Delta Air Lines, Inc.
Q1 2015 Earnings Call Transcript

Published: 15 Apr 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Delta Air Lines First Quarter 2015 Financial Results Conference Call. My name is Sherlon and I will be your coordinator. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Jill Sullivan Greer, Managing Director of Investor Relations.

[Jill Sullivan Greer:]

Thanks Sherlon. Good morning everyone and thanks for joining us. Here in Atlanta today we have Richard Anderson our CEO, Ed Bastian our President, and Paul Jacobson, our CFO, and we have the remainder of the leadership team here in the room with us for Q&A. Richard will open the call, Ed will then address our financial and revenue performance, and Paul will conclude with a review of our cost performance and cash flows. 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 does contain 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 the reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I will turn the call over to Richard.

[Richard Anderson:]

Thanks Jill. This morning we reported the best first quarter in Delta’s history producing solid top line growth, margin expansion and substantial free cash flow. Our pre-tax earnings grew 34% from last year to $594 million despite $300 million from early hedge settlements in the quarter. We earned $0.45 per share versus a consensus of $0.44. We grew our top line revenues by 5%, increased our operating margin by 1.0% to 8.8% and generated a return on invested capital of 22% for the last 12 months. Our strong cash generation continued with 1.1 billion of operating cash flow and north of $500 million of free cash flow in the first quarter. We contributed 900 million to our pension plans, maintained net debt levels of just over $7 billion and returned $500 million to shareholders in dividends and buybacks. We continue to run by far the industry's best operation. In the March quarter we delivered 98.6 completion factor that had a lot of tough weather days in it but we did have 25 days with zero mainline cancellations. Our mainline on-time rate improved 3.1 points to 83.4%. This operational performance is contributing to solid increases in customer satisfaction, we have achieved all time highs in our Net Promoter scores and our customer complain rate has decreased by 23% so far this year. These outstanding results were made possible by the dedication of our employees who work hard everyday to provide an industry leading customer experience and outstanding returns to our shareholders. Looking forward the business on the whole is performing quite well, while the strong dollar is creating a $600 million headwind for our international revenues, it is also a factor in keeping fuel prices down which will contribute over $2 billion in gross savings year-on-year in 2015. We are looking at June quarter operating margins of 16% to 18% up over 200 basis points year-over- year with over $1.5 billion of free cash flow in the June quarter. These record results in cash flow show that the strong dollar is a net positive for Delta. We will use that cash flow to further reduce our debt levels and buyback our stock. These are permanent positive changes to our capital structure. But even with this record level of performance, we have a lot of work left to do to improve our business for our owners. The domestic business is performing very well and demand is solid. Our network and product investments combined with the world class customer service of our employees have widened our domestic revenue premium to the industry which currently stands at 115%. We will continue to be disciplined with our domestic capacity levels, with our domestic growth driven by higher gauge in fewer total airplanes which will cause us to improve efficiency and drive higher operating margins. On the international side, like all U.S. global companies, we are working through volatile currencies around the world. We are taking action to address these issues by reducing our international capacity by 3% year-over-year this winter. This is a six point reduction versus our planned capacity levels. Unlike other U.S. global companies, our margins and profitability will expand in 2015 in the phase of currency volatility because of dramatic fuel cost reductions and top line growth. With flat system capacity for the fourth quarter, we should get our unit revenue growth back on the right trajectory. Cost productivity is a core part of Delta and we've kept our non-fuel CASM growth below 2% for seven consecutive quarters. We have good control of our costs and we continue to drive productivity through domestic upgauging, technology investments and leveraging our scale. The biggest cost opportunity ahead of us is fuel. We restructured our hedge book this quarter which will put the bulk of our hedge losses behind us after this quarter. So starting July 1, we will have significant tailwind for fuel with fuel prices 25% lower than what we will pay in the first half of the year. Over the long-term our focus is on building a durable business model not just through our margin expansion efforts but also by taking risk out of our enterprise, we have the best labor relations in the industry with a strong paper performance culture and a history of working collaboratively with all of our employees. On business risk, we expect considerable time diversifying our revenue streams and building out a geographically balanced network, 15% of our passenger revenues are part of immunized joint ventures and 20% of total revenues from non-ticket sources. Finally, we are reducing our financial risk, we have lowered our fixed cost structure uniquely with our aircraft purchase strategy which gives us the flexibility to quickly make capacity adjustments. We have also substantially strengthened our balance sheet with nearly $10 billion in debt reduction in less than five years. We are only two notches away from investment grade and with another strong year in 2015, we expect to operate Delta with investment grade credit metrics by year end. With a clear path to long-term margin expansion and reduced risk, we get improved earnings predictability and better visibility to the long-term cash generation of this business. We are investing in our future to healthy base of $2 billion to $3 billion annually which is more than sufficient to support our strategies, and this year we expect to generate $4 billion to $5 billion in free cash flow after those investments, less than 10% of the S&P 500 generate free cash flow at this level. In 2015, Delta will once again comfortably exceed our long-term commitments to our owners and despite being one of the top performers in the S&P 500 over the last year, last several years, we believe there is considerable upside in Delta stock. Our free cash flow yield is roughly 12% to 13% compared to the S&P Industrials average of 5% to 6% and our PE multiple is at roughly half the level of this peer group. We are working through our updated long-term plan now. We'll take the plan to our Board at the end of this month. Part of that work includes developing the next set of metrics that will guide the business including the optimal long-term debt target and level of shareholder returns for the company. We believe this plan will give long-term equity holders very clear guidance on our future and what they can expect from our cash flows and it will show that Delta has earned a place among the top tier S&P 100 companies. We look forward to sharing those plans with you in mid-May. With that I'll turn the call over to Mr. Bastian and Mr. Jacobson.

