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Edited Transcript of DAL earnings conference call or presentation 11-Jul-19 2:00pm GMT

Q2 2019 Delta Air Lines Inc Earnings Call

ATLANTA Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Delta Air Lines Inc earnings conference call or presentation Thursday, July 11, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward H. Bastian

Delta Air Lines, Inc. - CEO & Director

* Glen W. Hauenstein

Delta Air Lines, Inc. - President

* Jill Sullivan Greer

Delta Air Lines, Inc. - VP of IR

* Paul A. Jacobson

Delta Air Lines, Inc. - Executive VP & CFO

* Peter W. Carter

Delta Air Lines, Inc. - Executive VP, Chief Legal Officer & Corporate Secretary

* Wayne Gilbert West

Delta Air Lines, Inc. - Senior EVP & COO

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Conference Call Participants

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* Andrew George Didora

BofA Merrill Lynch, Research Division - Director

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Daniel J. Mckenzie

The Buckingham Research Group Incorporated - Research Analyst

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Duane Thomas Pfennigwerth

Evercore ISI Institutional Equities, Research Division - Senior MD

* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Hunter Kent Keay

Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense

* Jamie Nathaniel Baker

JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Rajeev Lalwani

Morgan Stanley, Research Division - Executive Director

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

* Elliott Blackburn

* Leslie Josephs

* Ted Reed

* Tracy Rucinski

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Delta Air Lines June Quarter Financial Results Conference Call. My name is Jake, and I will be your coordinator. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead.

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Jill Sullivan Greer, Delta Air Lines, Inc. - VP of IR [2]

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Thanks, Jake. Good morning, and thanks to everyone for joining us on our June quarter earnings call. Joining us from Atlanta today are our CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Paul Jacobson. Our entire leadership team is here in the room for the Q&A session. Ed will open the call and give an overview of Delta's performance, Glen will then address the revenue environment, and Paul will conclude with a review of our cost performance and cash flow. (Operator Instructions)

Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures. All results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the IR page at ir.delta.com.

And with that, here's Ed.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [3]

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Thanks, Jill. Good morning, everyone. Thanks for joining us today. Our record June quarter financial and operating results demonstrate the Delta difference in action. We are translating our powerful brand, unmatched competitive advantages and pipeline of initiatives to drive earnings growth, margin expansion and solid returns for our owners.

Earlier today, we reported a June quarter pretax profit of $2 billion, with earnings increasing 32% to $2.35 per share. We expanded operating margins by more than 2 points and generated $1.8 billion in free cash flow.

We continue to run the best operation in the global industry by far. To date, we've achieved 82 days without a single cancellation across the Data system, a 26% improvement over last year's record performance. And for our mainline product, we've already reached 153 days without a cancellation. This reliability, combined with a great service our people provide, is translating to more consumers than ever choosing Delta. As a result, we ran the highest load factors in our history and flew a record 53.9 million passengers in the June quarter. And even with these record volumes, this was the first time in our history that Delta had 0 involuntary denied boardings for an entire quarter.

This strong demand drove an 8.7% improvement in our top line, and total revenue of $12.5 billion, which marked the highest quarterly result in our history, and our momentum continues to build. We've experienced 5 of the top 10 revenue days in our history just over the last 30 days. With our people consistently delivering best-in-class travel experiences for our customers, we are seeing our Net Promoter Scores reach new heights and our brand affinity grow.

We have the world's most valuable airline brand, one that's mentioned not just among the best global airlines, but also alongside top consumer brands. The essence of our brand is a sign of the trust and preference we're earning from our customers through operational excellence and unmatched service. Our people are the very best in the business, and they are Delta's strongest competitive advantage. They keep climbing, improving year-after-year because our customers count on us to connect them to moments that matter around the world every day. And not only do they serve our customers, but they continue to give back to the communities where they live, work and serve.

Earlier this week, Delta was recognized by the American Red Cross as the #1 corporate blood donor in the country for the second year in a row. This is a fantastic accomplishment, and I want to say congratulations and thank them for their service. So far this year, we have accrued $739 million towards next Valentine's Day profit sharing.

Across the business, we are harnessing Delta's strength in quality and innovation to drive improvement in the customer experience, stronger customer loyalty and profitable global growth. Delta's financial foundation and cash generation are allowing us to sustainably invest across the business at a level no competitor can match. During the first half of the year, we generated $2.5 billion in free cash flow, more than what we produced in all of 2018, positioning us to achieve $4 billion in free cash flow in 2019.

We are investing for the future to ensure that our customer experience and brand continue to elevate, while ensuring our employees have the right tools and continue to provide best-in-class customer service. One example is the transformation of our domestic narrowbody fleet, which is exciting, and Glen will cover the substantial benefits we expect this to deliver to our customers as well as to our owners.

On the airport front, we'll invest over $12 billion in terminal facilities at our key hubs over the next 5 years. This fall, we'll achieve a major milestone in New York as we open Concourse G, the first of 4 new Delta concourses included in our $3.9 billion project at LaGuardia. By taking control of the construction process, we've been able to build a more efficient facility focused on meeting the needs of our customers and by utilizing our investment grade balance sheet, that facility will have a long-term competitive cost advantage.

We're also making meaningful investments in our customer-facing technology. Delta.com is one of the top e-commerce sites in the U.S., and we continue to add functionality, not only to our site but also to our Fly Delta app. These are our fastest growing distribution channels with the highest customer satisfaction as more customers are choosing to interact directly with us.

Our technology investments are helping us deliver more customized offers and enabling our employees to further differentiate our level of service. Through our single view of the customer technology stream, we are increasingly personalizing interactions, celebrating milestones and engaging with our customers through their preferred channels as we deepen our customer relationships. We're also continuing to enhance our onboard experience. We just announced that starting in November, we'll launch an industry-leading reinvented international main cabin experience that will make every customer feel even more valued.

We are also taking steps to provide more options for spending time in flight. During the quarter, we took the first step towards bringing free WiFi to life by completing a 2-week test, and we'll conduct more testing in the months ahead to create an experience customers prefer. We are committed to providing the best in-flight entertainment in the sky, and it will be another point of differentiation.

