q3 2007 delta air lines, inc earnings conference …...2007/10/16 · oct. 16. 2007 / 10:00am, dal...

F I N A L T R A N S C R I P T

DAL - Q3 2007 Delta Air Lines, Inc Earnings Conference Call

Event Date/Time: Oct. 16. 2007 / 10:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Jill GreerDelta Air Lines, Inc. - Director of Investor Relations

Richard AndersonDelta Air Lines, Inc. - CEO

Edward BastianDelta Air Lines, Inc - President, CFO

Glen HauensteinDelta Air Lines, Inc. - EVP of Network and Revenue Management

C O N F E R E N C E C A L L P A R T I C I P A N T S

William GreeneMorgan Stanley - Analyst

James HigginsSoleil Securities - Analyst

Bob McAdooAvondale Partners - Analyst

Bill MastersBank of New York Capital - Analyst

Robert BarryGoldman Sachs - Analyst

Jamie BakerJPMorgan Chase - Analyst

Andy ShapiroMidwest Securities - Analyst

Gary ChaseLehman Brothers - Analyst

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines third quarter 2007 financial results conference call.My name is Carmen, and I will be your coordinator for today. At this time all participates are in listen-only mode until we conductthe question-and-answer session following the presentation. If at any time during the call you require assistance, please hit starfollowed by zero and a coordinator will be happy to assist you.

I would now like to turn the call over to Miss Jill Greer, the Director of Investor Relations for Delta Air Lines. Please proceed,ma'am.

Jill Greer - Delta Air Lines, Inc. - Director of Investor Relations

Good morning, everyone, and thank you for joining us to discuss Delta's third quarter 2007 financial results. Speaking on today'scall are Richard Anderson, our Chief Executive Officer, and Ed Bastian, our President and Chief Financial Officer. Also joining usfor the Q&A is Glen Hauenstein, our Executive Vice President of Network and Revenue Management. Before we begin, pleasenote this call is being transmitted live via the web is and being recorded. If you decide to ask a question, it will be included in

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Oct. 16. 2007 / 10:00AM, DAL - Q3 2007 Delta Air Lines, Inc Earnings Conference Call


both our live transmission as well as any future use of this recording. Any recording or other use or transmission of the text oraudio for today's call is not allowed without Delta's express written permission.

Also today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. Allforward-looking statements involve risks and uncertainties that could cause the actual results to differ in a material mannerfrom the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings.We'll also discuss certain nonGAAP financial measures. You can find the reconciliation of those nonGAAP measures on ourinvestor relations website at Delta.com. Finally, I would like to ask that when we get to the Q&A portion of the call we limit eachparticipate to one question plus one followup. Now, with that, I'd like to turn the call over to our Chief Executive Officer, RichardAnderson.

Richard Anderson - Delta Air Lines, Inc. - CEO

Good morning, and thanks to everyone for joining us today. I'm excited to have joined this very talented team at Delta. SinceSeptember first, I have spent a great deal of time talking to our people across the system, and in doing this it is obvious whyDelta's people have the reputation for being the best. It's their passion for and dedication to the company. So when people askwhy I have returned to the airline industry, the answer is really simple: great people at Delta and a tremendous opportunitygiven the assets route network and positioning at Delta.

As Ed will discuss in more detail, we are quite pleased with the progress and momentum that continues to build in our businesses.Our financial results announced today over $360 million in pre-tax profit on the highest quarterly operating revenue in thecompany's history is evidence in our strengthening financial performance. None of this, of course, would be possible withoutthe endless and tireless efforts of the people of Delta Air Lines. In recognition of all of their hard work, we are delighted to reportthat we have accrued almost $160 million in profit sharing for our employees this year.

Looking ahead, our objective will be to continue to increase profits and boost shareholder value by achieving the targets setout in our plan. We'll do this by taking advantage of the significant revenue opportunities that remain available to Delta to closethe remainder of RASM gap to the industry by the end of 2008. Our network restructuring is continuing and will drive significantadditional returns, not only from international expansion, such as the recently announced service to Shanghai beginning nextMarch, but also from ramping up the investments we have made over the last several years. In addition with more passengerdemand data for the new markets we have launched, and more experience with your new scheduling and yield managementsoftware, we'll be able to more fully utilize this technology to continue to close the RASM gap and ultimately get to a premiumrevenue position versus the industry.

On the cost side, we'll maintain strict discipline around spending. While Delta's CASM is best in class we must focus on sustainingour cost advantage by always looking for ways to take out cost from the business. There are plenty of opportunities remaining, even with the great work that's already been done, to continue to improve the cost side of our business. Our approach tocapital spending will be incredibly disciplined. We will focus on strategic aircraft acquisitions when they have a demonstrablereturn on equity and will support profitable international growth. And we will make product improvements that either drive atrue revenue advantage or demonstrable lower costs. Examples of these would be upgrading our premium product in businessclass internationally and adding winglets to our aircraft to gain fuel efficiencies.

And as important as improving product, providing an on-time operation is just as important to our customers. Year-to-date,Delta leads the network industry in a rival within 14 performance, and we expect through the end of the year that we'll continueto lead the industry in that important operating metric. As we look over the past summer, we had difficulties in the northeastwith congested operations. Because of our leadership position at JFK, we announced last month a complete redesign of ourJFK schedule, which includes a reduction in the number of Delta flights operating during peak hours, upgauging aircraft andremoving propeller airplanes from the schedule, but there must also be broader changes to solve the problem. Accordingly,we are working closely with the Department of Transportation, the Federal Aviation Administration and the New York Port






Authority to ensure the needs of our commerce and our operations are best served. We believe the most and first critical stepsare to ensure that the airports are delivering all of the capacity the FAA has published the airport can produce and to addressthe real need to modernize the nation's antiquated air traffic control system.