[Edward Bastian:]

Thank you, Mr. Anderson, and good morning, everyone. We delivered a record March quarter with pretax income increasing over 30% to $594 million, despite a $300 million early hedge settlement. Our net income was $372 million or $0.45 per share versus consensus of $0.44. We expanded our operating margin by a point to 8.8% which includes the impact of the early out of quarter hedge settlements, which cost us roughly three points of margin. These results are in line with the initial margin guide we gave in January. The quarter was obviously impacted by our $1.1 billion in hedge losses, thus to give you a better sense of the core performance of the business. End market fuel prices our margin for the quarter is 17.8% among the best in the industry and provides a good go-forward perspective on our margin expectations given our hedge losses will be largely behind us as of July 1. I want to thank the great Delta people for their dedication and determination that made these record results possible. We continue to grow the topline which will be up 5% to $9.4 billion against a back drop of roughly 45% in lower market fuel prices and $105 million in currency headwinds. Corporate revenues increased 3% despite pressure from currencies, with strength in the Trans-Atlantic driven by our joint venture with Virgin Atlantic and from the financial services industry both up double-digits in the March quarter. Our recent survey shows corporate travel managers continue to be optimistic about the remainder of the year with roughly 85% of respondents anticipating they will maintain or increase spending over the balance of this year. We also saw good traction with our ancillary revenues. Merchandising revenues including branded fares, first-class upsell and preferred seating grew by 27% and contributed an incremental $50 million to our top-line this quarter. However, the strong dollar and lower international surcharges are causing our revenue performance to fall short of expectations. As Richard mentioned, we are taking action with our winter capacity plans to address these issues which I'll give details on in just a few minutes. First, on the March quarter. Passenger unit revenues declined 1.7% driven by 1.5 points of currency effect. However, the underlying demand environment is stronger than the RASM optics would suggest. In fact on a currency neutral basis, unit revenues were essentially flat with last year's levels. Our domestic performance remains solid with RASM flat on 5% higher capacity. And as a reminder, two of those capacity points were caused by the first quarter 14 winter storm cancellations which created one point of RASM benefit that we had to overcome this year. Our Seattle expansion is performing well with domestic unit revenues up 2% on 55% higher capacity. We also saw strength in our JFK long haul markets, especially the Transcons as we continue to make corporate gains in New York and Los Angeles. Our hub to hub markets also performed well with 4% RASM gains. In the Trans-Atlantic, unit revenues declined 3% driven entirely by a three point currency headwind on four points of higher capacity. Strength in core Europe and London offset headwinds in Africa, the Middle East and Russia which pressured entity unit revenues by more than two points. To give perspective, these markets collectively saw unit revenue declines up 15% despite 10% capacity reductions. We're pleased with the performance of our two Trans-Atlantic joint ventures. This quarter as these relationships with Air France, KLM, and Virgin Atlantic allowed us to expand margins despite significant currency pressure on the euro and pound. In Latin America, unit revenues declined 4% on 13% higher capacity. The entirety of the decline was driven by currency and pressure from last year's Venezuela in capacity reductions. Our partners GOL and AeroMexico contributed $33 million in incremental revenues this quarter and we have more opportunity to expand these relationships. Along with AeroMexico, we’ve filed an application for anti-trust immunity for a new $1.5 billion joint venture between the U.S. and Mexico. This is a significant opportunity that expands options for customers to the largest market in Latin America. We face our toughest revenue environment in the Pacific where unit revenues declined 9% with roughly seven points of the decline driven by foreign exchange. Specifically, the Yen revenue headwind in the quarter was $40 million net of hedges. For the remainder of 2015, our Yen hedges are valued at about $110 million. Now looking forward to the June quarter, we are forecasting total revenues to increase about 2% with RASM down 2% to 4% on 3% higher capacity. About three points of that RASM decline is attributable to currency and international surcharge declines. It is also important to note that we are lapping a very strong Q2 2014 performance in which we grew system RASM at 6% which is the toughest comp we'll face this year. Our summer revenue performance combined with significantly lower fuel prices and continued strong cost controls should result in another record profit with second quarter operating margin of 16% to 18% up two points year-on-year. Excluding hedges our second quarter margins are expected to be north of 20%. Domestically, the demand environment remains stable and we expect unit revenues to be roughly flat this quarter on 3% to 4% more capacity. This is consistent with the performance we saw in March of what we're already seeing in April. We expect international RASM to be down in the high single digits in Q2 with five points of impact from currency. In addition to currency, we're also continuing to experience softer demand trades in certain markets including Brazil, Russia, the Middle East and Africa. However, revenue headwinds from currency will be more than offset by cost reductions and fuel price declines. Cash flow and margin performance in the international entities will be at record levels this summer. Post Labor Day, we will reduce our planned international capacity by six points resulting in a 3% year-on-year reduction to get our RASM performance back to better levels for the winter. This reduction will be a key component to achieve the pricing improvements necessary to drive longer term sustainable margin expansion. In the Trans-Atlantic, we'll reduce our planned capacity levels by five points resulting in a 0% to 2% capacity decline for the fourth quarter. The biggest adjustments will be in Africa, India and the Middle-East which will see a reduction of 15% to 20%. In addition, we will suspend service to Moscow for the winter season. In Latin America, our network investment tails-off later this year with capacity growth less than 2% by the fourth quarter. To address the RASM pressure, we've seen from the devaluation of the Real, we'll reduce capacity to Brazil by about 15%. We'll also make adjustments to longer haul ethnic markets that are highly reliant on foreign point of sale traffic. These capacity adjustments along with lapping the impact of last year's capacity reductions in Venezuela should drive a better unit revenue result. Pacific will take longer to show improvement as we take the next steps in our network restructuring there. Through gauge reductions, we'll take another 15% to 20% of capacity out of Japan including a 25% reduction in our intra-Asia and beach lines since those markets have been significantly impacted by the devaluation of the Yen. These capacity reductions will be achieved through down-gauging which will allow us to retire six more 747's by the end of the year. In total, our Pacific capacity will decline 10% in the fourth quarter. We should have good margin and cash flow performance through the seasonally strong second and third quarters. Once the peak summer season ends, we are moving quickly on our capacity actions which will continue to drive momentum in the business. Now, I'll turn the call over to Paul to go through the details on cost and cash flow.