And finally, as part of the foundation for our global franchise, we have built a $2 billion equity portfolio of strategic partners. The most recent addition was our 4.3% investment in Hanjin-KAL, the largest shareholder of Korean Air. We intend to increase our stake to 10% pending regulatory approval. This investment supports the stability and growth of our joint venture with Korean, an important piece of our long-term Pacific strategy.

So in summary, we're executing well, and we have confidence in our continued momentum. As a result, we are raising our full year earnings guide to $6.75 to $7.25 per share, which is a 25% improvement over last year's EPS. We also announced the Board's decision to raise our quarterly dividend by 15% to $0.4025 per share. This is the sixth year in a row that we have increased the dividend, and this increase represents a 2.7% yield at yesterday's price. Importantly, it demonstrates the sustainability of the Delta business model and our shareholder-friendly capital allocation strategy. We've also raised our total shareholder return expectations for 2019 to $3 billion on the strength of our free cash flow results and our expectations for the rest of this year.

The business has positive momentum with significant opportunity ahead. We have a durable foundation of strategic advantages. Our culture, leading operational reliability and unrivaled network, our loyalty program and relationship with American Express and an investment grade balance sheet. These advantages, combined with a great brand powered by very best people in the business, provide the engine to drive meaningful long-term value for our customers, our employees and our owners.

And now I'll turn it over to Glen and Paul to discuss the details of the quarter.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [4]

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Thanks, Ed, and good morning, everyone. I'd like to start by thanking the Delta team. Exceptional operational performance and unmatched service of our people provide are the reason why more customers than ever are choosing to fly Delta. Their hard work enabled a record revenue quarter with a $1 billion increase over the prior year. The 8.7% growth in the June quarter is the seventh consecutive quarter of top line growth of 7% or more, a level that is more than 2x GDP.

Demand for Delta remains strong, both our onboard products and our SkyMiles currency. Our investment in products, airports, service and reliability are reshaping customer perception and driving record satisfaction scores. This increasing brand affinity supports our revenue premium to the industry, which remains at more than 110%.

Premium product revenues were up 10% to more than $4 billion, on a 7% increase in premium capacity. With more customers choosing these products and improved distribution, premium paid load factors increased by 3 points year-over-year.

The loyalty revenues grew 19% to $1.2 billion, including a roughly $100 million benefit from the American Express contract renewal announced in April. Our loyalty program and relationship with American Express are key drivers of our business and remain sources of true long-term competitive advantage. New acquisitions of SkyMiles members this year are on track to increase at a rate double that of just 3 years ago. And more and more of our members are signing up for the SkyMiles American Express cards. But most importantly, customer satisfaction among our loyalty members is at record levels.

During the quarter, spend on our co-brand cards and mileage uses both increased double digits. More customers are using miles as currency to upgrade their experience post-purchase. This new functionality has been very well received, and it's exceeding our expectations with over 0.5 million members using this option since launch earlier this year. Both leisure and business travel demand remain robust and have improved relative to the March quarter. The shift in Easter to April and peak summer travel season contributed to strong leisure volumes and record load factors.

Corporate revenues remain healthy, increasing 6% for the quarter. This was driven by domestic up 8% versus prior year. In our most recent corporate travel survey, 83% of travel managers expect to maintain or increase their air travel spend this quarter. This is consistent with last year as pockets of international softness in the automotive and manufacturing industries are being offset by strength in health care, technology and financial service sectors.

Cargo revenues declined 17% on both lower volumes and yields as industry capacity continues to outstrip demand. We are actively implementing strategies to mitigate this impact but are very cautious on the cargo outlook for the remainder of the year.

Turning to specifics on unit revenues in the quarter. Total unit revenues were up 3.8% above our guidance on 4.7% higher capacity. Passenger unit revenues were up 2.9% over prior year, sequentially improving 2 points compared to the March quarter driven by strong demand. Domestic revenues grew 8.8% with 3.6% higher PRASM. This is the best domestic performance in nearly 5 years with unit revenue growth in every hub. Boston led the system with revenues up 25% over prior year on a 10% improvement in unit revenues. Now with over 140 departures a day, Delta is increasingly the airline of choice for Boston travelers.

Internationally, revenues grew by 5.3% as we offset a 1.5 point currency headwind to increase our unit revenues by 1.1%. While Pacific revenue performance was softer than our initial forecast, we were able to maintain our margin performance versus prior year. We see opportunity for profitability to improve as we continue to execute on our multi-year Pacific restructuring. Additional commentary on the entity performance for the June quarter may be found in this morning's press release.

Looking forward to the September quarter, total revenue is expected to increase 6% to 7% on a 1.5% to 3.5% improvement in unit revenues. July is off to a great start with a new number one system revenue date -- is it last Sunday or this Sunday?

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Jill Sullivan Greer, Delta Air Lines, Inc. - VP of IR [5]

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This past Sunday.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [6]

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This past Sunday, okay. While underlying passenger demand remain strong, sequentially, we expect TRASM to see about 1 point pressure from the Easter holiday timing and a slight deceleration in the transatlantic.

Domestic corporate and leisure demand remains strong, premium product growth should continue to lead to main cabin as we monetize the investments we have made in improving the customer experience.

In international, currency headwinds are beginning to moderate in the back half of the year as we lap U.S. dollar strength. Atlantic unit revenue is expected to be roughly flat over prior year as strong U.S. point of origin demand and stable corporate trends are offset by some softer European leisure demand. In the Pacific, we expect unit revenue declines will be similar to the June quarter but should begin to moderate later this year as we lap foreign exchange headwinds and as our comps ease.

Latin is positioned to remain our best-performing international entity as strength continues in both Brazil and Mexico, and we expect system capacity to grow by 4% in the September quarter, a modest decline from our first half run rate. Full year capacity is trending slightly above 4%, including additional capacity from higher completion factor, incremental joint venture flying to assist our partners with grounded airplanes and increased charter flying. I'd like to congratulate our charter team on an outstanding quarter and strong year-to-date performance.

As we think longer-term, our opportunities lie in leveraging both our brand and our scale to grow our revenues, expand Delta's competitive advantages and differentiate the perception of Delta in the minds of our consumers. We are targeting our capacity in markets with the best growth potential, improving the efficiency and profitability of our core hubs through upgauging.

