delta_425-071608.htm
Filed by
Delta Air Lines, Inc.
Pursuant
to Rule 425 under the Securities Act of 1933
and
deemed filed pursuant to Rule 14a-12
of the
Securities Exchange Act of 1934, as amended
Subject
Company: Northwest Airlines Corporation
Commission
File No.: 1-15285
Forward-looking
Statements
This
information includes “forward-looking statements” within the meaning of the safe
harbor provisions of the United States Private Securities Litigation Reform Act
of 1995. Words such as “expect,’ “estimate,” “project,” “budget,”
“forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,”
“believes,” “predicts,” “potential,” “continue,” and similar expressions are
intended to identify such forward-looking statements. These
forward-looking statements include, without limitation, Delta's and Northwest’s
expectations with respect to the synergies, costs and charges, capitalization,
anticipated financial impacts of the merger transaction and related
transactions; approval of the merger transaction and related transactions by
shareholders; the satisfaction of the closing conditions to the merger
transaction and related transactions; and the timing of the completion of the
merger transaction and related transactions.
These
forward-looking statements involve significant risks and uncertainties that
could cause the actual results to differ materially from the expected results.
Most of these factors are outside our control and difficult to
predict. Factors that may cause such differences include, but are not
limited to, the possibility that the expected synergies will not be realized, or
will not be realized within the expected time period, due to, among other
things, (1) the airline pricing environment; (2) competitive actions taken by
other airlines; (3) general economic conditions; (4) changes in jet fuel prices;
(5) actions taken or conditions imposed by the United States and foreign
governments; (6) the willingness of customers to travel; (7) difficulties in
integrating the operations of the two airlines; (8) the impact of labor
relations, and (9) fluctuations in foreign currency exchange
rates. Other factors include the possibility that the merger does not
close, including due to the failure to receive required stockholder or
regulatory approvals, or the failure of other closing conditions.
Delta
cautions that the foregoing list of factors is not exclusive. Additional
information concerning these and other risk factors is contained in Delta’s and
Northwest’s most recently filed Forms 10-K. All subsequent written
and oral forward-looking statements concerning Delta, Northwest, the merger, the
related transactions or other matters and attributable to Delta or
Northwest or any person acting on their behalf are expressly qualified in their
entirety by the cautionary statements above. Delta and Northwest do not
undertake any obligation to update any forward-looking statement, whether
written or oral, relating to the matters discussed in this news
release.
Additional
Information About the Merger and Where to Find It
In
connection with the proposed merger, Delta filed with the Securities and
Exchange Commission (“SEC”) a Registration Statement on Form S-4 that includes a
preliminary joint proxy statement of Delta and Northwest that also constitutes a
prospectus of Delta. At the appropriate time, Delta and Northwest will
mail the final joint proxy statement/prospectus to their
stockholders. Delta and Northwest urge investors and security holders
to read the final joint proxy statement/prospectus regarding the proposed merger
when it becomes available because it will contain important information. You may
obtain copies of all documents filed with the SEC regarding this transaction,
free of charge, at the SEC’s website (www.sec.gov). You may also obtain these
documents, free of charge, from Delta’s website (www.delta.com) under the tab
“About Delta” and then under the heading “Investor Relations” and then under the
item “SEC Filings.” You may also obtain these documents, free of charge, from
Northwest’s website (www.nwa.com) under the tab “About Northwest” and then under
the heading “Investor Relations” and then under the item “SEC Filings and
Section 16 Filings.”
Delta,
Northwest and their respective directors, executive officers and certain other
members of management and employees may be soliciting proxies from Delta and
Northwest stockholders in favor of the merger. Information regarding the persons
who may, under the rules of the SEC, be deemed participants in the solicitation
of Delta and Northwest stockholders in connection with the proposed merger
will be set forth in the proxy statement/prospectus when it is filed with the
SEC. You can find information about Delta’s executive officers and directors in
its definitive proxy statement filed with the SEC on April 25, 2008 related to
Delta’s 2008 Annual Meeting of Stockholders. You can find information about
Northwest’s executive officers and directors in its Amendment to its Annual
Report on Form 10-K filed with the SEC on April 29, 2008. You can
obtain free copies of these documents from Delta and Northwest using the contact
information above.
******************************************************************************
The
following is a transcript of a conference call hosted by Delta Air Lines, Inc.
on July 16, 2008, the replay of which will be available at
www.delta.com/about_delta/investor_relations/webcasts/ until August 16,
2008.