[Paul Jacobson:]

Thank you, Ed. Strong cost control is a highlight again this quarter and was a key driver of our strong margin expansion we realized before early hedge settlements. Total operating expenses increased by $356 million driven largely by higher volumes and investments in our product and people, as well as by higher profit-sharing expense which was up 40% versus last year. Non-fuel CASM declined 1.4% on a 5% capacity increase driven by up-gauging initiatives, lower maintenance expense due to the 50 seat retirements and other productivity improvement efforts. FX also benefited non-fuel CASM by about a point. Moving on to fuel. Our total fuel expense increased slightly as lower market prices were offset by higher consumption at our hedge losses. Our all-in fuel price was $2.93 per gallon down from $3.03 in the same period last year. The early settlements added about $0.33 per gallon for the quarter. The refinery made an $86 million profit this quarter versus a $41 million loss in the same period last year. The improvement was driven by lower group costs driven by an increase in North American consumption, a continued favorable crack spread environment and increased throughput. Over the last four quarters, the refinery has produced a cumulative profit of over $220 million. We expect that to continue to build in 2Q with a projected profit of approximately $80 million. As Richard mentioned and as we disclosed previously, we took steps in the first quarter to restructure our second half 2015 hedge book in order to balance our exposure while still retaining some level of longer term upside protection. In February, we took an advantage of the 20% spike in forward curves to settle about a third of our second half 2015 hedges for approximately $300 million. We also extended a similar portion of our exposure out of the back half of 2015 and into 2016. While the second quarter will have approximately $650 million in hedge losses, the average price per gallon will be significantly lower than what we realized in Q1. Specifically, we are projecting an all-in fuel price of $2.35 to $2.40 per gallon for the June quarter. For the June quarter, we are approximately 40% hedged against an increase in prices but have nearly full downside participation of about 90% all the way down to Brent prices of $40 a barrel. For the second half of the year, given the hedge book restructuring, we expect our fuel price per gallon to be consistent with the industry average. We have a total of about $300 million in hedge losses for the second half and 90% to 95% downside participation to a Brent price of approximately $40 a barrel. This will equate to roughly 25% lower price per gallon for Delta in the second half relative to the first. For the second half of the year, we expect our all-in fuel price to be in the range of $2 and $2.05 per gallon which is approximately $0.70 to $0.75 lower than 2014. Overall, we continue to expect fuel costs to be an enormous tailwind and provide a net benefit of $2.2 billion for Delta for the year. We are also well positioned to benefit of fuel remains at these levels in 2016. As a result, our already strong cash flow will continue to grow which will allow us to further strengthen the balance sheet by paying down debt, fund our pension plans, and return cash to shareholders in 2015 and beyond. For the March quarter, we generated more than $1 billion of operating cash flow, net of $900 million in pension contributions. This compares to $605 million of pension contributions in last year's March quarter. We subsequently made substantially all of the remaining 2015 contributions for a total of $1.2 billion for the year. We also reinvested roughly $600 million back into the business primarily related to aircraft modifications and the purchases required for our domestic re-fleeting. For the June quarter, we are projecting $1 billion in capital expenditures primarily related to 737-900 and A330 deliveries, as we continue to reinvest in the business for the long term. With more than $500 million of free cash flow we generated during the March quarter, we continued our path of increasing shareholder capital returns with $75 million of dividends and $425 million of share repurchases. To date, we have completed $1.3 billion of our existing $2 billion authorization. Adjusted net debt at the end of the quarter was $7.4 billion and our debt reduction lowered interest expense by $55 million for the quarter. We continue to expect strong free cash flow generation going forward and remain committed to a capital allocation strategy that drives value for our shareholders. We look forward to updating you on our longer term capital deployment plan in May. In closing, I'd like to once again thank the entire Delta team for another record breaking quarter. We have the best employees in the industry and our performance is driven by their contributions. Thanks. And with that, I'll turn it back to Jill.