While the last 10 years were spent fundamentally transforming our domestic hub structure, we are currently in the midst of the most significant fleet evolution in Delta's history. We are focused on getting the right aircraft on the right routes, allowing us to deliver leading customer service, focused products and services and expanding our margins. With over 200 narrowbodies set to deliver over the next 4 years, we are building a more efficient fleet that best serves the scale of our network. These are larger gauge aircraft with a higher percentage of premium seats, which help drive Delta's margin profile.

Our fleet transformation extends to the international entities as well. Not only will our fleet become more efficient with new deliveries, our entire international fleet will have upgraded interiors, including Premium Select and Comfort+ by the end of 2021.

The improved international product combined with efforts to create a more seamless experience for our customers flying within our partner network gives us confidence in our global ability to continue to drive profitable growth. The scale of our global network, product investments and Delta's best-in-class service are the foundation for our revenue premium and underlie the improved economics of our recent American Express agreement. That agreement alone should drive a nearly $7 billion contribution by 2023, double to what we saw in 2018.

In closing, we expect strong demand to continue throughout the rest of the year. Our first half results and pipeline of initiatives give us strong confidence to again raise our revenue growth target to 6% to 7% for the full year.

As pleased as we are with the record June quarter result, we are even more excited about our great runway opportunity.

And with that, I'll turn it over to my good friend, Paul.

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [7]

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Thanks, Glen. Good morning, everyone, and thank you again for joining us this morning. Our results through the first half the year show that we're delivering against our Investor Day plan to drive both top line growth, margin expansion and continue to return consistently to our owners.

In the first half of the year, revenue has grown by 8%, our operating margins have expanded by 200 basis points, and we've grown earnings per share by 30%. We've also generated $2.5 billion of free cash flow, more than all of 2018, with $2 billion of that going back to shareholders.

Our after-tax ROIC on a trailing 12-month basis is 15.3%, as the investments we have made are driving strong returns. These results give us confidence to raise full year revenue, earnings per share and free cash flow guidance. For the full year, we are on track to deliver 6% to 7% top line growth, at least 150 basis points of margin expansion and 25% EPS growth.

With results to date and updated expectations for the full year, we now expect to return $3 billion to shareholders in 2019. This is a $500 million increase above our initial plan outlined at Investor Day.

Turning to June quarter results. We set a June quarter record with pretax income of $2 billion. Our operating margin of 17.1% was 2.3 points higher than last year. Our pretax margin of 16% was the highest we've achieved in 2 years. We're firmly on track to exceed our target for full year margin expansion and now expect at least 150 basis points of improvement versus 2018.

We continue to deliver solid cost performance with efficiency gains throughout our operations, fleet transformation, and One Delta initiatives all contributing. For the June quarter, nonfuel unit costs were up 1.4% in line with our guidance of 1% to 2%. This included approximately $60 million of pressure due to higher depreciation expense associated with our decision to accelerate the retirement of the MD-90 fleet by 2 years to the end of 2022. This impact is largely limited to the June quarter, as 31 aircraft were permanently retired. We will retire another 9 of these aircraft by year-end and expect MD-90 depreciation to moderate in future periods.

One Delta is enabling a more efficient approach to our ongoing fleet transformation as well. The team has identified a number of opportunities to drive incremental efficiency gains as we transition aircraft into and out of the fleet, minimizing friction cost from operating small sub-fleets. We will continue to realize fleet simplification benefits as we reduce and exit another fleet type in the MD-90.

And as we induct new aircraft, such as the A330-900neo, we're streamlining entry into service to minimize unproductive time. This enables crew efficiencies through better training and scheduling management and drives incrementally higher ROIC through less idle time on the asset.

Nonfuel unit costs increased 0.6% in the first half of the year, giving us confidence in our full year CASM-Ex guide of approximately 1%. In the back half of 2019, we face tougher cost comparisons from last year's performance as well as decelerating capacity growth.

While fuel was volatile during the June quarter, Brent prices remain below prior year levels. Total fuel expense decreased $35 million on 4% lower market fuel prices. Refinery profits of roughly $40 million were flat to last year. Our re-fleeting and One Delta initiatives drove a 1.6% improvement in fuel efficiency in the June quarter, and we expect a 2% fuel efficiency gain for the full year.

Nonoperating expenses for the quarter were $60 million higher than prior year due to lower pension income and a decline in our equity partner earnings. For the full year, we now expect nonoperating expense to be in the range of $525 million to $575 million. This is above prior expectations due primarily to these lower partner earnings.

For the September quarter, we expect earnings per share to be in the range of $2.10 to $2.40 per share, up 25% versus prior year at the midpoint. This equates to a pretax margin of 14.5% to 16.5% comparing favorably to last year's 13.6% result. This includes an expectation for nonfuel unit cost growth of 1% to 2% and all-in fuel price of $1.95 to $2.15 per gallon. This is down from last year and similar to the June quarter. Our guidance includes an approximately $40 million contribution from the refinery this quarter, which is expected to benefit the September quarter fuel price per gallon by roughly $0.04.

Turning to the balance sheet and cash flow. Our balance sheet remains strong. Adjusted debt-to-EBITDAR of 1.7x is at the low end of our target leverage ratio of 1.5x to 2.5x. Consistent with our capital allocation strategy, we continue to proactively address our pension obligation with a voluntary $500 million contribution in the June quarter.

We generated $3.3 billion of operating cash flow and reinvested $1.4 billion into the business during the June quarter. This produced free cash flow of $1.8 billion, bringing our first half free cash flow to $2.5 billion. This represented conversion of more than 100% of net income, nicely ahead of last year, benefited by both top line growth and margin expansion.

Our strong first half performance sets us up to achieve $4 billion in free cash flow for the full year, and we expect a net income conversion of nearly 90%. This includes our expectation for full year CapEx of $4.5 billion, which is unchanged from initial guidance provided at Investor Day.

Our healthy balance sheet and cash generation enable us to consistently return cash back to our owners, while also investing in the future growth of the company. During the quarter, we returned $497 million to shareholders. Including the accelerated buyback earlier this year, total shareholder returns are just over $2 billion through the first 6 months of the year. We funded our accelerated buyback in the first quarter with a $1 billion short-term loan. With cash flow running ahead of plan, we completed repayment of this short-term facility earlier than anticipated.