CORPORATE
PARTICIPANTS
Shannon
Mutschler
Delta
Air Lines, Inc. - General Manager of IR
Richard
Anderson
Delta
Air Lines, Inc. - CEO
Ed
Bastian
Delta
Air Lines, Inc. - President & CFO
Glen
Hauenstein
Delta
Air Lines, Inc. - EVP, Network and Revenue Management
CONFERENCE
CALL PARTICIPANTS
Mike
Linenberg
Merrill
Lynch - Analyst
Dan
McKenzie
Credit
Suisse - Analyst
Jamie
Baker
JPMorgan
Chase & Co. - Analyst
Gary
Chase
Lehman
Brothers - Analyst
Ray
Neidl
Calyon
Securities - Analyst
Bill
Greene
Morgan
Stanley - Analyst
Kevin
Crissey
UBS
- Analyst
Chris
Cuomo
Goldman
Sachs - Analyst
PRESENTATION
Operator
Good
morning, Ladies and Gentlemen. And welcome to the Delta Air Lines June 2008
quarter financial results conference call. My name is Fab and I'll be your
coordinator. At this time all participants are in a listen only mode until we
conduct a question and answer session following the presentation. (OPERATOR
INSTRUCTIONS) I would now like to turn the presentation over to Shannon
Mutschler, General Manager of Investor Relations for Delta Air Lines. Please
proceed.
Shannon
Mutschler - Delta Air Lines,
Inc. - General Manager of IR
Thank
you, Fab, and good morning everyone. Thank you for joining us today to discuss
Delta's June 2008 quarter financial results. Speaking on today's call are
Richard Anderson, Chief Executive Officer; and Ed Bastian, President and Chief
Financial Officer. Also joining us for Q&A are Glen Hauenstein, Executive
Vice President of Network and Revenue Management; and Hank Halter, Senior Vice
President and Controller.
Before we
begin, please note this call is being transmitted live via the internet and is
being recorded. If you decide to ask a question, it will be included in both our
live transmission as well as any future use of this recording. Any recording or
other use or transmission of the text or audio for today's call is not allowed
without the express written permission of Delta Air Lines.
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 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 will also discuss certain non-GAAP
financial measures. You can find the reconciliation of those non-GAAP measures
on our Investor Relations website at delta.com. Before we begin, I'd like to ask
that when we get to the Q&A portion of the call we limit each participant to
one question and one follow-up. And with that, I'll turn the call over to our
Chief Executive Officer, Richard Anderson.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Thank
you, Shannon, and good morning, everyone. Thanks for joining us on the call
today. This morning we announced Delta's financial results for the June 2008
quarter. Excluding special items, Delta recorded net income for the second
quarter of $137 million in spite of record high fuel prices that drove more than
$1 billion in additional fuel input costs year-over-year. This compares to net
income of $274 million the June quarter of 2007. On a GAAP basis, we recorded a
$1 billion loss driven mainly by $1.1 billion non-cash impairment charge. And
you'll recall last quarter, we had the first part of that charge and this is the
final trueup. And a $96 million severance charge -- and I'd note on the $96
million severance charge, that was part of our process that we initiated earlier
in the year to reduce overall staffing at the airline. And that process has gone
well and will result in significant payback within the year.
Generating
positive earnings for the quarter given the unprecedented rise in the price of
jet fuel is something that not many of our competitors will be able to report,
and it's a testament of the hard work of all of the people at Delta Air Lines
that are delivering on our internal financial goals and they're running a great
airline. For the last 12 months Delta ranked number two among our competitive
set for on time performance, and in addition the latest DOT statistics ranked
Delta in the top five for baggage performance in May and we had a 32% decline in
the number of mishandled bags year-over-year in the June quarter. This
improvement reflects our ongoing investment in technology and process
reengineering, and so we appreciate and want to thank all of the Delta employees
for their great work. They received $10 million in shared reward payments during
the quarter for achievement of operational performance goals, so really great
work by our people and we all want to thank them.
Moving on
to the most pressing topic for Delta and the entire industry is the price of jet
fuel. It continues to rise. In the second quarter alone, the price of a gallon
of jet fuel increased $1 to $4. Crude jumped $40 to over $140 per barrel and
prices have continued to rise from there. While these prices are causing a
tremendous amount of pain for almost every industry you can think of, without a
doubt they've created a crisis in the airline industry, not only because of the
magnitude of the change but also because of the pace of the change.