[Jill Sullivan Greer:]

Thanks, Paul. Sherlon, we're now ready for the Q&A portion of the call with the analysts, so if you could give instructions on how to get into the queue.

[Operator:]

[Operator Instructions] We'll have our first question from Darryl Genovesi with UBS. Darryl Genovesi Hi, good morning. Thanks very much for taking the question and thanks for all the detail. I guess just the first one. When we think about the future outlook from here, and I know you're not ready to give 2016 capacity guidance yet, but should we think about this as a reduction in kind of the overall capacity levels that you would see from Q4 forward, or is this capacity cut more about a bigger swing between the peak periods and the off-peak periods? Edward Bastian Darrel, this is Ed. We are – the guidance we've provided for the post Labor Day you can expect should carry through the winter season into the spring of 2016, and obviously at that point we'll be better position to understand where fuel prices are and where currency are and it focus as you know largely on the international network. So, we need some time to see how the volatility settles a bit, but we're keeping all our options open. Darryl Genovesi Okay. Thank you. And then also I had a question on tax. At your Investor Day and maybe this one's for Richard, you alluded to the potential to maybe pay a tax rate less than the 38% you've been running through the P&L by taking advantage of some of the international JVs. I suppose you're not ready to provide an update on exactly what rate you might expect, but was wondering, if that is the case, should we also expect a reduction in the book tax rate going forward for the purposes of the P&L, and then also perhaps a retroactive revision higher to the current NOL balance? Richard Anderson Well, the question with respect to the book tax rate is above my pay grade. I don't know whether I would really be able to explain that. I do think that we'll be in a position probably by our investor update in December of this year to update you on our tax strategies. We do have viable options given the breadth and scope of our international operations to have a positive impact on our tax rate. Darryl Genovesi Thank you. Richard Anderson And Bill Carroll here, our Controller and the person to whom I direct all accounting questions. Bill Carroll There won't any impact on the NOL? Darryl Genovesi I'm sorry, well, I didn't hear you? Bill Carroll I'm sorry there will not be any impact on the net operating losses. I mean, those are pretax numbers that will come through and this will be at what rate they get benefited at? Darryl Genovesi Okay. Thank you.

[Operator:]

We'll go next to Julie Yates, Credit Suisse. Julie Yates Good morning and thanks for taking my question. A question on the revenue environment, so Q2 PRASM marks the fourth quarter of deceleration and the reasons are well telegraphed, but it seems that Q2 could be shaping up to be a little low point for unit revenue growth and that Q3 directionally improves with the prospect of potentially returning deposits of comps in Q4 since headwind start to anniversary, capacity will be lower and even maybe the branded fares contribution run rate will improve. Is this the right way to think about unit revenue production as the year progresses? Edward Bastian I think that consistent with our expectation, surely, we've not guidance beyond Q2 right now, but directionally, yes. Julie Yates Okay. Richard Anderson That mean the one thing you not miss in all that is that we will have really fine margins in Q2 and Q3 margins we haven't seen before. Julie Yates Sure. And then maybe one for Ed, can you breakdown the Q2 PRASM expectation by international geography and the currency hit that you expect in each? Edward Bastian I don't know that I have all the details to Q2. Our focus – the guidance we've given is more post Labor Day. We expect a – I think we said about three points of the international – excuse me, of the system wide RASM decline to be driven by currency and the fuel surcharge declines which covers probably say 75% of what the overall international RASM decline Julie Yates Okay. Edward Bastian So on balance our minus two to four is a effectively similar to what we saw in Q1 and that's draw the majority of that unit revenue overall decline. Julie Yates Okay, great. Thank you very much.