We believe our official constraints on capacity or our congestion pricing at the New York airports are not in the best interestsof the public or the industry. If constraints are necessary, we support the fair allocation of limited resources using the IATAinternational slot rules that are in place and have been in place for many years at congested airports around the world. I wouldjust note with respect to the operation that our on-time performance will continue through the end of the year, and we intendon being a long-term leader in that important metric.

Before I close, I would like to address a topic that has been on the minds of many of the people on this call and observers of theindustry. And this is true both within the broad investment community and the airline industry in general, and that's the issueof consolidation. This industry, including Delta, and candidly all of the major network carriers are products of consolidation andwe fully expect that this evolution toward a more consolidated industry will continue. I would even say that it makes sense andcould make sense for Delta if it's done thoughtfully from a position of strength, and is in the long-term best interests of Delta'sshareholders and its employees. As a result we are evaluating the best path forward for Delta. There are obvious benefits thatcould accrue from consolidation from our shareholders and employees. Remember that our employees are our greatest asset.The magnitude of change that they have accomplished over the last year -- two years is a testament to the importance thatthey play in the future of Delta. Their crucial -- their support is crucial to our continued success. As such, we will take an balancedview toward consolidation and its impact on Delta, while keeping focused on any execution risk, while being certain that wedo our very best to create shareholder value.

Ultimately, it's our goal to be the undisputed leader in the airline industry. To achieve that goal we must be on the leading edgeof change to keep pace in this dynamic business environment. And we believe our continuing financial improvements, combinedwith the great employees of Delta, the route network, fleet and cost structure, give us as a strong play as the industry continuesto evolve toward consolidation. And speaking of change, we are hosting this call today from Paris. There will be a joint pressconference tomorrow morning Paris time regarding an exciting new agreement we are executing with our SkyTeam partnerAir France. Stay tuned for more details about the agreement, and we will be discussing tomorrow the tremendous benefits thatit will bring to all of the Delta employees, our shareholders and the improvements it will bring in our international expansionstrategy.

To close, we are absolutely committed to achieving the goals and improving upon the goals in our plan in strengthening Delta'sleadership position in the industry. Doing this allows us to control our destinies, make the right decisions that will increase valuelong term for our shareholders, create a great place to work for our employees, and make Delta a great airline to fly for ourcustomers. So thanks, and with that I'll turn the call over to Ed to discuss financial results for the quarter, and then the three ofus will be here to answer your

Edward Bastian - Delta Air Lines, Inc - President, CFO

Thanks, Richard. Good morning, everyone. Thank you for joining us today. This morning we reported a pre-tax profit of $363million for the September quarter, excluding last year's [rioric] items this was $432 million improvement over the prior year.Net income was $220 million or $0.56 per share on 394 million fully diluted shares. This compares favorably to consensus of$0.42. Due to our significant NOL carry forwards, the $143 million in tax expense for the quarter is strictly a noncash expense.For that reason we believe pre-tax earnings is the relevant measure to focus on to understand our year-over-year improvement.

Our operating margin was 8.7%, a more than five point improvement over the prior year quarter, driven by strong revenueimprovements and continued cost benefits from our restructuring. This result was slightly better than our last guidance due toa slight improvement in fuel prices and the resolution of certain state tax related matters. We're pleased to report these resultsinclude $79 million in profit sharing accrued for the quarter to recognize the hard work of the Delta employees. This brings our






year-to-date profit sharing accrual to $160 million for the Delta people. Our results for the quarter also include two noncashemergence related items, which when combined largely offset each other. First fresh start accounting changes drove a $50million increase to pre-tax income, and second we recorded $50 million in share-based compensation expense. While offsettingin total, these emergence-related changes did affect various line item comparatives increasing consolidated passenger RASMby $0.16, and increasing mainline CASM by $0.21.

Turning to the details of our performance. The successful execution of our network and revenue initiatives continue to deliverstrong returns for the business. In the September quarter we realized a net $246 million revenue improvement year-over-year.This factors in approximately $154 million from the cost of international and regional capacity growth. Consolidated unitrevenues improved by more than 6% on 3% higher capacity. Specifically, domestic RASM increased six points driven by strongdemand, coupled with capacity discipline and the regauging of the domestic network. International RASM increased 9% drivenby strong yields in both Latin America and the trans-Atlantic. We continue to be pleased with the way the international strategyis performing. In fact the international routes that we added this year outperformed the first-year performance of routes thatwe added in the prior year. Year-to-date through August, Delta's length of quality adjusted RASM was 96% of industry average,and we continue to believe we'll be able to close the remainder of that gap to the industry by the end of 2008. We plan to closethat gap in several ways.

First, because new markets can take two to three years to fully ramp up, we'll continue to realize the significant benefits fromthe pipeline of network initiatives that we've already implemented. Second, we're always working to improve revenuemanagement. Over time we have gained experience with the complex revenue management systems we've implemented andwe also have much better historical passenger demand data on the new markets launched over the last two years. And third,as recent announcements demonstrate, we're continuing to expand our international strategy. This includes our new serviceto Shanghai, which will begin in March and 17 new routes by the summer of 2008.

Our international strategy is also being supported by strategic additions to our fleet. During the quarter we confirmed ordersfor two additional Boeing 777-200LR aircraft, which will be dedicated to our Asian expansion. This brings the total 777 LR firmorders to eight. We also still have 13 767-400 aircraft flying in the domestic markets that are available to reallocate to internationalflying. We intend to reconfigure six of these aircraft early this year into early 2008 and the remainder the following winter. Inaddition since July we are taking delivery of six 757-200 aircraft from the secondary market and expect to receive nine more bythe spring. These aircrafts -- aircraft will ETA certified and will primarily serve our international expansion in the trans-Atlanticand other targeted markets. They deployment will free up nine 767 ERs for the longer haul and more profitable missions in theMiddle East and Africa.