However,
Delta is taking aggressive action to position the company to survive this crisis
and become the industry leader and we're doing this in several core areas. First
we're intently focused on preserving liquidity. We are currently projecting that
we will see about $4 billion of additional fuel cost this year alone; however,
we expect to mitigate almost $3 billion of that higher cost by aggressively
hedging our fuel needs, maintaining strict cost discipline so that we preserve
our best-in-class cost structure and continuing to grow top line revenue. We're
now earning a revenue premium to our peers as a result of our industry leading
domestic capacity reductions, international expansion, yield management
strategies, and overall top line growth of other revenue. In spite of high fuel
prices, it's important to continue to invest in our products and in the markets
that are profitable to us.
As a
result, we recently exercised two additional options for 777 LR aircraft to be
delivered in early 2010, which will further support our plans for international
growth. We're also looking forward to the delivery of the first of 10 737-700s
next week. With the 777s and 737s, we'll have 20 international capable aircraft
deliveries this year and through 2010. The 737-700s are for longer, thinner,
higher airports in South America. Unfortunately, fuel prices also demand that we
make difficult decisions about areas of the business that aren't profitable.
Smaller regional aircraft are not efficient to operate at current fuel levels.
So we are now targeting to remove the equivalent of 100 regional aircraft from
the system by the end of the year through a combination of lease returns,
decreased utilization, and changes in contractual arrangements.
As a
result of these actions to mitigate fuel prices, we expect to close the year
with unrestricted liquidity of $3.2 billion including our $1 billion undrawn
revolver, and we're evaluating additional cash raising opportunities
post-closing of our merger with Northwest. Second, while we recognize that there
are a number of key factors that are driving the recent unprecedented rise in
fuel prices, the lack of any real energy policy in this country, the weak dollar
as well as supply shortages in the face of increasing global demand, we believe
that speculation in the market is also a very real component that must be
addressed. As a result, Delta has partnered with all of our competitors in the
Air Transport Association, both inside and outside of the airline industry, to
insist that necessary changes are made in the regulation of energy
markets.
Last and
most importantly, we're moving forward with the Northwest merger. We believe
this deal makes even more sense at these fuel price levels, and given the lack
of follow on consolidation in the industry, it gives us a real leg up on the
competition in the long term. It's a real game changer in terms of this
industry. In fact, we've already achieved two milestones on the path toward
closing the merger and achieving a seamless integration of the two airlines. The
first was reaching an unprecedented pre-merger contract with both Delta and
Northwest pilots which calls for integrated seniority list upon closing of the
transaction. That allows us to capture the synergies much more quickly. The
leadership of both pilot groups approved a combined agreement earlier this month
and we expect voting by the general membership to be completed by mid
August.
Second,
earlier this week, we announced the post-merger organizational structure of the
executive team that will lead the new Delta. The team will combine leadership
from both Delta and Northwest and their diverse backgrounds and extensive
experience provide a solid foundation for building America's premiere airline.
In addition, our integration teams have been working hard to refine earlier
synergy estimates and identify new opportunities. We have 26 working teams of
executives from the two airlines building the bottoms-up plan for both
integration and development of the synergies. Ed will provide the details later
in the call, but at a high level we expect the merger to provide approximately
$2 billion in annual synergies by 2012. We've also taken a hard look at the cost
and timeline to integrate the two airlines, and now project cash integration
costs of approximately $600 million over three years. Our goal is to provide a
seamless transition on day one, and our guiding principle will be to focus on
integrating only those activities that will provide real value to customers,
employees, and shareholders.
In
closing, Delta's a very different airline today from others in the industry. It
has a very strong and flexible workforce driven by outstanding employees who are
working hard to deliver industry leading operating performance across all
metrics. We're now earning a revenue premium to the industry due to our focus on
network and revenue management and great work from our sales and marketing team.