[Operator:]

We'll go next to Andrew Didora Bank of America. Andrew Didora Hi, good morning everyone. Look, I know we'll be getting more into the capital returns and the balance sheet story in a few weeks, but I just wanted to ask if maybe you can frame your thoughts or maybe some factors that you consider in terms of setting a leverage target and how that target changes over the course of a cycle. Richard Anderson This is Richard. With candidly we look out on our five year plan even with high fuel price assumptions and a pretty conservative plan. The enterprise just continues to generate more cash particularly as we get through investment grade credit metrics. You know we can continue to keep the return on invested capital that the kinds of rates that we see today. So, when we do think about the capital investment level which is really the first piece of the puzzle, we are really comfortable that the $2 billion to $3 billion of balance sheet CapEx is a really comfortable rate long term. It’s more than – significantly more than our depreciation and so we’re comfortable with that level of CapEx investment in the business. And really what is driving the long term debt target is where we want our weighted average cost of capital to come out number one, and number two, being certain that we have the business really derisked because the best way to provide a long term stable investment for long equity holders is to make sure we have the best labor relations in the industry and make sure that we have a much lower data on our balance sheet because you have events like we’ve had in the last six months where currencies become much weaker against the dollar we have you know Ebola in Africa, Yen at 120 and Russia and the Middle East because of global political issues creating headwinds in our business. And I just used those as examples. So the way, the best way to make Delta secure in that environment is to have low levels of debt. But we don’t want those levels in their being so low that our weighted average cost of capital ends up going up because it’s so heavily equity weighted. Andrew Didora Guys, that’s very helpful. Thank you. And one last one for Paul, I think you mentioned to date you've contributed $1.2 billion to the pension plan. Are you done for the year or do you continue -- do you plan to continue to fund that throughout the course of 2015? Thanks. Paul Jacobson Good morning, Andrew. That’s substantially completes our contribution for 2015. There’s $5 million here and there that can’t vary by timing based on funding rules, but its substantially done. Andrew Didora Great, thank you.

[Operator:]

We’ll go next to Mike Linenberg, Deutsche Bank Michael Linenberg Yeah, hi I want to go back on you know Eddie has talked about Japan and some of the impact that that had on RASM. You didn’t say much about China and you know I think we just got some additional information out from China that suggest that the economy is growing at the slowest rate against since ’08 or ’09, that said you did have a change in the Visa requirements. So I’m just – are you really seeing any softness out of China or is it just because of the structural change that’s going on in the market place with the Visa restrictions being lifted for the most part, are you still seeing good flows out of that market? Richard Anderson Yes Mike we are seeing good flows, but candidly the industry capacity between China and the U.S. I think the number in Q1 was about 20% of an increase. So either the supply is certainly outstripping demand but demand is strong and our early indications on our -- the new flight we were launching between LA and Shanghai are very positive. So we’re not the predominant player in China at this point, so we’re still building strength as we go. Michael Linenberg Okay, great and just another second question and Ed and maybe even Glen can answer, you know the discussion about you know maybe allowing more of long haul flights out of LaGuardia and I mean I think specifically they have talked about LAX and San Francisco, is that something that makes sense that something that you are in favor of, is it at the risk that if one or two carriers end up doing it everybody tries to get slots to do it and you end up having too much capacity in Transcon market just your thoughts on that? Edward Bastian We are supportive of the lifting of the preliminary rule. We think it’s something that’s incredibly important for New York as they build the future of aviation in the New York Metropolitan area and revisiting an outdated ruling from over 30 years. We are prepared and we’re ready to respond if it does get lifted and I think it will be good for the city, I think it will be good for us as a company and I think it will be great for consumers in the metropolitan area. Michael Linenberg Okay. Thank you.

[Operator:]

We’ll go next to Jamie Baker, JPMorgan. Jamie Baker Hey good morning, question for Glen and follow up to Mr. Linenberg’s question. Should we assume that any long-haul LaGuardia flying would complement the JFK flying, as opposed to grow it? And are 767s supported at the terminal there in LaGuardia? Glen Hauenstein Well, an interesting factoid is that the 767-400 was developed for LaGuardia by Boeing for Delta. So the answer is, yes, 767s can fly. 757s can also fly and well I wouldn’t comment on our exact schedules but I would expect it was finding to demand in a set where the constraints were lifted and we would likely serve both airports from the West Coast. Jamie Baker Okay and just to clarify, I was thinking more about the 300 since those are in the trans configuration and -- the 400s are not but it’s a good point that you make. A follow up for Richard as it relates to pilots and you know a year ago you know I think the conventional wisdom was that the industry might overtime move closer to Delta as it relates to profit sharing, American was obviously it was an outlier but many view that as unsustainable. Today, I think it’s fair to ponder whether Delta might move closer to where others in the industry are as opposed to vice versa. I know you are philosophically in favor of profit sharing but would we be re-missed and if we’ve contemplating a revision bigger formula beginning in 2016? Richard Anderson You know we’re in the midst of negotiations with our pilots so it’s pretty mature to really comment on that. But our formula has really served us pretty well. I mean I think that we are working right now on our five year plan and there aren’t very many companies in the S&P 100 that are going to approach the kind of quality of earnings and the quality of cash flows we have with the structure that we have there. Jamie Baker Okay. And just a quick follow up on that, on the five year plan since you brought it up, Richard have there been any changes into in regards to your long term oil price assumption? Richard Anderson Well, I mean we’re still in the midst of working on our five year plans, so as I said my remarks were due to present it. We’ve had several meeting with our board. We have another meeting with our board and then we’ll see you and New York I think on May 13. But you know that our long term philosophy and this is how we’ve always run the airline is to assume a high fuel price, and to assume a much higher fuel price than the forward curve. And that does a lot of good things for you. I mean we put it this way, having tried different ways to budget airlines over a really long period of time the only rational way that we found is to assume a high fuel price over the long term, because you are never disappointed when its lower. But if you assume – if you assume a low fuel price then the fuel price ends up being high then you are put in a situation where you’ve got to go tear apart the company in order to get your cost down. The other thing it does is it puts a discipline in our pricing and in our revenue management that you know because our revenue managers and our pricers, they don’t get the benefit of making an assumption, a planning assumption over the long term that there’s going to be a few good guy out there. And that the fuel has to be recaptured, that we use the high fuel price and then we’re going to put the burden on our team to be sure we capture that and then lastly when the fuel price is high then you are not going to build a whole lot of capital and a long term plan to buy a lot of extra airplane, it’s going to force capital efficiency both in terms of the airplanes you select and how many airplanes you buy. So that philosophy won't change. Now what our numbers are we’ll wait and talk to you about that in May. Jamie Baker Sure. All right as always I appreciate a very thorough response. Thank you, Richard. Thank you, Glen. Take care.