Since first announcing our capital allocation strategy in 2013, we have returned more than $14 billion to owners. We reduced our fully diluted share count by approximately 25% and increased our dividend for 6 consecutive years. But importantly, we've done that while also investing in our business and our people.

Additionally, we're maintaining low debt levels and improving the funded status of our pension plans as part of our commitment to maintain our investment-grade credit ratings. Our consistent repurchase activity and 15% dividend increase in the third quarter demonstrate our continued strong conviction on the durability and sustainability of our business model. These results are a validation of our unrivaled network, our dedicated people and our powerful brand. Our competitive advantages continue to deliver industry-leading results and drive long-term value for all of our stakeholders.

And with that, I'll turn the call back over to Jill to begin the Q&A.

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Jill Sullivan Greer, Delta Air Lines, Inc. - VP of IR [8]

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Great. Thanks, Paul. Jake, we're ready for questions from the analysts if you could give the instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll begin with Mike Linenberg with Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [2]

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So I have one and one follow-up. Just I guess the first one to Glen. You called out the strength in Boston, and I think over this last quarter, I think Boston was maybe officially anointed a hub. I think there was also some press out about maybe some other focused cities like Nashville and Austin. As we think about your domestic capacity growth in 2019, Glen, will more of it be allocated to these focused cities or newer hubs? Or how should we think about the split across to your system?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [3]

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Great question, Mike. I think Boston is a true focus city for us that we have commitments over the next 1 year, 1.5 years to take our departure levels up towards 200. For those of you who are familiar with our Boston operation, we have shared our terminal with various carriers over the years, and we will take over the entire terminal starting late this summer, which will allow us to continue to grow in Boston.

And what we've been focused on is making our hubs more efficient so we can drive higher earnings and targeting those cities that are high growth. And Boston, Seattle, Austin, Nashville, Raleigh, all fit that profile of cities where growth and growth for air travel is significantly higher than they are across the system in general. So that's really been our thoughts to continue to grow where markets are growing and to continue to make our existing hubs more efficient.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [4]

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Okay. Great. And then just jumping over to Paul on the pension, the $500 million contribution. Is there anymore requirement -- are you required to contribute more this year? It sounds like maybe you went above and beyond what you were required to. And where is -- what's the funded status of the pension at this point, if you could?

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Peter W. Carter, Delta Air Lines, Inc. - Executive VP, Chief Legal Officer & Corporate Secretary [5]

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So all of the contributions that we made are voluntary as we've talked about at Investor Day. With airline relief, we have fully completed all of our required funding through 2024, but we remain committed to try to achieve an 80% funded status by the end of 2020. Right now, we're in the low to mid-70s. The plan is performing very well in line with equity markets globally, and we expect it to be a good year on the return front.

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Operator [6]

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We will now move to the next question and that will come from Jamie Baker with JPMorgan.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [7]

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First question either for Glen or for Jill, it's a hypothetical. If you had a substantial portion of your fleet grounded right now, from an operational perspective, what would be the most intelligent and profitable way for Delta to reintroduce aircraft in a manner that wouldn't prove detrimental to RASM? Simply hypothetical, how would Delta phase grounded aircraft back into its operation? Hopefully, I'm asking in a way you're comfortable answering.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [8]

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Jamie, this is Ed. Actually, I'm going to jump the line, I'm going to answer. We know what you're asking, and it's really not appropriate for us to be speculating as to what the other carriers ought to do. It's clear that MAX has been a real -- it's had a dramatic impact on our industry. I think the reintroduction, when the time comes, is going to have to be carefully managed, no question. But in the interim, we're going to continue to watch and see the developments there. But I don't think we should be looking to second-guess or call out the current or the expected actions of our competitors.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [9]

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Fair enough. Can't blame me for asking. Second, probably for Paul. You continue -- Delta continues to demonstrate that it's possible to grow revenue at a rate nicely ahead of that of capacity, which of course lays ways to the long-held view that, that wasn't possible. Similar to my question, last quarter, could you rank order what drives this? I assume, loyalty is probably the biggest driver, but we've had significant consolidation, there's the phenomenon of segmentation, there's consumer shift from goods to services. I'm just trying to understand the drivers and better hopes of predicting the sustainability of this trend, given that it is a new trend.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [10]

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Jamie, it's Glen. I think all those things that you just mentioned are contributors to it. It is not one thing and it is -- while, we are really excited about the American Express transaction, that is not the key driver within the quarter for the excellent performance. I think as much being able to charge for products, being able to understand where people want to fly, being able to put the right products and services in those markets and being able to charge customers for what they're willing to pay us for. And I think it's a combination of everything you just mentioned.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [11]

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Okay. I'll settle for that.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [12]

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Jamie, this is Ed. I'll just chime in on Glen's response as well. This is a growing business. I think for years, people wondered whether it was a mature business. But when you think about what -- where consumers are looking to go and whether, as you say, it's the millennial impact of wanting experience versus ownership, whether it's the baby boomer segment that's looking to explore, I think technology's had a huge impact here. People are more aware of the world than ever before, people are more interested in seeing the world and connecting with the world than ever before. And as the best-performing airline in a market that's growing at a multiple of GDP, we're really well positioned to see this continue to grow into the future, and all the other actions that you talk about are more tactics in terms of how we continue to drive greater value back to consumers, but I think the fundamental demand for this product in this business is very, very strong, and we're capitalizing on it.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [13]

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And if I could just squeeze in a third question since you deflected -- understandably deflected the first. Just getting back to Mike's question about Boston and reiterating a question I asked about 11 years ago, how do you define hub?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [14]

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I think hub is a place that we connect traffic and an endpoint clearly is the opposite of a hub. And so to the extent that we are beginning to connect traffic and more and more traffic over Boston, we would consider it a hub. This year, we're connecting almost 1,000 people a day from the U.S. to Europe over Boston, for example, with our partners started new service from Boston to Asia. I think when you think about our ability to connect people through a city, that's what we define it as a hub.