In addition next summer we'll be taking deliveries of our first 737-700s, which will be equipped with [blank] winglets andpersonal in-seat entertainment. We have 10 aircraft on order through 2009. These high performance aircraft will allow us to flyin specialty markets that we cannot access today. While taking future aircraft deliveries we're still reinforcing our domesticcapacity discipline. During the quarter we returned 13 aircraft. These include three wide-body 767 ER aircraft, one 757-3 MD80sand six RJs. Our fleet restructuring has created substantial flexibility, funding considerable international growth with very modestcapital investment, while enabling domestic capacity discipline. In addition, fleet flexibility provides a natural hedge becauseit enables us to very capacity in response to today's high fuel prices or general economic weakness.

Turning to cost, we continue to exercise cost discipline to meet our unit cost targets. In the September quarter we recognizednet cost reductions of $230 million, which mainly consists of the continued benefits of our restructuring initiatives. These include:reduced interest costs from lower effective interest rates and higher interest income on our improved cash position, reducedemployee cost, savings from fleet airport and contract renegotiations, and benefits from a business interruption insurancesettlement. These savings are net of investments we have needed to make in our JFK operations and for the rebranding initiativeswe have understood taken. Total fuel expense including fuel costs that are within the contract carrier line were higheryear-over-year by $27 million. In the September 2007 quarter we hedged 32% of our fuel consumption, resulting in an all-infuel price of $2.21 per gallon. Fuel hedges drove $46 million in cash savings for the quarter. Main line nonfuel CASM, excludingprofit sharing expense, decreased by three points year-over-year to $0.065. Our planned target is to get the to mid $0.06 CASM






range for nonfuel costs. This target as you know was developed prior to consideration of fresh start or share based compensation.Without these items our mainline nonfuel CASM for the September quarter would have been $0.0629, a 6% decline on anapples-to-apples basis, demonstrating the progress we continue to make towards achieving our goal. Due to continued highfuel prices during the September quarter, we did implement several initiatives to ensure that we meet our planned targets forthe year, which included lowering capacity for the December quarter through the return of the 13 aircraft that I previouslymentioned.

EBITDAR for the quarter was $810 million, which includes the impact of fresh start reporting and reflects a margin of 16%. Thisis more than $300 million higher than last year. We expect to hit our EBITDAR plan for the full year of $2.7 billion, including theimpact of fresh start. We have also made progress in strengthening our balance sheet and liquidity. We ended the quarter with$2.4 billion in unrestricted cash, not including our undrawn $1 billion revolver. During the quarter we invested over $400 millionin capital expenditures. Of this amount about $375 million was for aircraft parts and mods. In addition, we paid down $1 billionin debt maturities with cash, including payment of $225 million to the PPGC in July and fully funding our $650 million obligationto Alpa in September, that was also related to the retirement settlement. During the quarter we paid approximately $125 millionin scheduled debt maturities on top of those numbers. To fund the Alpa and PPGC obligations we recently closed two separatefinancing transactions, which, when combined generate more than $600 million in additional liquidity at reduced interest rates.

First in late September we refinanced our spare parts loan with GE Capital which resulted in an additional $181 million inproceeds and significantly lower interest rates. Second, last week we issued $1.4 billion in new EETC debt. The proceeds wereused in part to refinance approximately $1 billion in existing secured aircraft debt. As a result of these transactions, not onlydid we raise more than $600 million of liquidity on the existing asset collateral, we also importantly reduced debt maturities in2010 and 2011 by over $500 million. We are pleased with the results of these transactions, and we think they are a strongreflection of the market's continued confidence in Delta's plan. As a result of the debt payments, our cash position at the endof the quarter dropped to $2.4 billion. However, with the closing of our the 2007 EETC post-quarter close, we expect our cashbalance at the end of the year to be approximately $2.9 billion. In addition we expect our $1 billion revolver to remain undrawn,leaving us with a total available liquidity of approximately $4 billion.

Looking to fourth quarter guidance, and I want to note that these projections include the impact of the emergence-relatedaccounting, we expect operating margin to be in the range of 3% to 5%. Our mainline nonfuel cost, excluding profit sharing,to be down 5% to 7% year-over-year. Not to confuse the matter in the guidance, but fresh start accounting and managementequity did contribute two points of cost increase to us. So thus on on an apples-to-apples basis, our nonfuel CASM for the mainline is expected, in real dollars, to be down 7% to 9% for the quarter, our fuel cost per gallon to be approximately $2.36 all in,including the impact of fuel hedging. And regarding fuel hedges for the fourth quarter, we have hedged 20% of our anticipatedconsumption using heating oil [powers] with an average jet fuel equivalent cap of $2.35 per gallon. We expect a combinedimpact of fresh start reporting and share-based compensation to contribute approximately $35 million to fourth quarter pre-taxearnings. This consists of an increase to operating revenue of $50 million, an increase in operating expenses of $55 million, anda decrease in nonoperating cost of $40 million. All in, we expect fresh start accounting and share-based computation to contribute$33 million to our fourth quarter pre-tax earnings.

Looking at capacity, in the fourth quarter we expect systems capacity to be up 3% to 4% year-over-year, with consolidateddomestic flat and consolidated international up 12% to 14%. Virtually of the system capacity increase related to run-rate flyingthat we've already begun in prior periods. Looking at advanced bookings. At a system level advances booking through Novemberare ahead of last year. Domestic advanced bookings continue to be strong, and solid demand continues to drive additionalloads. On the international side, we continue to see strong demand in yields in October -- through November, rather, with thetrans-Atlantic and Latin America markets booked well ahead of last year. In the Pacific region our year-over-year load factorcomparisons are impacted by the introduction of capacity to the Seoul market, which is performing above expectations.

Regarding CapEx for the fourth quarter, net CapEx will be approximately $280 million, which includes $260 million for aircraft,parts and mods. For the full year 2007, we expect free cash flow to be approximately $1.4 billion, which is ahead of our businessplan targets by almost $300 million. Looking out in to 2008, we're in the midst of preparing our plan for the next year. We are






watching the domestic economy very closely, and addressing the challenge presented by the recent fuel price increases. OurPOR calls for a significant step forward with respect to pre-tax earnings, and we do expect significant improvement. However,the degree of that improvement needs to be calibrated in view of the higher fuel prices and our updated perspective on theeconomy. We're not prepared to give 2008 guidance at this time, but will do so closer to this year end.