Our flexible fleet has allowed us to react quickly and decisively to rising fuel
costs. Having a low cost, low capital cost, one of the lowest capital cost
fleets in the industry and many paid for airplanes gives us a lot of flexibility
to react to the demands of the marketplace. We have a significant cost advantage
to our peers and a solid balance sheet. We have a strong liquidity position with
substantial opportunities available to enhance that position, particularly as we
approach the merger with Northwest. Our trans-Atlantic joint venture with Air
France, KLM, and Northwest will be unrivaled in the industry, particularly with
the anti-trust immunity and long term evolution of both of those alliances. Our
merger with Northwest, which will be unmatched by any of our competitors, builds
on all of these assets, driving approximately $2 billion in synergies that will
help mitigate the fuel challenge. And lastly, we're very focused not just on
passenger revenue but all other revenue -- cargo revenue, affinity card revenue,
and we expect to be able to have the strongest top line growth in the industry,
because in the end, that's what really is the driver of the engine. And once
again, just like the three previous quarters, we have very strong top line
growth.
So in
summary, we believe Delta holds one of the strongest hands in the industry, and
because of the strength of our people and business model, I'm confident we can
seize opportunities in the current environment and strengthen our leadership
position as we move forward with the merger with Northwest. With that, I'll turn
the call over to Ed to discuss the financial details for the quarter, and give
you a detailed merger update, and then we'll open it up as usual for questions.
Thank you, thank you for being on the call this morning.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Thanks,
Richard. Good morning, everyone. Thank you for joining us today. For the June
quarter, Delta reported a $1 billion loss which includes three special charges.
A $1.1 billion non-cash charge, net of $119 million tax benefit relating to the
impairment of goodwill and other intangibles. This charge represents a trueup to
the estimates recorded in March and reflects third party valuations that were
finalized during the June quarter. Next, a $96 million severance charge related
to the over 4,000 employees who participated in our early retirement program
announced last quarter. About one-third of those employees have left the company
as of June. 80% in total will have left by the end of September, and the
remainder will exit by the end of this year. And finally a small $6 million
charge related to facilities restructuring.
Excluding
these special charges, net income for the period was $137 million, which
compares to net income of $274 million in the June 2007 quarter. On a base of
396 million diluted shares, this equates to earnings per share of $0.35 and
compares to consensus of $0.10 per share. Operating margin in the quarter was
4%, in spite of the fact that fuel prices were 50% higher on a year-over-year
basis. In fact, higher fuel prices added over $1 billion in additional fuel
input costs this quarter. Delta was able to mitigate almost 80% of this
additional fuel cost through increased revenues of almost $500 million,
including international expansion as well as the other revenue gains that
Richard was referring to, productivity initiatives, and importantly fuel hedging
gains which totaled $313 million in the quarter.
Delta
began taking aggressive actions to combat rising fuel costs last year, when we
developed our 2008 business plan, which included $400 million in revenue and
cost initiatives. As fuel continued to ramp, we worked to make further changes
in our model, allowing us to identify additional revenue enhancing opportunities
and cost savings, and we've accelerated the timing of previously identified
initiatives. Revenue initiatives include growing our cargo business, our third
party MRO, and ancillary revenue stream; new fees for services provided to
customers such as the second checked bag fee, ticket changes, excess baggage and
unaccompanied minor changes; and adding fuel surcharges on Frequent Flier Award
tickets. Some of the cost initiatives that we've implemented include the
workforce reductions that we've already implemented, deferral of certain
rebranding activities, and technology enhancements such as expanding
self-service boarding. All the initiatives combined equate to roughly $650
million in value in 2008 and $1 billion in annual value, so we'll continue to
see the benefits from these actions as they annualize next year.
Turning
to revenue, our June quarter revenue improved 10%, or almost $500 million on a
year-over-year basis. Our network restructuring and yield management initiatives
continued to deliver strong results with with a 6% increase in passenger revenue
this quarter. Delta's consolidated unit revenue increased in the June quarter by
5%, on a 5% increase in the length of haul. This improvement was driven by 4%
higher yield and 2% higher traffic. Delta's consolidated length of haul adjusted
RASM as reported to the ATA was 102% of industry average for the year-to-date
period through the end of May, the last month reported. In fact, in every region
during this period, we were at a revenue premium to the industry. Hats off to
the network revenue management sales and marketing team for delivering premium
revenue results a full year ahead of plan.
Our cargo
team is also doing a great job. Revenues continue to improve, growing $42
million or 36%. These results reflect significantly higher yield from a more
aggressive focus on yield management and a 15% increase in cargo ton miles,
mostly in international markets. The team is implementing structural and
operational changes to further enhance the business. Our other net revenue also
increased $177 million or 45% driven by higher passenger fees, growth in our
third party MRO business, and growth in the Sky Miles revenue
program.