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Operator [15]

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We'll now hear from come Rajeev Lalwani with Morgan Stanley.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [16]

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Glen, I wanted to come back to some of your comments and I guess Ed's as well, in particular, when you think about the divergence you're seeing in cargo and passengers, is that something you've seen before? Is cargo maybe a leading indicator of a potential rollover? I'm just trying to get more and more comfortable with the demand outlook as we're looking forward.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [17]

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Well, any of us could take that, Rajeev. Cargo is not -- it's certainly not a big contributor to the total revenues. It's probably less than 2% of our total revenue base. The impact we're seeing in airfreight has been across the industry, not just the airline industry, but the major freight and express companies, we're seeing those same impacts. I think a lot of the reduction currently is due to the big inventory build last year in advance of the tariffs and all the geopolitical trade tension that existed. And as a result, there's not as much demand for -- near in airfreight. So shipping and other forms of transportation are probably getting a higher amount of volume. So it's something that we -- that's important to us, but at the same time, I don't think it has really any direct correlation to what we see on our passengers business.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [18]

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It's on Paul. And Paul, a question for you on the cost side. We've obviously seen capacity tick up for this year. Is that not creating a tailwind on the CASM side or is it simply offset by some of the D&A items that you talked about? And then just generally, how do you feel about keeping trend steady, i.e., inflationary sort of cost curve going forward given that we're looking at potential labor step ups for you guys, for the industry and so on?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [19]

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Sure. Thanks, Rajeev. We obviously have enjoyed in the first half some of the benefit, and we've seen that in our results with our nonfuel CASM benefiting alongside higher completion factor and more consistent and better operational performance contributing to that, that has helped. We've been pressured a little bit by some of the revenue index. So with revenue growing at more than -- almost twice the rate of capacity, we see some revenue index pressure around commissions and around merchant fees, et cetera, but all of that is good money to spend from that perspective.

Last half of 2018, we had negative CASM, so we've got a little bit of tougher comps going in, but we feel very comfortable about holding the line between 1% to 2% and delivering that 1% for the full year. Obviously the additional D&A from the MD-90 fleet, which we absorbed into our regular earnings has pressured that somewhat, but we do feel confident.

Looking forward, we continue to see really good progress from One Delta. It's contributed almost $200 million incrementally in the first half of this year over 2018, and we're on track to exceed $500 million total from the One Delta program through the first 2 years on track to our $1 billion number. We're going to need to continue to do that. Obviously there's potential pressures on the horizon, but we're constantly diligent about it, and we feel good about holding that below that 2% goal long term.

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Operator [20]

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We'll now hear from Hunter Keay with Wolfe Research.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [21]

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A couple questions on loyalty. Can you hear me by the way, sorry?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [22]

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Yes. We can hear you.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [23]

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We can hear you.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [24]

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All right. Is there a point where you feel like your loyalty is so strong that you can fully remove yourself from the aggregators that commoditize the look and feel of air travel, airfare?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [25]

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Our strategy has been to build something that consumers want to buy and let them chose how they buy it and that's led to a continuation of a migration towards Delta direct channels and Delta loyal customers, and I think that's how we see the landscape continuing to evolve. The question is, do you want to do a more aggressive and say no to customers who might want to buy a product a certain way or distributors? The answer is, we would never want to do that. We would just want to continue to focus on buying directly from Delta and Delta sites as the better way to buy a Delta ticket.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [26]

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Why not? I mean Southwest customers, a lot of those guys go straight there without price comparing. And I would argue that a lot of Delta customers now buy Delta airfare without price comparing because they feel like it's a good value. So maybe this is a 5-, 10-year question. But why not maybe say if you're going to commoditize our product and sell it the way that's not representative of the value you're getting, we're just not going to do business with you.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [27]

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Hunter, let me offer my thoughts here. We're going down that direction obviously. I'd say, 10 years ago, about 1/3 of our tickets were sold over the online agencies. Today, we're down to somewhere around 10% to 15%. And probably as you look forward, you're right, delta.com is going to take more and more of the traffic. So I don't think we need to put a stake in the ground and say that we won't sell over those channels. But at the same time, the online agencies are aware that they need to provide a differentiated experience to our customers in order for us to continue to invest in them and together have our content on their sites.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [28]

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Okay. And just one more quick one just related to it. Do you happen to know maybe through survey work or whatever how many customers book directly with you guys without price comparing?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [29]

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We have no idea.

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Operator [30]

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And our next question will come from Savi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [31]

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Just a question on the cost side. With the tariffs, I'm wondering if that's having an impact on airport projects and costs and what's the implication for just airport costs in general and the LaGuardia project you're working on in particular. And just tied to that, I think we're seeing a lot of just airport projects in general and a lot of funding related to that, and wondering if we're going to start to see funding pressure in these -- if that just means it translates to higher airport cost for the industry in general or if we might see some of these projects getting curtailed?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [32]

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Savi, thanks for that. Certainly, we've seen some inflationary and tariff-related pressure on structural steel and other elements. I would say actually a little bit of a bigger pieces than just general inflation in the areas of New York, and L.A., where we're constructing. There's obviously a lot of infrastructure work going on and competition for labor is tight. That being said, both of those projects remain on target, on schedule and on budget. The work that the team is doing has been phenomenal on the ground in both places. And this is one of the strong benefits that we feel we have by controlling the financing and controlling the construction of these projects being able to manage through these things, and the teams have done an amazing job.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [33]

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So any thoughts and then kind of as you look at other airports as well if at all, if we're going to kind of continue to see this kind of increasing slip of airport inflation or if some of these projects get curtailed especially as the economy kind of slows down here?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [34]

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Well, I think you're going to continue to see airport cost inflation. Across the board, there is a lot of infrastructure improvement happening not just at our hubs but across the board. But all of these are customer enhancing and going to make the customer experience better, more streamlined with more features and more modern. So we actually feel good about it. And those projects are all moving ahead. We feel comfortable absorbing that rate of inflation as we can deliver those products and in line with our general cost goals.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [35]

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Savi, if I may take a stab at what I think you're getting at to is, when you think about the trends in the U.S. aviation industry, the big cities tend to be getting bigger and the small cities tend to be getting a bit smaller. And if you look at Kennedy, when we made the initial investment, during the first year or 2, our CPE went up slightly. But sitting where we are today, by driving the more efficient larger airplanes through those facilities, which you couldn't have done through previous facilities, our CPE is now significantly below where we were just a few years ago and even before the construction. So really these are the enabling projects for the airlines to become more efficient as well.