To conclude, Delta's results for the quarter demonstrate the momentum we have in our business, and the opportunity we haveto take our performance to the next level, with improving pre-tax margins and strong free cash flows. We have maintained adisciplined approach to domestic capacity, focused on profitable international growth, and are aggressively working to improveour competitive position in the industry. Operator, at the time we are happy to start fielding questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) Questions will be taken in the order received. (OPERATOR INSTRUCTIONS) And we'll wait onemoment while questions compile. And the first question comes from the line of William Greene from Morgan Stanley. Pleaseproceed.

William Greene - Morgan Stanley - Analyst

Yes, good morning. I'm wondering if you can add a little bit more color about the fourth quarter RASM trend. Given what fuelhas done, it seems that you've got some pretty robust expectations for RASM. I'm just trying to understand a little bit aboutwhy you would think that would continue given the economic backdrop.


Glen, do you want to take it?

Glen Hauenstein - Delta Air Lines, Inc. - EVP of Network and Revenue Management

Sure. Bill, I think we have a couple of things going on here. And domestic seems to remain strong through the fourth quarter,and while we do have a fuel hit, certainly, on the cost side, we have some very nice currency fluctuations going on with theforeign currencies. And that's really driving double-digit unit revenue increases in the trans-American and Latin Americanentities right now. So we see continued strength in the domestic, and then really, what we are seeing on a year-over-yearbusiness, accelerating international driving the total RASM numbers.


Okay. So I know you haven't given 2008 guidance, but if we see further weakness, what kind of flexibility do you have on thecapacity front to pull it back, relative to where we are at in plan right now?


Well, Bill, we had a result of the restrictions, as you know we've reduced the cost of our fleet substantially. In fact on a year-over-year-- comparative pre-restructuring levels almost $500 million a year of fleet savings. So, the cost impact of grounding a domestic






capacity, particularly regional jets, is not going to be substantial as compared to what it would have been previous to -- to ourin court work. So I think capacities, particularity on the domestic side is the number one focus that we deploy.


But just to be clear, I mean, could we get to a situation where you'd have, instead sort of a 3% capacity number, could it be asmuch as flat or slightly down, or is that too big of a change --


Again, our capacity for this year is flat for the domestic market. And for mainline domestic in fact it's been down year-over-year.The only capacity growth we've got going on in domestic is the upgauging of regionals from 50-seat to 76-seaters, as we'regetting rid of those 50-seaters. So there's not a -- from our perspective the down gauging is working quite effectively in thedomestic market place, and the international markets that we're going into are new territories with much, much more robusteconomic expectations and projections which is -- you're seeing that in our numbers already.


Bill, this is Richard, from a planning perspective, we're approaching 2008, with really, a sort of dual approach, which is to takecurrent economic trends and assume that you see this -- the same kind of GDP growth that we have seen in 2007. And then wewill have a contingency plan that if we see in effect from the credit markets with respect to the sub-prime issues that are in thecredit markets, or other sort of effects on the economy, we will be prepared, and have the airline position to be able to take outdomestic capacity to match that demand appropriately. We don't want to be in a situation where our domestic capacity is sortof out of balance with where GDP and demand is.


And just the last comment on that is that our plan for 2008 has domestic capacity flat. So we are -- we are not -- even where theenvironment is today, planning on adding any additional domestic capacity.


And given the large shell sizes that we have, it is -- and very low -- we have the lowest CASM cost in terms of fleet costs in theindustry to Ed's point -- to reinforce Ed's point, we have a very flexible fleet in terms of the being able to move capacity prettyquickly.


Okay. Thanks for your help.

Operator

And the next question comes from the line of James Higgins from Soleil Securities. Please proceed.






James Higgins - Soleil Securities - Analyst

Yes, hi. Thanks very much. You have got a lot of moving -- of -- of cross-currents it looks like on the interest expense side. Canyou give us an idea of what sort of quarterly numbers we should be at there, looking at the -- looking ahead?


Sure, Jim, this is Ed. We had some -- you are right. We did have some moving parts in the nonoperating interest line. First off,as part of the refinancing of the GE spare parts deal, we picked up a $14 million of benefit from the amortization of debt premiumthat was on the balance sheet from that original financing. Then in addition to that in the second quarter we had written offabout $20 million of unamortized debt issuance cost related to the replacement of the retirement of the dip, since we replacedthe dip on an accelerated basis on what the original intent was for the life of the dip. So the $20 million bad guy in the secondquarter number is a $14 million good guy in the third quarter numbers, then on top of that we obviously have better rates fromour lower debt levels and better rates on our exit facility as compared to our dip financing. Then we expect the -- or the sum ofthose two numbers is about another $13 million on a quarter-over-quarter basis.


So it's another $13 million reduction?


In the third quarter. But that's the on-going part. The $13 million is a continuing benefit.


Okay.


The first two items I mentioned were unique to the quarter. In the fourth quarter, we're going to see another $20 million benefitcoming in on the nonop line related to the same factor that I mentioned on the GE spare parts refinancing, with the refinancingof the aircraft and the new EETC we accelerated about $20 million of debt premium, and that will flow through the nonup lineas a good guy in the fourth quarter as well.


Okay. And that's a one-time event in the fourth quarter?


That's right.


Okay. Great. Thank you very much.







You're welcome.

Operator

(OPERATOR INSTRUCTIONS) The next question comes from the line of Bob McAdoo from Avondale Partners. Please proceed.

Bob McAdoo - Avondale Partners - Analyst

Hi, just to -- trying to get a little more flavor as to what is going on the post Labor Day. You have what I would consider kind ofnonstandard destinations beyond the big industries in Europe. Some of the Africa and some of the smaller European things.Just curious how those are going. In the peak I understand they did well. I'm curious, any kind of sense of how they are goingin the fall? How are those markets doing in the fall relative to the more traditional European destinations?