[Operator:]

We’ll go next to William Greene, Morgan Stanley. William Greene Hey there good morning. Richard can I ask you a follow-up on that last point and that is do you think about this year than given effectively fuel surprise significantly versus a long-term assumption in the plan. Does this your sort of appears kind of a peak margin year and so we can kind of think about well they’ll take actions next year on both capacity and cost if fuel is higher to make sure that it turns out that this is not a peak margin. How do you think about adjusting for that or as you have these anomalies and you think about the long-term trend instead? Richard Anderson Well if you think about running the enterprise to be able to capture higher fuel prices and you build in the kind of operating leverage that we consistently achieved in this business you’re going to continue to improve margins. And it will translate into long-term double-digit EPS growth. So when you have a model where fuel cost is covered by the business. In other words higher fuel prices are going to be taken into account either in our pricing or our capacity. You can then build around that all the operating leverage that we've have a really good track record of developing and you can continue to produce that mid single-digit EPS growth. William Greene And when you think about the – that sort of plan within an industry context it seems at least one risk seems to me that some of the smaller competitors when you put them in aggregate maybe 20%, 25% of the capacity out there in the domestic market they may change their fuel price assumptions. How do you counter that, how do you think about the competitive dynamic there such that you’re not sort of losing out if you will or losing share or is that not really concerning or you don’t care about share? Richard Anderson We’re a margin driven enterprise, a margin and a cash flow driven enterprise. So we really look at the totality of the pricing environment with our capacity to be certain that we’re going to hit the long-term financial targets that we layout in our five year plans. William Greene Is there any evidence that the industry is losing discipline in your mind or not so much? Richard Anderson I wouldn't comment on that, because that I think it’s just too much too much commentary on future capacity of the industry, but when you look at what Delta has been able to do even in this quarter when you take our fuel hedges away in this quarter and we would have been approaching an 18% margin. So when you look at what we were able to do with capacity plus pricing it’s really pretty remarkable that the underlying business of Delta in the first quarter x fuel hedging decisions that were made in prior quarters. So you’re looking at an 18% margin I mean that is remarkable. William Greene Agree. I appreciate the time. Thank you.

[Operator:]

We’ll go next to Helane Becker with Cowen & Company. Helane Becker Thanks very much operator. Hi everybody, thank you for the time. Just, I think Richard you and not to negotiate on the conference call. But I think you exchanged open or sort your pilots already for the contracts. Can you just say where - what expectations are relative to both sides expectations are you far apart is there going to be tough negotiation or can you offer any comment on that? Richard Anderson Let me offer my best commentary on that, which is to look at our track record and the track record we have but there are pilots is something that we're proud off, which is look back all the way to 2007, 2006 actually going back to 2006 and I think there’s been one, two, three, four, five, five agreements that were all done in advance of event able dates. And remember over that same period of time, we’ve proudly posted the most dramatic financial performance of any enterprise over that timeframe. And S&P 100, I mean there maybe others I haven’t gone on check. But by any measure it’s this process and it served us well and I think it served our pilots well, because the pilots are key leaders in making Delta a preferred airline for our customers. And we're going to continue. We're working very hard and hopefully have a good confident path to continue that same process in practice. Helane Becker Thank you very much. Can I just ask Ed a question? I think you have quoted in a trade magazine that I read yesterday saying that foreign currency headwinds this year would be $1 billion. And then on the conference call you talked about $600 million. And I'm just kind of wondering if they took your comments out of context, or you can reconcile the difference? Edward Bastian Thanks Helane. I was talking in general terms, and I was also including in my thought process on the $1 billion the impact of fuel surcharge declines as well, which is an incremental cost, largely related to currency since it's affected by fuel prices and the strong dollar. So, we're in the same neighborhood. Helane Becker Perfect. Okay. Thank you very much for your help.

