Delta Air Lines, Inc. (DAL)

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Delta Air Lines, Inc. (DAL)

Q3 2012 Earnings Call

October 24, 2012 10:00 AM ET

Executives

Jill Greer – Managing Director, IR

Richard Anderson – CEO

Ed Bastian – President

Paul Jacobson – SVP and CFO

Glen Hauenstein – EVP, Network Planning & Revenue Management

Analysts

John Godyn – Morgan Stanley

Dave Fintzen – Barclays Capital

Jamie Baker – JP Morgan

Michael Linenberg – Deutsche Bank

Savanthi Syth – Raymond James

Glenn Engel – Bank of America Merrill Lynch

Duane Pfennigwerth – Evercore Partners

Hunter Keay – Wolfe Trahan

Dani McKenzie – Buckingham Research

Bob McAdoo – Imperial Capital

Helane Becker – Dahlman Rose

Josh Freed – Associated Press

Andy Compart – Aviation Week

Karen Jacobs – Reuters

Mary Jane Credeur – Bloomberg News

Ted Reed – TheStreet

Kelly Yamanouchi – Atlanta Journal-Constitution

Linda Loyd – Philadelphia Inquirer

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines September 2012 Quarter Financial Results Conference Call. My name is Cynthia and I will be your coordinator. At this time all participants are in a listen-only mode until we conduct a question-and-answer session following the presentation. (Operator Instructions) As a reminder, today’s call is being recorded. I would now like to turn the call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta.

Jill Greer

Thanks, Cindy. Good morning, everyone, and thanks for joining us for our September quarter call. Joining us from Atlanta are Richard Anderson, Delta’s Chief Executive Officer; Ed Bastian, our President; and Paul Jacobson, our Chief Financial Officer. Richard will open the call. Ed will then address our financial and revenue performance, and Paul will conclude with a review of cost performance and liquidity. We have our entire Executive team with us for the Q&A session and 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 otherwise noted and you can find a reconciliation of our non-GAAP measures on the Investor Relations at delta.com.

And with that, I will now turn the call over to Richard.

Richard Anderson

Good morning, and thank you for joining us. Today we announced a September quarter profit of $768 million or $0.90 per share and an operating margin of 10.2% excluding unusual items. On a GAAP basis our net income was $1 billion. I’d like to thank the entire Delta team for staying customer focused and running a good operation while producing strong financial results.

Delta is quite unique in the global industry with strong employee relationships. Our people are committed to make Delta the best and we are not distracted from serving our airline and its customers. That unique quality de-risks our business and is good for our equity holders. We look forward to rewarding our employees with well-earned profit-sharing checks in February which totaled $309 million in profit-sharing accruals year-to-date.

Delta’s strong third quarter results combined with industry-leading operations and customer service reflect the benefits of steady execution of our strategies across the business and our prudent investment in the airline. We now have a product network and operation that customers are willing to pay a premium for.

During the quarter we produced an 8.3% revenue premium to the industry – our best performance on record. We have generated a revenue premium to the industry 18 months in a row and we intend on continuing to do so. Our operational performance this year has been quite good. For the last 12 months our all-time performance is running at about 87% domestically and our completion factor is 99.7% which may be a record for a major airline. Our DOT mishandled bag rate was down 18% from the prior year and we had a 35% decline in DOT customer complaints. Since 2007, our system bag claims have declined 66%.

Looking forward, we continue to have a positive outlook on RASM yields and loads in the December quarter. This is based on corporate revenue gains and Ed will discuss that in much greater detail, a strong global network, superior product and facilities.

Our October unit revenues will be up 4% to 5%, our capacity down 1% to 3% and we expect the December quarter to produce good profitability with an operating margin of 4% to 6%. With our consistent investment in the business and significant capacity reductions our non-fuel costs have grown faster than we would prefer in the past few quarters and this trend will continue into the first half of next year.

The actions we are taking now which include a $1 billion structural cost reduction over the next two years will allow us to maintain strong financial performance and free cash flow yield while laying the foundation for future revenue growth, cost efficiency, margin expansion and consistently hitting our return on invested capital targets. We are managing fuel, our top cost item, by taking the unique step of operating a refinery to address high jet crack spreads. Our refinery turnaround is progressing well under the leadership of Jeff Warman and our trainer team. We expect to be at full production by first quarter of 2013 and we expect a positive trainer contribution in 4Q. Paul will go into greater detail about our fuel positioning.

We are working to change the cost dynamic in this industry around fuel and our results from trainer and the events in the industry have validated our strategy. Delta will continue to take industry-leading action to control fuel expense by managing capacity, fully pricing our products to cover fuel costs, operating our refinery and deploying effective purchasing and conservation strategies. We will continue to prudently manage our capital spending in order to ensure that we generate strong free cash flow yields for our shareowners and we will continue our march to pay down debt.

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