I think the Middle East is having a banner fall. Africa is strong throughout the fall, and -- and winter looks like it's going to beback to summer levels again. One of the great things about Africa is it contraseasonal. And the Eastern Europe is a market basketof different results with things like Kiev, and markets like Kiev continuing to be extremely strong. Some of the -- for exampleBucharest is one of the weaker markets, so we're reexamining the level of capacity we have in the winter. And that's coming upa really wonderful summer for Bucharest. But in general, the fall and winter, particularly in the Middle East and Africa and Indiaare very, very strong. There are a few weak spots that we will be addressing as we plan next year.


So is it safe -- it is safe to say that -- that those are kind of working in -- in -- and maybe counterbalancing of the normal seasonalweakness you see in the European traditional destinations?


That certainly is the intent, to be able to rotate. This is the first year we have had the 767-400 fleet. We're calling it the FollowThe Sun Project, where we're taking it out of Europe in the summer and then we're putting it down into Africa and into SouthAmerica in the winter. And we think that is going to be very accretive to the winter P&Ls.


Great. Okay. Thanks a lot.

Operator

And the next question comes from the line of Bill Masters from Bank of New York Capital. Please proceed.






Bill Masters - Bank of New York Capital - Analyst

Richard, you have been very public about the need for Delta to go ahead and continue to strengthen their balance sheet. I'mwondering, could you just set forth some goals as to where you would like to be and particularly in the context of maybe anynew financings that might come up for let's say the 10 aircraft? And if you could also comment, and I know this question has alot of different parts, I can appreciate that, and just reassure, maybe the fixed income side, that any announcement that comesout of Paris, alright, is not going to be to the detriment of bondholders?


No. I can tell you any announcement coming out of Paris will not be to the detriment of bondholders. With respect to the balancesheet, the industry has got to get -- and Delta has to get -- to a return on capital in the 10% to 12% range. And, along the way,loading the balance sheet up with a lot of debt to fund new airplanes is something we have to be very careful about. Fortunatelythe work that Ed did leading the restructuring, put the airline in great shape with respect to its fleet. And aside from, perhaps,a handful of 777s, that would be very accretive to the P&L over the next few years, and the 757s that we have coming in fromthe after market, along with a handful of 737-700s, and the existing POR regional jet delivers, we're pretty well set on the fleet.

So bottom line is, we want to be in a position to be able to take our cash flow and continue to be certain that we're paying downdebt just like we did in the last quarter. I think you are going to see us avoid capital expenditures that are not really disciplinedcapital expenditures that have conservative assumptions that will produce real value over the long term. You can see the valueof the debt pay down. Jim Higgins question, the value that it already has on our pre-tax. And so as we look out in the next severalyears, in 2010, 2011 and 2012, we have some significant maturities. A lot of that is EETC debt that can be refinanced. But wantto stay pretty focused on a debt-to-equity ratio in the 40% to 50% range, over the long term. And to do that is going to requireincredible discipline on the CapEx side, as we build real equity on the balance sheet.


That debt-to-equity ratio, that includes any type of activities relating to consolidation?


No, that's not a stand-alone basis, Bill.


And that also -- and that debt to equity also includes and incorporates what would probably be a future EETC financing to fundthe 10 aircraft. Would that -- would it be correct there?


We have not made a decision, Bill, as to how we're going to approach the -- approach the deliveries. We're considering quitehonestly whether we should pay cash for some of them.


Okay. Thank you.







You're welcome.

Operator

(OPERATOR INSTRUCTIONS) And we have another question coming from the line of William Greene from Morgan Stanley. Pleaseproceed.


Yes, Richard, can I just ask a question about, when you are thinking about driving sort of shareholder value here, you talkedabout consolidation, but can you offer any color on the other options that have sort of been been bantered around in theindustry from assets spin-offs, whether it's MRO, or frequent flyer, or anything like that? And also your views on sort of dividendpayments and this sort of thing. I recognize those are Board decisions and what not. But just sort of how you are thinking aboutthat?


Well, first, the Board is a very independent and strong Board. This Board was selected by the process out of the plannerreorganization of the creditor's committee. So you have a very -- a lot of very sophisticated and financially astute Board memberswho are very focused on making sure Delta continues to operate from a position of strength. And that includes making certainthat we do the right thing for the shareholders. So with that background, we have teed up the issue of whether we should ownComair. And I think you'll see us making a judgement in that regard in the next quarter or so. We have the work underway doingthe internal evaluation our -- on whether we need to really have that -- basically have our balance sheet carry that set of assets.Out of our nine regional carriers, it is the only one that we own. So you should expect us in the course of the next quarter ortwo -- I would actually think in the next quarter, to make a judgement that regard.

With respect to the other asset, the MRO business and Global -- Delta Global Services, and Delta AirElite, given that we ownthose assets already, there really is an opportunity that is unique at Delta to use those assets and leverage those assets to providesome diversification, particularly if you are in an economic downturn. The MRO business is quite profitable on a fully allocatedbasis. It's not labor intensive, it mostly relies on expertise, and the economies of scale that we have in that business. Delta GlobalServices has a broad, indeed, client base. I think you are going to continue -- you're going to see from us, starting next year alot more visibility into the P&Ls in those businesses, because those two businesses -- actually those three businesses, we havea lot of opportunity. If we ran those things on stand-alone basis, given the low capital base that we have, they could actuallyprovide nice earnings diversification, and contribute material to the cash flow.


So just to make sure I understood that last point, so are you suggesting that you would rather sort of break them out so themarket can see them or you are comfortable --


Yes. Yes.







-- rather than a spin out or something like that?


At this point. There's a lot of value to be created there yet.


Okay.


Particularly, in the motor business.


Okay. And any views on frequent flyer?