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Operator [36]

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And now we will take a question from Brandon Oglenski with Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [37]

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So Glen or Ed, I want to circle back to this idea of sustainably growing revenue above GDP, and I know we've kind of hit on this, call like, the de-commoditization of the products. But can you talk to -- have you seen like repeat purchases of these different branded fares or segments of products? Or is it just like a novelty that could potentially wear off as consumers just go back to thinking, "Hey, a seat is a seat?"

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [38]

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I think it's become more and more sticky and that's why I think we pointed out that every year the paid load factors in the premium products get higher and higher and higher, and we continue to drive loyalty into those products and services, so I think our ability to continue to grow those sectors. I think when you look back and say what was wrong with this industry 5 or 10 years ago as we all thought that it was a race to the bottom and that the only thing that mattered to consumers having the lowest fare. What we really figured out when we did a lot of survey and results was that, for the most customers or 60% of the customers, they were choosing on something other than the lowest fare. And then when we dissected that even more, it was 60% of customers but really 80% of revenue. And we weren't really geared towards being able to provide value, and that's the whole genesis of this transformation of Delta and its premium products and services has been about providing people what they want to buy.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [39]

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And Brandon, the other thing I'd add to that is that we've been growing our top line revenues easily the last 2 years in the high-single digit level year-on-year. Again, multiples of where GDP has been and the diversity of those revenue streams is powerful, whether it's loyalty and other components of that, but the other thing is our Net Promoter Scores are at their highest in records, so not only are they purchasing these new products, they are even more satisfied than ever in the services that Delta is providing. So I think it's quite sustainable, and I think it's going to continue to grow at a pretty accelerated pace.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [40]

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Okay. Well, it make sense because we've always had travel options on hotels and cars. So if I can, I want to ask one nerdy analyst question here. So you guys are guiding to 6% to 7% top line growth for the year, let's say, capacity is around 3%, it gets you close to 4% for the fourth quarter. I think, that's implying TRASM that would be close to flat. Is there anything in the guidance that is suggestive of like a slowdown in industry yields or maybe a bit more caution on the economy?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [41]

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As you said so, you're right. That's a nerdy analyst question. No, we're not expecting to see any trend shifts in the numbers. We're probably just being a little conservative in our long-term top line guide.

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Operator [42]

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And now we'll hear from Andrew Didora with Bank of America.

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Andrew George Didora, BofA Merrill Lynch, Research Division - Director [43]

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Paul, actually wanted to get your thoughts here as we head into the back half on -- just on IMO 2020 and how you are thinking about that and the impact of jet fuel. Are there any ways to hedge this as what we see futures contract show kind of a meaningful step up from the end of the year into 2020? And does this maybe change your thoughts at all on the refinery?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [44]

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Well, Andrew, thanks for that. At the end of the day, as we've said, the refinery, given its diesel and jet production, will effectively serve as about 35% hedge against that. So we feel like we're well positioned going into that. Certainly, we've seen a little bit of pressure on the futures curve, but it hasn't been near what the market had expected or at least thought in extreme cases that it would be. So we're continuing to watch it and keep it close. The refinery is performing well. We've seen some upward pressure on gasoline and other products on the profitability of that given the recent announcement by PES to shut down their refinery. And we feel like we're well positioned to be able to continue to deliver those results.

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Andrew George Didora, BofA Merrill Lynch, Research Division - Director [45]

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Got it. That's helpful on the diesel and jet hedge. But I mean my -- I guess, my follow-up question here just on the free cash flow execution obviously has been excellent this year. Can you maybe talk a little bit on how sustainable you see this $4 billion going forward, particularly in the face of maybe some rising jet fuel, possibly slowing economy? And can you remind us of what levers you have to pull in case kind of any of these scenarios play out?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [46]

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Well, sure. We always have the flexibility levers on voluntary spending and capital, et cetera, to be able to manage that, which is why our balanced capital allocation strategy is the right one because it can be flexible and respond to changes. But if you look at our cash flow conversion rates, they've been going up pretty steadily and a huge contributor to that is the American Express deal. As we've talked about, the loyalty program, the cash turn versus the deferral that we see, some of that to the balance sheet is very strong and that's expected to continue to grow, which will enhance our operating cash generation going forward. This year in particular, we've lapped a couple of sizable increases in noncash-related expenses, principally the pension as well as depreciation and amortization. So you see the cash efficiency of the earnings stream increasing. And that should continue as well. So the trajectory we're on, we're confident about, and we feel good about being able to continue that performance into the future.

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Operator [47]

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The next question will come from David Vernon.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [48]

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Hello?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [49]

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Hello. We can hear you.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [50]

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Okay, sorry. There was a moderator who was speaking there. Coming back to the theme of infrastructure for a second, Paul, if you think about the amount of money sort of Delta's been putting into airport projects the last several years, is there a point over the next several years where you start to get some free cash flow leverage off of that investment because we're starting from a pretty low base in terms of airport quality around the network. I'm just wondering if there's a point in the investable horizon where that nonaircraft CapEx could start to fall off a little bit.

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [51]

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Well, thanks for that, David. We also for the large projects that we are doing because we finance those in the tax-exempt markets or through general airport funds or excluding those from investing activities because they are on a stand-alone and we repay those over time. So I think there's going to be a steady stream of investment across the airports whether it's driven by the airports themselves or by us. We've put significant investment into our Sky Club and lounge program for customer satisfaction, and clearly, those are paying dividends in the product scores and the revenue performance of the company as well.

So I don't see the non-large infrastructure changing significantly as we go forward. But those large infrastructure projects will be here for a little bit of time and they'll be great for the customers. And Glen talked about they create some significant operational efficiencies and scale benefits for us to be able to amortize those costs over higher loads.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [52]

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And maybe just as a follow-up, Glen, that tie-in as far as kind of the cost advantages creates for you as a bigger airline. As we kind of finish the development of the airport at LaGuardia, for example, how does that change sort of the competitive dynamic against a lower cost carrier in that market?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [53]

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So I don't think we want to speculate on how they're going to react to the new facilities, but I do think that we know that in order to accommodate the growth of air travel in New York City, we have to have a bigger facility as -- if you've used it, you understand how constrained it is and that constrains our ability to put larger airplanes in there that can drive significant cost efficiencies and accommodate growth over time. I think we all realize, particularly at -- in summer time, how constrained New York City aerospace is. So there is really no way to be able to put more airplanes in there, so we're going to have to put bigger airplanes in there that are more efficient and those facilities are the key enablers for that.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [54]

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Given your scale benefit though, wouldn't you think that the higher cost per plane that might be more relatively impactful for a lower cost carrier than it would be for you to absorb or am I not thinking about that right?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [55]

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Clearly, our business model would be favored in a high CPE environment.

