our labor relations are really good that’s a risk that’s not here. The second thing is the net debt reduction continues to take OpEx, non-Op expense and improve EPS it’s incredibly accretive and it’s really interesting when you talk to the different large buy side owners there are many of them that believe that continues to be the most important lever because it’s so accretive to EPS.

So they will continue to be that piece of the equation in terms of our application of our free cash flow to reduce our net debt. And this really tells I think and you are going to see some of our slides today repeat, but it’s the capital discipline with the enormous cash flows we have that will allow us to continue to make investments and the investments that we are making are often times in the case of the Virgin investment yesterday it going to be a once in a lifetime opportunity. The opportunity to go into Heathrow and get a 25% market share is only going to come by at that kind of a price once.

So when we have those opportunities or we have the opportunity to vertically integrate in the trainer facility which Ed will talk about a bit more and you think about the investments in public companies liquid investments like GOL and Aeromexico which facilitate cross border integration and long-term sustainable RASM improvements those are important investments and they are important investments for five, ten years from now. But, you can see what the trend line has done and how we have been able by discipline CapEx to continue improving our operating cash flow. And on the aircraft side, you know it’s interesting that in this industry, we almost take it with a grain of salt when airline buys 50, 777 for $8 billion, where we don't do that.

We are so disciplined about how our capital gets invested, this management team actually will sit down all the way down to investments of $1 million to prove the returns, the internal rates of returns where its investment and airplanes, opportunistic investments in airplanes like the 717 or the 737 or the MD-90 strategy. In each of those instances, we are testing cash on cash returns and we have a real disciplined at the company around being certain that we don't get focused on going to air shows and buying a lot of shining new airplanes that don't have returns. Someone yesterday asked me about the Virgin Atlantic transaction, and said well you know, how would you compared that to buying an A-380. Well I know for sure it’s a lot better return then buying A-380, because when you look at 30 year investment in a piece of equipment like that, you got to have sustainable returns that you can see and that you can affect.

And so that discipline that you have seen I hope that we have built your confidence level. And our ability to manage our fully inner where we maximize the returns for the investments that we make, and we continue the capacity discipline and the important thing about our fleet plan is when you own 90% of your fleet and you have a large number of airplanes that are fully depreciated without a monthly payment. You can manage your capacity to match supply and fuel prices. And we do not get focused on one supplier or another supplier or a certain fleet type. They are all assets that have to be managed in an asset intensive business to provide a return to our owners.

So, this slide which really I think encapsulates kind of the last five years but let me talk about where we want to go heading into 2013. We know there's been a lot of discussion and we've had a lot of feedback from our large shareowners about our free cash flow and I think by far free cash flow yield is the highest in the industry and we will continue to be the highest in the industry and we've realized that we are interested with a significant amount of capital and those capital owners expect to return.

As I've said, I think our financial performance has been strong and we will continue to get stronger and as it does, we are going to in 2013 with our board lay out for you at our annual meeting in June of 2013 our capital deployment strategy.

And by this time next year we will have a new debt at our analyst conference in next year have a new net debt target and Paul is going to talk a bit about this because I know one of the issues out there has been the pensions.

But we have a long run in terms of being able to fund those pensions and Paul will talk through what those requirements are but our real focus now is to begin the process of returning the cash to our shareowners in a rational way while continuing to reduce our debt.

And our plan is that our annual meeting once we get into 2013 and we've done the proper analysis with our board to come back to you with a plan on how we will deploy our capital and return our cash, a reasonable amount of our cash to our shareowners while at the same time given us the capital base we need to continue to innovate in the industry.

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