Moving to
cost, our main line CASM ex special items increased 16% for the quarter, which
reflects the sharp run-up in fuel cost. Excluding fuel and other special
charges, main line CASM increased 1 point on a year-over-year basis to $0.0703.
We hedged 49% of our second quarter fuel consumption and averaged an all-in fuel
price of $3.13 per gallon. As a result, our hedges reduced fuel expense in the
quarter by $313 million. Non-operating expenses for the quarter also included a
$31 million gain from FAS 133 benefits.
Strengthening
our balance sheet and liquidity continues to be a top priority. We ended the
quarter with a strong unrestricted cash and liquidity position of $4.3 billion,
which includes our undrawn revolver. Key components include operating cash flow
of $1 billion. Beginning this quarter, we began requiring that our fuel hedge
counterparties post cash collateral due to our fuel hedge positions being
significantly in the money. Operating cash flow includes $671 million from these
deposits. The CapEx for the period was approximately $260 million, which
includes $220 million in net expenditures for aircraft parts and mods. During
the quarter we issued debt totaling $115 million to finance aircraft
pre-delivery payments as well as three CRJ-900 aircraft that were delivered in
the quarter.
In
addition, we paid $97 million in debt maturities and capital lease obligations,
which result in a net debt increase of $18 million. And as I mentioned earlier,
our $1 billion revolver remains fully available and undrawn at the end of the
quarter. At the end of the June quarter, we were well within the required range
of all of our financial covenants. As Richard mentioned, we expect to end the
year with $3.2 billion in total liquidity, which does include our undrawn
revolver. Liquidity preservation is right at the top of our priorities as we
navigate a highly volatile environment. We've been working on additional cash
raising opportunities that we plan to act on following the close of the merger
later this year.
Looking
at advanced revenue trends, overall they are ahead of last year. However, the
pace of change has not been enough to keep up with the changes in the price of
jet fuel. On the international side, yields are up for both business and coach
classes. International business demand exit US is down slightly, but yields are
more than compensating for lower load factors. We're also continuing to see
strength in demand on the exit international side, with additional yield
improvement from foreign exchange gains. Domestically, business travelers seem
to be showing more price sensitivity, with a shift of booking further out to
take advantage of lower fares. As a result, we're recapturing revenue by adding
pricing fences back into the fair structure. Looking forward to the fall, while
there is some concern about the domestic demand environment, we are optimistic
that the actions we and the industry have taken to rationalize capacity will
have the desired effect. The amount of capacity that's coming out of the
domestic system is unprecedented. You're seeing reductions along the magnitude
of those seen post 9/11. We'll continue to evaluate our outlook and competitive
position, and we'll take additional actions if called for.
We would
typically walk you through our guidance at this point of the call. However, we
included that information in our Press Release this morning to allow time to
provide you an update on Delta's merger with Northwest. It's been three months
since we announced the merger agreement with Northwest and we wanted to update
you on the progress we've made, including revisions to both synergy as well as
one-time cost targets. As Richard mentioned we reached a pre-merger contract
with both the Delta and Northwest pilots which calls for an integrated seniority
list upon the closing of the transaction. This is a first in the industry and is
representative of the value that we place on positive labor relations. We
believe that we have one of the best pilot working relationships in the industry
and are working hard to establish the same with the Northwest pilots. The four
year contract that we've agreed to runs through 2012 and calls for pilot pay to
be harmonized day one with pay increases of roughly 4% annually. Note this
includes previously contracted increases, so the incremental cost is roughly 3
points a year. While pay rates will be harmonized, retirement arrangements will
not be harmonized until the end of the contract.
In
addition, Delta pilots will receive a 3.5% equity stake and the Northwest pilots
will receive a 2.38% equity stake in the new Delta. This agreement provides
substantial financial and operational benefits which will far outweigh the cost.
It accelerates our ability to realize network synergies by achieving that
integrated pilot workforce and fleet. It expands our ability to codeshare, and
importantly gets our pilot group behind the merger during this critical
integration period for our two airlines.
As you
know, our initial synergy estimates were based on a high level analysis. Since
that time we have refined earlier estimates through a very detailed bottom up
analysis that included 26 teams across both Delta and Northwest and we have
identified substantial new opportunities. As a result, we've increased our
synergy target to roughly $2 billion annually, which compares to the $1 billion
previously estimated. We expect total synergies in 2009 of roughly $500 million,
increasing about $500 million each year until you get to the full run rate by
2012. When fully ramped up, our network synergies are expected to be $1.4
billion and our net cost synergies to be roughly $600 million annually. Roughly
half of the $1 billion increase in total synergies is from refining earlier
estimates. We now have better information about overhead reduction
opportunities, technology, facilities overlap, and improved efficiencies
possible in the airport operations and our selling cost. With a combined pilot
deal reached, we also now have the full ability to realize network and fleeting
synergies, which accelerates our revenue capture.