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Operator [56]

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And now we will take a question Helane Becker with Cowen.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [57]

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One of the areas that you guys seem to be on the leading edge of but don't talk a lot about is what you're doing regarding environmental and sustainability efforts. And I think you're pretty big internationally and that seems to be where there is more focused, rather than the U.S. from international investors more than domestic investors. But could you maybe talk a little bit about how we should think about your efforts in that regard and whether you think they add to brand and so on?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [58]

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Sure, Helane. Thanks. It's a very good question and you are absolutely right. ESG is going to become an increasingly important part of our responsibilities and our governance of our brand and how we operate into the future. You're right, that is probably a bigger point of emphasis in Europe today than it is in the U.S., but it's going to continue to grow here as well. We've made a lot of commitments as an industry as well as an airline, and I'm pleased to say that Delta is continuing to meet its commitments in that. We've made a commitment as a company as well as an industry to reduce our footprint by 50% by the year 2050, which requires that we need to continue to reduce our footprint by up to 2% per year, which is right in line with where we are today on fuel and emissions.

We've made a commitment as a company to eliminate single-use plastics from onboard our aircraft as well as in our lounges, in our airports. And we continue to make new announcements. I just saw the new amenity kits that we've got for international that's eliminated the plastic. We're going to be taking the wrappers off the blankets here soon. And every day, there is a lot of small efforts, all of which add up to a lot of big impact.

So ESG is something that we are paying good attention to. I think investors will increasingly pay more attention to. And it's going to be a point of pride for Delta people as we bring forth the -- lead in that effort as well.

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Wayne Gilbert West, Delta Air Lines, Inc. - Senior EVP & COO [59]

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Can I just add, Ed? This is Gil. That also sustainability goes hand-in-hand with efficiency because as the waste is reduced, right, there is a cost savings associated with that. So whether it's fuel as an example, fuel efficiency, but everything else associated with waste we save money.

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Operator [60]

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Our next question comes from Duane Pfennigwerth with Evercore.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [61]

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Congratulations on strong results.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [62]

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Thank you, Duane.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [63]

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Wanted to ask you about the accelerated retirement of the MD-90s 2 years early. Was there a corresponding new order to facilitate that? How far out does your current narrowbody order book take you? And have you considered any potentially opportunistic pricing on the MAX?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [64]

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Duane, this is Paul. Thanks for the question. The decision to retire the MD-90s is part of the continued move and fleet simplification. Driving that through, we feel comfortable with our existing order book. There were no new orders accompanying that decision as we thought about it. And we feel good with that balance and the trajectory that we're on to be able to drive to the benefits of fleet simplification significantly reduce the complexity in the business, which is going to translate to better efficiency going forward.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [65]

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And have you been tempted by any opportunistic pricing on the MAX?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [66]

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Duane, we are very focused on the narrowbody transformation that Glen talked about in his comments. We've got -- we made the decision 2 years ago to invest in the 321, and I think that we're going to stay that course.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [67]

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Fair enough. And then just for my follow-up, very strong Latin RASM, comps actually get easier, much easier in the back half. Can you just remind us what were the main drivers of weakness in the second half of last year? Was it more Mexico? Was in South America?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [68]

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It was both Mexico and Brazil last year, which have had turnarounds in both those marketplaces. Really, those are our epicenters of Latin turnaround.

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Jill Sullivan Greer, Delta Air Lines, Inc. - VP of IR [69]

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Jake, we're going to have time for one more question from the analysts.

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Operator [70]

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And that question will come from Dan Mckenzie with Buckingham Research.

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Daniel J. Mckenzie, The Buckingham Research Group Incorporated - Research Analyst [71]

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Both of my questions also tie to revenue sustainability. On corporate revenue, I'm hoping you can elaborate on underlying volumes tied to the larger managed accounts and the smaller unmanaged accounts and wonder if there's been a change in velocity here. One of your competitors had some pretty substantial operational disruptions. And I guess I'm wondering to what extent there are new revenue pipelines getting turned on from potentially new accounts? Or is just the corporate revenue story more about getting the existing accounts just to pay more?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [72]

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Well, it really isn't about corporate accounts getting -- paying more. Really, the yield trends have been very stable this year, both domestically and actually slightly down internationally, primarily driven by currency headwinds, but it's really been a volume story. Volumes have been up throughout the year. So we've seen very robust volumes particularly domestically with many weeks being up double digits in terms of the volumes. So I think we're relatively excited about the broadness of this. And clearly, there are industries that are growing and there are industries that are scaling back, but in general, the trends have been overwhelmingly positive for volume.

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Daniel J. Mckenzie, The Buckingham Research Group Incorporated - Research Analyst [73]

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Glen, I think, that actually ties to the second question I have here and that is just sort of helping to clarify some of the revenue outlook for later this year. It sounds like the outlook is factoring in some impact from the MAX' coming back and potentially some elevated macro risk and it sounds like you've got some strong offsets to those headwinds, corporate volumes being one of those. Should we think about the offsets to some of these risks later this year is also being on the international side of the revenue equation ex Europe?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [74]

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I think as we go through the year and really more in the fourth quarter, we're starting to lap the higher dollar. And as you know, international has a longer sale, advanced sale than domestic. So the tail end of the fourth quarter should -- or the mitigation of the headwinds should be better as we move through the year. And we're also looking at starting to lap some of the weakness in some of the sectors.

As we mentioned earlier in the call, automotive had -- has been down. And as you might expect with a hub in Detroit and a very big Midwest presence, it had a pretty large impact on us. So as we get to the fourth quarter, we're actually lapping those lower comps and so that should actually prove. Hopefully, we can get back to a constructive environment in one of our bigger sectors. And so we're really looking forward to a very strong close to the year.