Frequent flyer candidly needs to be a post consolidation sort of decision, because you really need to have a lot of scale to makethose -- those transactions work if you look at the one that's -- that's been successful up in Canada. And so you want to be ableto have all options on the table at the time you made that kind of decision, but ultimately, those are very valuable programs.


Okay. And if I can just ask Glen one followup on -- when you are looking at your corporate contracts and you're looking at thenegotiations with Corporate Travel Managers right now, what kind of discussions are you having in terms of the color on whatthey are willing to accept, perhaps, in terms of discussions about rate increases from here?


Well, historically we had -- we had some contracts that we fixed rates, and now we have gone to floating discounts off of thevarious structures, so essentially, most corporations as we continue to pass through rate increases due to fuel -- primarily dueto fuel -- those pass right on through to our corporate clients. And you saw this week the industry took another industry-widefair increase, and that will be reflective in -- in all of the discounts that we have with the major corporations.


Okay. Thanks for your help.

Operator

And the next question comes from the line of Bob McAdoo from Avondale Partners. Please proceed.







Yes. I know you said you have got a press conference tomorrow there in Paris. Without asking you to disclose destinations andall that kind of thing, there is a writer story that has gone over here in the last hour or so, which talks about a lot of the samekinds of things, about a joint venture between you guys and Air France. And I'm curious not so much as to asking you aboutwhat destinations or exactly what might be coming out that way, but more if there is a joint venture announced, how does thatimpact our financials? How should we be thinking about that in terms of modeling in terms of -- assuming there's a particularroute or two out of Heathrow that do in fact get announced, how should we be thinking about, what does that do to you andwhere do you -- how does it flow through in terms of revenues and expenses and bottom line?


Well, we got to be careful, Bob, we're not going to preannounce --


Yes. I'm asking you to tell us what you are going to do exactly. But if you end up in a joint venture, what -- how does that endup working?


It's a not going to have a dramatic impact on the balance sheet, if that's your question, or kind of the nature by which the resultswill be reported. It will be very positive. You can be assure it will be accretive, but it will not fundamentally change the reportingstructure of the entity.


If -- in n those kind of situations. You guys share seats on whether it is this particular one or in future joint ventures, should wejust assume that you share the revenues and you share the expenses on a particular flight that may be a part of that joint venture,and that --


I think it's fair to say that it would be more oriented toward the profit of the entities than the specific revenues and costs. Theywon't go into a new entity.


Got it.


Right, and Bob, you might think about it in terms of continuing to fuel increased RASM across the Atlantic. In other words itsdemonstration will come from the fact that you can leverage the two largest carriers together across the trans-Atlantic, and thegoal would be to continue to help fuel our RASM improvement across the Atlantic.







And if you have X number of round trips across the North Atlantic today, it's going to look a lot like that, but the basically thenet-net all we need to worry about is it ought to help the RASM on that.


It will help the RASM. It will definitely help the RASM.


That's about all we can say on that right now, Bob.


Okay. Got it. Thanks.

Operator

And our next question comes from the line of Mr. Robert Barry. Please proceed, sir.

Robert Barry - Goldman Sachs - Analyst

Hi, everyone, good morning.


Good morning, Rob.


Couple of followups, actually. There was an early question about international PRASM growth and there was a question aboutsignificant FX benefit. Could you tell us how much of the PRASM growth in Atlantic and Latin was related to currency?


We think it's about four points of year-over-year PRASM increase attributable to currency.


And does any of that make it to your bottom line? Or is that just the revenue impact?


Well, I think a fair chunk of it does, Rob.







Any ability to quantify how much the operations --


We don't have the numbers here. We're over in Paris. You can follow up with Jill after. We'll get you that number.


Okay. And then there was -- mentioned just a couple of minutes ago about the recent fair increase. In what percentage of yourmarkets did that fair increase stick?


Well, it's the entire network ex the low-cost carrier network. So it's about 40% to 50% of the markets. And I -- I will fully expectthat we see some traction from the -- from various low-cost carriers over the next few weeks here as fuel continues to remaincertainly high in the mid-80s.


Yes. And then, finally, I was wondering if you could update us on the progress you're making with the regionals, and in particularhow you feel things are going since you took over the ground handling this summer?


Good progress. Two -- two important things occurring there. One, we brought Don Bornhorst up, he was the CEO of Comair.And we brought him up to Delta, and have pulled together all the various parts of Delta under Don to take control of all of ourcontract carrier relationships. So that's the first important development. Second thing is we had ASA reached an agreementwith its pilots on a new contract going forward. Third, we took over the ground handling in -- at Atlanta, and we have begunto see improvement in the on-time performance and completion factor. It's a work in progress, but we feel pretty good aboutwhere we are given the most recent DOT numbers.


Okay. Thanks, guys.


Okay, Rob.

Operator

Next question comes from the line of Jamie Baker. Please proceed.






Jamie Baker - JPMorgan Chase - Analyst

Good afternoon, everybody. Richard, I'm actually seeing an headline across here African Airlines must merge says industry chief.I'm guessing that's not what you were speaking about earlier. When you talk about incremental aircraft, you talked about ademonstrable return on equity. I was hoping you could quantify a bit about what sort of return you look for? This is actually aconcept that seems to be lost on some of your competitors.


When you sit down to make that decision, you've got to make a decision that's based upon some reasonable assumptions overtime about the cost and the revenue performance that you can assume. You have got to weigh that against what happens ifyou are in a downturn and you have off -- a fleet that's all covered by fixed obligations and you don't have variable capacitythat's sort of free at the bottom of your fleet. We target, really, a return on capital, a return on investment of somewhere around15% when we make those decisions.


Yes.