[Operator:]

We'll go next to Duane Pfennigwerth, Evercore ISI. Duane Pfennigwerth Thanks. Good morning. I wanted to ask you about your international margins. And obviously, it's a little tricky to do on the first quarter, given the hedge impact. But as we think about the second quarter, can you talk about the regions where you're seeing year-to-year margin expansion? And can you also, I wonder, give us sort of a rank of your profitability by region, sort of, what would be kind of your most profitable region as we think about a seasonally stronger June quarter? Richard Anderson Duane, we are not going to give you all the details you asked for as you would expect. But when you look at the margins of our international business, and you -- again you have to take the hedges out because they will largely be out of there by July 1, and those are singular decisions taken corporately, not in the regions. All the margins in our businesses look really healthy in the upcoming summer period. I'd say the strongest margins are -- it will continue to be in Europe despite the weakness in the euro. We have a growing business at Heathrow, which is doing fabulous. We have a great relationship and again strong partnership in -- with Air France KLM and Alitalia, so the continents also looking very, very solid and very strong. Our line is building up; seasonally Latin America in the second quarter is not as strong. There are off season, but absent Brazil which is having some real struggles. The majority of Latin America is doing very well. In the pacific business we're in the midst of our restructuring, and I think you have to wait to see the effects of that by the end of the year about summer. Duane Pfennigwerth Okay. Thanks. On Latin I wonder, just a follow-up to Julie's question, the down 4% unit revenue in the first quarter, can you talk about sort of the shape of that trend into the second quarter? Paul Jacobson The shape is relatively similar. I think as you move through the quarters, you actually get the currency headwind getting stronger. Because, as you know, international so far in advance, and so those tickets tend to be out 60, 90, 120 days, all the way up to six months, nine months. And as we were selling last fall for the spring, we were selling them at very different exchange rates. So you see the exchange rate differentials becoming more of a headwind in the second quarter. And as one of the previous questions indicated, the good news is as you head towards the fourth quarter you start to see that headwind become flattening experience for international. I think we're positioning and Ed has charged us to go into the next quarter with positive revenue momentum and that's our plan. Duane Pfennigwerth Okay. Appreciate that and I want to sneak one more in here. The 10% of your expenses that are not USD, assuming that's primarily labor and primarily euro, any color you can offer there is appreciated. Thanks for taking the questions. Richard Anderson Duane, actually it's primarily like navigation charges and local expenses for handling, and it's really scattered throughout the globe. Duane Pfennigwerth Thank you. Jill Sullivan Greer Sherlon, we're going to have time for one more question from the analyst.

[Operator:]

That will come from Dan McKenzie, Buckingham Research. Dan McKenzie Hey, good morning, guys. Thanks for squeezing me in here. Just going back to the margin questions earlier, Richard, I think you've said more than ones this year, you believe Delta could expand margins this year holding fuel constant. And just based on the second quarter here, what imply a much stronger second half of the year than what we all are modeling, and that's presumably on both cost and revenue. So I guess my question is, is the impact from FX simply greater than expected to hit that outcome at this point, or was that comment really tied to hitting the goal at some point later this year? Richard Anderson Getting that question? Edward Bastian Dan, this is Ed. Could you clarify? Because I think you asked several questions in one. Dan McKenzie Okay. Sure. So, you know, really comes down to this goal of being able -- of Delta being able to expand margins this year holding fuel prices constant. So, throwing in the '14 jet fuel price into the '15 and expanding margins and… Edward Bastian Right, right. Dan McKenzie I think Richard has shared more than ones that he believe Delta could do that. I'm just wondering if the FX headwind at this point is simply greater than expected to hit that or was that comment really tied to just to specific quarter some point later this year. Edward Bastian Well, certainly FX has deteriorated, and I don't think any of us anticipated the significance a year ago what we'd be facing. But yes, I'd say that's correct. We are still focused on expanding our core margins; as we said, if you took the hedge loss out in Q1 and we had an 18% op margin and 15.5% pretax margin, substantial improvement in raw numbers. And I think there is margin expansion there if you were to -- I don't have the math in front me, but if you were to fuel adjust on a year-over-year basis, you'll continue the expansion in the quarter. Dan McKenzie Okay. Very good. And then a second question here, Ed, since I guess I have you. This is a soft question. Delta has made enormous investments in the business over the past few years obviously. And I would imagine that that strengthens the brand by a significant degree and that of course should benefit revenue. But how are you measuring the investments made in the business? Is the net promoter score really the best measure for measuring the brand? And if so, how was that evolved with the investments that you've made in the business? Edward Bastian Well, our net promoter score is, we believe, the best measure of brand performance and it's across multiple consumer industries, not just the airline industry. And we've seen a very tight correlation between improvements in our unit revenue performance and outperformance that's directly attributable to customer satisfaction and net promoter score. In the first quarter, our overall unit revenue performance on the domestic was 115, indexed against our competitors, which is substantial, and we had close to 40% net promoter score in the first quarter as well on the domestic business. So, there's no question. It's a -- we think it's the strong measure. It's what we used in our internal incentive metrics. And obviously, you need to drill down to far more specificity when you really can't look at just the broad score; you got to then look at all the drivers that accumulate that score. And we're constantly focused on continuing to make investments to improve areas of underperformance on a customer standpoint, particularly internationally. But we do think and we've been pleased with the tracking that we've had with net promoter score, our financial performance, our employee moral and satisfaction, and obviously our financial performance and our stock price. Dan McKenzie Fantastic. Richard Anderson The one thing you can't miss in all that is -- Dan, is that a lot of the investment we've made has had a huge payback. I mean, that investment -- the investment you've seen us make is also was driving non-fuel CASM seven quarters in a row below 2%. So, you see -- and when you run a really, really good operation, your unit costs are lower. I mean, Ed, you had a -- what was the fact you had yesterday on completion factor at Delta versus our competition? So, if you were to look at 2014 domestic performance, we had 197 days last year with perfect completion; and obviously, when you run a perfect schedule that makes everything much better for your customers, for your employees, for your operation. If you were to add Southwest American and United combined in 2014, their total number was 13. So, as a consumer-driven and customer-driven company, we're delivering for our customers, and Gil West and the operating team are doing a fabulous job. And we're going to get better yet again this year. Dan McKenzie Okay. Fantastic. Thanks guys. Jill Sullivan Greer Thanks Dan. Sherlon, that is going to conclude the analyst portion of the call, and so I will turn it over to Kevin Shinkle, our Chief Communications Officer for the media portion. Joanne Smith Good morning. It's Joanne Smith and Kevin Shinkle. We have about 10 minutes for questions. So to accommodate everyone, please limit yourself to one question and one follow up. Sherlon, can you please repeat the instructions and then we'll take our first call.