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Jill Sullivan Greer, Delta Air Lines, Inc. - VP of IR [75]

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I think that's going to wrap up the analyst portion of the call. We will hand it over to Tim Mapes in our media team. If Jake, you could give the instructions to the media for how to get in the queue.

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Operator [76]

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(Operator Instructions) And we'll go first to Leslie Josephs with CNBC.

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Leslie Josephs, [77]

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Could you, please, update us on the -- what's going on with WiFi and those tests? You said you had a 2-week test in the last quarter. Where the tests are this quarter? And when do you expect it to be free throughout the network?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [78]

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Sure, Leslie. This is Ed. We did conduct 2 weeks of tests. It was on a limited scale. We've learned a lot about the technical capacity challenges that you face when you want to open WiFi up free with great broadband capabilities across our entire global network. We're not ready to announce when the next free tests will come, but they will be coming certainly later this year and we're on a path here. We think it's important that our customers stay connected. And entertainment is something I think that will continue to distinguish Delta in the sky.

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Leslie Josephs, [79]

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And then just one quick follow-up. On the interview this morning, you said that about 65% to 70% of first class is paid in cash. Is that first class purely or is that first in like Delta One Business Class as well?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [80]

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It's essentially our first class product, both domestic as well as international. Our payload factor's in that 60% to 70% range.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [81]

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But it's not only...

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Leslie Josephs, [82]

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What was it last year?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [83]

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Importantly -- what's that?

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Leslie Josephs, [84]

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Sorry, what was it last year?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [85]

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This is Ed. Glen can give you some of the details there.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [86]

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Importantly, it's not cash. It's cash and the frequent flyers using their mileage to upgrade into those cabins. And I think that's one of the real -- when we talk about continuing to increase the diversity and the ability for people to sit up there, we're trying to bring more and more ways to get there and that's -- increasing the distribution has been one of the keys.

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Operator [87]

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And now we'll hear from Tracy Rucinski with Reuters.

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Tracy Rucinski, [88]

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I am interested in hearing a little more context on your Hanjin-Korean Air investment. You mentioned your close personal relationship with the Cho family. Did anyone from the Cho family contact Delta to ask for help in wording the activist fund, KCGI? And what role do you expect to have in Korean Air's corporate governance?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [89]

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Tracy, this is Ed. We do have a close relationship with the family as well as with the company. We are in contract on a almost daily basis across our 2 companies. And I'm not going to comment relative to investment, how we develop our investment thesis, but the investment that we made in Korean is consistent with the investments you've seen us make in many of our main partners around the globe. So I don't think there should be anything considered unusual at all about it.

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Operator [90]

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We'll now take a question from Ted Reed with Forbes.

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Ted Reed, [91]

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I have 2 questions. The first is about the MAX. When you guys decided not to buy the MAX, what was the reason? Your competitors had it -- had ordered it, was it just cost or was the wait too long or was it something else?

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [92]

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Listen, the MAX is a good product. I'm not dismissing, it's a very competitive tool that our -- the OAL has. We look at all aspects of performance. We looked at the customer view of product. We looked at the cost from the OEMs. We looked at the engine deal. We looked at what we were able to do with Pratt & Whitney on the geared turbofan and the commitments that we've received in the neo. So it was a comprehensive review. It was a close call on it. We spent quite a few months analyzing and going back and forth, but the 321 neo in aggregate carried the day for us.

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Ted Reed, [93]

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All right. Secondly, I would like to ask about Boston. You said -- Glen, you said you'd get to 200, is that going to be hit for you once you get to 200? And also you mentioned competitors there flying Boston-Asia, is that something you're interested in?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [94]

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No. I said our partners were flying from Boston to Asia. As you may know, we -- our partner Korean launched the Korea to Boston this year on the 787. And it was an incredible success. So they have been doing quite well on that. I think they will expand that service as we move into next year. So we've been working with our partners. We've been growing our own hub. And I think, 200 is kind of our medium-term objective here, and we think we'll get there in the next 18 to 24 months. But beyond that, we'll see how the market grows. We think at 200, it's a very sustainable and very profitable franchise for us.

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Ted Reed, [95]

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Is it important to be the #1 carrier in market share in Boston?

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [96]

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No. It's important to be most profitable and most loved.

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Edward H. Bastian, Delta Air Lines, Inc. - CEO & Director [97]

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Jake, we have time for one final question please.

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Operator [98]

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And that final question will come from Elliott Blackburn with Argus Media.

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Elliott Blackburn, [99]

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I wanted to ask, you guys touched on this a bit and you bought the Trainer refinery years back in part to ensure continued fuel production in the New York market. How does the planned closure of the Philadelphia refinery change Delta's outlook for fuel supply and cost in that region?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [100]

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Elliott, this is Paul Jacobson. That Trainer refinery was originally purchased for events just like this. As we saw supply contracting in the region through various closures back in 2012, we saw this as an opportunity for us to take a little bit more control over production and we've done just that. We've taken the refinery and used it in connection with our commercial operations to drive a, on average, $0.05 per gallon benefit against our competitors using the benefits of the refinery and all the logistics expertise that we have. That means it translates to about $200 million per year. Certainly, we would expect to see some rebalancing going on with the lost production from the PES facility, and we believe the Trainer refinery is well positioned to help us offset any increases in the region we might see.

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Elliott Blackburn, [101]

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I mean do you guys continue to seek a partner at that facility or how is this also changing kind of your outlook for refining generally in that area?

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Paul A. Jacobson, Delta Air Lines, Inc. - Executive VP & CFO [102]

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You know we're always looking for opportunities to enhance the return structure and the overall structure of how we manage that refinery. We went through the process. We found we've got multiple investors and firms interested in talking to us. Ultimately, we weren't able to put a deal together that met all of our needs and have decided for the time being to remain at the status quo. So we expect no changes in that structure and we've put our pencils down on that process.

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Glen W. Hauenstein, Delta Air Lines, Inc. - President [103]

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That will conclude today's call. We're grateful for everyone's time, and look forward to sharing the great results that we will be talking about in October. Thank you everybody.

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Operator [104]

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Once again, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation. You may now disconnect.