So, and -- and look, candidly, that's going to come down, Jamie, what are you going to assume about what costs are going tobe over time. And what are you going to assume about what your revenue performance is going to be over time. So you gotto be careful about those input assumptions. But we generally target -- and we target that by the way when we're makinginvestment like winglets and seat reconfigurations -- Ed talked about these seat reconfigurations. In many instances on the seatreconfigurations we're getting a better -- much better product for our customer, and we're able to put more seats on the airplanewithout affecting pitch. So when you look in to each one of these investments we're making, we're targeting a 15% return oninvestment, and we're pretty disciplined -- the company is -- is very disciplined -- I mean that's what Ed does so well, is makecertain that when we do make these kinds of fleet investments, that we actually are going to see the returns, rather than justbeing proud of having new, shiny airplanes.


Okay. Well, that's helpful. And when you talk about evaluating this path for consolidation, I'm curious how long the study processis likely to take?


Jamie, we -- we -- as you know we just now have the team together. We have got the Board constituted, we have got -- theBoard is rapidly getting very educated in the industry and up to speed. We're on it. So we're not going to give you a date, we'renot going to give you a time line, but we're looking at currently.


Okay, and finally, your demand commentary noted that you were looking through November, does that imply that Decemberis -- is somehow looking different, or that you just don't have the requisite visibility? And also what is your approximate netinterest run rate going forward? We goofed in our model this quarter on that metric.







No, it wasn't to make any implications towards December at all. It's just as you know at this point in the cycle December looksabout where we think it should be, but November is -- it gives us the best transparency.


Right.


For interest costs, I know -- let me try to grab something here fourth quarter. Tell you what, I don't have the page in front of methat's got the fourth quarter interest costs -- forecast.


I might have it.


Why -- why don't we have Jill get back to you.


That would be lovely, I look forward to it. And thank you again, I appreciate it.


Okay. Thanks, Jim.

Operator

Next question comes from the line of Andy Shapiro from Midwest Securities. Please proceed.

Andy Shapiro - Midwest Securities - Analyst

Good afternoon. Other revenues looked like they were up very strong in the quarter, though maybe it wasn't quite as strongas it initially appears, because it looks like you did restatements to both mainline and other revenues in the prior period. I guessI would like to better understand what was sort of driving other revenues in the quarter, and how we should think about thegrowth rates going forward?


Other revenues were impacted by fresh start accounting. I think that was about $10 million on a year-over-year basis. And theother big change in the other revenue line was the -- was the breakout of the TOC, our MRO business. Insourcing activities. We






now gross them up. And that was incremental $25 million on a year-over-year basis. So even though restated the prior year, interms of closing up the prior year for reclassification purposes, we grew the business by $25 million this quarter over the thirdquarter a year ago. Those are the two largest changes in there. We have increased fees for administrative service charges, we'vegot some SkyMile benefits as well.


And how should we think about the growth rate going forward?


I would think that the rate you saw here for the third quarter is probably not too different than what you should expect to seegoing forward.


Okay. Great. Thank you very much.


And Jamie, if you are still on the line, I did identify the fourth quarter nonoutlook forecast is in the $90 million to $100 millionrange for the fourth quarter, if you are listening.

Operator

And the next question comes from the line of Gary Chase. Please proceed, sir.

Gary Chase - Lehman Brothers - Analyst

Good morning, guys. Or I guess good afternoon in Paris. Couple of questions for Richard as it relates to the -- just the restructuringplan. I know you voiced support for what I would call the major pillars of the plan anyway. Are there any tweaks that we oughtto be thinking need to be made looking forward? And secondly, I have heard you make reference a couple of times now to costopportunity, and I was wondering if you could elaborate. Do you think that the function of kind of off-setting inflation in thestructure? Or do you really believe that there is an opportunity to drive costs fundamentally lower than what was contemplatedin that plan?


I think it is going to initially off-setting inflation. The target -- we have industry-leading nonfuel CASM, and I do think that wecan sustain industry-leading nonfuel CASM. There are real innovation opportunities still ahead of us. The team has done a verynice job through the restructuring process. But you have to continually find new ways of doing business that can take thosecosts out, and we have a pretty long list of things that we're going to be examining in the planning process for 2008, especiallywhen you see fuel trending up the way fuel is trending up. But I guess in summary, I think you can count on our staying at thetop of the industry in terms of network nonfuel CASM.







Okay.


So -- so, two other -- couple of other points to your first question. One of the areas that we can leverage the plan even furtheris the reason why we're here in Paris, and Glen has done a nice job leading the effort there, but the opportunity that we havewith Air France across the trans-Atlantic, could create a very powerful entity. We have anti-trust immunity with Air France andwe have the number one position across the Atlantic from the U.S. They have the strongest position in Europe in terms of theEuropean hub. And combining those two together with anti-trust immunity could create an enormous amount of value goingforward and you're going to see the beginnings of that with some of the announcements we make tomorrow. I would say thethird part is we've -- we've got to step up our focus on the premium passenger, and that focus on the premium passenger isgoing to be particularly important in international and in international business class. And so you are going to see us continueto make more -- probably make more investment there, and more investment in driving the premium product for more premiumrevenues.

I would also say that we need to continue to push on the international side of the business. Every opportunity we have tocontinue to do the creative expansion that we have done internationally. The team is strong here with Bob [Bartell] and Glen,and that continues to be a significant opportunity for the organization. And I wouldn't leave off the fact that these -- these otherbusinesses are really interesting businesses. This MRO business, the Delta Global Services business, and the Delta AirElite business,you could imagine those businesses with the right business plans and the continued focus on growing them as stand-alonebusinesses, you could imagine those businesses at some point contributing a pre-tax number close to $100 million over -- ifyou built them right and you put the effort in to building those businesses collectively over the next three to five years, and Ithink it's sort -- they are hidden assets on the balance sheet. And airlines traditionally don't think about being in those kinds ofbusinesses.

We're in those businesses -- we're already in those businesses successfully, but we have always used them -- we've always viewedthem as contrarevenue. You just sort of netted them out against the department P&L. But we're going to start breaking themout and running them as a stand-alone -- stand-alone businesses. So I think there's a lot of opportunity there that would providesome diversification for kind of the monolithic revenue model we have in the industry.