[Operator:]

[Operator Instructions] We'll go first to Jeffery Dastin, Thomas Reuters. Jeffery Dastin Could you elaborate on the exact changes Delta might like to see to Open Skies agreements if the United States asks for consultations with the Qatar and UAE? Richard Anderson Yeah. This is Richard Anderson. What we have asked for is consultations and that those consultations would lead to some accommodation that takes into account the $41 billion of subsidies that have been provided to the United Arab Emirates and Qatar. And that would be with respect to the routs that are flown between those countries and the U.S. and with a particular focus on fifth and seventh freedoms. So we've land our case out to the United States' government. They're taking it seriously. We're in the process of answering questions with them. And the end results needs to be like the Chinese steel case or agricultural cases that the U.S. frequently brings, where you come up with remedies that will address a subsidy number that is actually the largest subsidy number I believe that has ever been proven in a WTO case. Jeffery Dastin And just to clarify, so might there be a clause discussed about capacity dumping or price dumping. Richard Anderson Correct. Jeffery Dastin Right. Thank you so much. Kevin Shinkle Yeah.

[Operator:]

We'll go next to Edward Russell, Flight Global. Edward Russell Hi. I wanted to ask a bit more on the Pacific restructuring. You mentioned that you're planning to remove six more 747s this year. How many 747s you're removing in total? And also, will there be any route cuts in addition to the down-gauging? Kevin Shinkle There will be no additional route cuts. All of this will be achieved through down gauging or frequency reductions. And there will be seven 747s, 400s remaining six flying. Edward Russell Thank you.

[Operator:]

We'll go next to Ted Reed, The Street. Ted Reed Thank you. My question was basically asked. But are you happy with the way things are going so far in Washington in regards to the Middle East subsidies? Joanne Smith We just need to see where we end up. I mean, we're pleased with the progress we've made and pleased with the work of our colleagues. America and United have worked hard with Delta in that case. So I'd say, Ted, overall, yes we are. But in the context of the Pacific trade agreement and the Atlantic trade agreement I think our government needs to first address the largest subsidy that's ever been brought to the U.S. government before we go deeper into more liberal trade regimes with state-owned and state-subsidies industries. Ted Reed All right. Thank you.

[Operator:]

We'll go next to Susan Carey, Wall Street Journal. Susan Carey Good morning. I just wanted to ask a little question about your Aero Mix ATI application. The DoT seems rigid on the fact that they are not going to consider it the submission unit the Mexico and the U.S. actually have Open Skies. And I'm a little bit confused about this misunderstanding. Richard Anderson Well, Susan, this is Richard. I don't think there is a misunderstanding. There was a side letter signed between the United States' government and the Mexican government that basically condition to the Open Skies on ATI. This is very common. This is what the United States' government did with Japan and has done another Open Skies regimes. Susan Carey Okay. Thank you. Richard Anderson Yeah. Thank you.

[Kevin Shinkle:]

Okay. With that we will conclude our call today. Thanks everyone for joining and listening.

[Operator:]

That concludes today's conference. Thank you for your participation.