Okay. And then could I just ask, Ed, (inaudible) made a mention of two things, state tax resolutions and insurance as you weregoing through the operating margin. Was there some operating benefit in the quarter we should think of as one time?


The state tax is. That was the reason if you look at our performance, we guided operating margin of 6% to 8%. I think we camein at 8.7%, the lion's share of that .7% was from a state tax resolution that came in at the very end of the quarter. We didn't havevisibility to the settlement when we gave guidance. The insurance settlement was smaller. We have got some ongoing discussionswith the -- these relate to business interruption down from the Hurricane Rita and Wilma and Katrina from the Gulf Coast in2005. We still have some on-going discussions and I would expect further settlements in the future quarter or two, not sizableenough to call out. We also obviously have some other things going the other direction I didn't call out either.







Okay. And then just one last one, I'm sorry. Glen, if there -- if you -- was there any story domestically on a regional level, anythingthat was -- obviously the overall performance looked very good for the quarter. Any -- anything stand out on the upside or thedown side?


Well, certainly, JFK is making the most progress for us, and with Jet Blue continuing to struggle there and they are perpetuallyraising fairs, the unit revenues in JFK are rising less dramatically. The rest of the network is relatively well balanced, but that'scertainly is the stand out.


Thanks a lot, guys.


Jamie -- Jerry, just one last one that came to mind that we are looking at in terms of sort of longer-term free cash flow, whichis, do we have to -- take all of the airplanes that we have in the POR, the new airplanes, and whether or not there are someoptions on fleeting that would, in fact, kind of reduce our CapEx going forward in the plan of reorganization. So we're lookingpretty hard at the POR, and figuring out what we can do to free up more cash flow from the original PRO. There may be some-- I'm not pretty to announce them yet. There may be creative things we can do on the fleet side to avoid some of the newaircraft purchases that we had assumed in that fleet plan. So, bottom line, can we -- it's a great POR -- can we really acceleratethe free cash flow?


Right. Right. And, Gary, this is Ed to follow-on what Richard was saying in terms of additional cost coming out on the business.We're going to be looking at, on an on-going basis, somewhere between a three to five points of additional cost coming outeach year. Now some of those we're going to have to go fund new cost pressures each year, but if you are trying to put a targeton the size of the benefits, we think you can still draw out of the network, which some of it -- that relates to growth in terms ofthe benefit of growth, but in average it's kind of three to five points of unit cost benefit, some of that's invested back in, whetherit be product or some other cost pressures.


And when you think about growing the airline, modest growth requires that you that, so that you can grow the airline at themarginal unit of production. Otherwise you end up with fully allocated cost for every additional unit of capacity that you add,and you don't want to do that or you won't get the marginal eco -- the value of the marginal economics.


Yes. Appreciate the color, guys.







Hey, thanks, Gary

Operator

This concludes your presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.

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Cover PageCorporate ParticipantsJill Greer (1 Turn)Richard Anderson (34 Turns)Edward Bastian (16 Turns)Glen Hauenstein (8 Turns)

Conference Call ParticipantsWilliam Greene (11 Turns)James Higgins (5 Turns)Bob McAdoo (9 Turns)Bill Masters (4 Turns)Robert Barry (7 Turns)Jamie Baker (6 Turns)Andy Shapiro (3 Turns)Gary Chase (6 Turns)

PRESENTATION1. Operator2. Jill Greer3. Richard Anderson4. Edward Bastian

QUESTIONS AND ANSWERS1. Operator2. William Greene3. Richard Anderson4. Glen Hauenstein5. William Greene6. Edward Bastian7. William Greene8. Edward Bastian9. Richard Anderson10. Glen Hauenstein11. Richard Anderson12. William Greene13. Operator14. James Higgins15. Edward Bastian16. James Higgins17. Edward Bastian18. James Higgins19. Edward Bastian20. James Higgins21. Edward Bastian22. James Higgins23. Edward Bastian24. Operator25. Bob McAdoo26. Glen Hauenstein27. Bob McAdoo28. Glen Hauenstein29. Bob McAdoo30. Operator31. Bill Masters32. Richard Anderson33. Bill Masters34. Richard Anderson35. Bill Masters36. Richard Anderson37. Bill Masters38. Richard Anderson39. Operator40. William Greene41. Richard Anderson42. William Greene43. Richard Anderson44. William Greene45. Richard Anderson46. William Greene47. Richard Anderson48. William Greene49. Richard Anderson50. William Greene51. Glen Hauenstein52. William Greene53. Operator54. Bob McAdoo55. Richard Anderson56. Bob McAdoo57. Richard Anderson58. Bob McAdoo59. Richard Anderson60. Bob McAdoo61. Glen Hauenstein62. Bob McAdoo63. Edward Bastian64. Richard Anderson65. Bob McAdoo66. Operator67. Robert Barry68. Richard Anderson69. Robert Barry70. Richard Anderson71. Robert Barry72. Richard Anderson73. Robert Barry74. Richard Anderson75. Robert Barry76. Glen Hauenstein77. Robert Barry78. Richard Anderson79. Robert Barry80. Richard Anderson81. Operator82. Jamie Baker83. Richard Anderson84. Jamie Baker85. Richard Anderson86. Jamie Baker87. Richard Anderson88. Jamie Baker89. Richard Anderson90. Jamie Baker91. Richard Anderson92. Edward Bastian93. Richard Anderson94. Jamie Baker95. Richard Anderson96. Operator97. Andy Shapiro98. Edward Bastian99. Andy Shapiro100. Edward Bastian101. Andy Shapiro102. Edward Bastian103. Operator104. Gary Chase105. Richard Anderson106. Gary Chase107. Richard Anderson108. Gary Chase109. Edward Bastian110. Gary Chase111. Glen Hauenstein112. Gary Chase113. Richard Anderson114. Edward Bastian115. Richard Anderson116. Gary Chase117. Edward Bastian118. Operator

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