The
remainder of the increase comes from identifying structural opportunities which
we knew were available but had not yet quantified. These opportunities include
the value of aligning the affinity card strategy, optimizing the regional jet
portfolio and creation of a single powerful Frequent Flier program. Additional
details on the merger status and synergy update can be found in an 8-K investor
update that we filed this morning.
We
refined our estimate of one-time cash integration costs to approximately $600
million over three years. As Richard mentioned, our guiding principle in the
integration will be to focus on activities that generate a return on their
investment, thereby conserving cash and providing value to our shareholders. Our
initial priorities will be to transition technology systems to a single
platform, move to a single operating certificate for the two airlines and
deliver a consistent customer experience by standardizing our brand, our
employee training, our uniforms, aircraft interiors, and liveries. We have
established 26 integration teams whose mission it is to ensure a smooth
integration and meet our new synergy and integration cost targets. They're
already hard at work and have made significant progress in a number of key
areas.
For
example, earlier this week we announced the organizational structure of the
combined airline, which will be in place at the close of the merger. In August,
we plan to file with the FAA for achieving a single operating certificate. And
following the closing of the merger we'll immediately begin the process of
linking our route networks, substantially increasing our level of bilateral
codesharing and quickly move to a single powerful Frequent Flier program for our
customers. We have continued to work closely with the DOJ to provide all their
requested data and we remain comfortable with our target of closing the
transaction by the end of this year.
In
closing, while the economic challenges that the industry faces today are very
serious, Delta has been a leader in taking aggressive action to position this
airline for long term success. This has demonstrated by our strong focus on
liquidity, our plans to merge with Northwest and our swift action to
significantly reduce domestic capacity and their related cost. We're confident
that the transformation of our business model over the last few years, coupled
with the strategic actions we've taken over the last number of months, make
Delta a very formidable competitor, well positioned for long term success. That
ends the prepared remarks section of our call. At this time, we'll be happy to
take any questions that you may have.
QUESTION
AND ANSWER
Operator
(OPERATOR
INSTRUCTIONS) Your first question will come from the line of Mike Linenberg from
Merrill Lynch. Please proceed.
Mike
Linenberg - Merrill Lynch -
Analyst
Yes, hi,
good morning, all. I have actually two questions. The first one as it relates to
your cuts in capacity, what does that mean for airport costs? And specifically
I'm looking at some of the stuff you're pulling back in Los Angeles. Do we see
on a unit basis those numbers move up, or do you have a unique opportunity with
sort of the merger in the offing to go back to these airport authorities and
recut deals?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Mike,
this is Richard. One of the integration teams has the facilities groups of the
two organizations and you'll notice in this quarter, we've already gone down the
road of starting to do that with part of the special charge that we have in the
GAAP reported earnings of $6 million as related to reduction of those
facilities. We have a plan with Northwest at basically every airport in the
United States to rationalize our capacity. L.A. would be a prime example where
you can consolidate into one of the two facilities and probably have a gain on
the facility that you get rid of at an airport like that. So there's a lot more
opportunity. And we have one team dedicated to that. And our station overlap, to
give you some idea, our station overlap synergy number on the cost side is in
excess of $100 million, well in excess of $100 million. So you hit the nail on
the head.
Mike
Linenberg - Merrill Lynch -
Analyst
Okay,
great. And then just my second question, the situation with Mesa, obviously I
believe -- I don't know if it's formally out on appeal yet, but from what I've
heard is that at present, they're not flying -- the airplanes aren't in the
schedule. What's the minimum that you have to pay them, I don't know if it's on
a monthly basis, what cash is going out and yet, you're not getting or receiving
any services?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Since
it's a pending litigation, it would be best for us to not comment on sort of
what the status of it is. So I wish I could answer your question. I think that
it's best to advise that given the nature of the litigation with Mesa that we
stay off the record on that.
Mike
Linenberg - Merrill Lynch -
Analyst
Okay,
fair enough. Nice quarter.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Thank
you.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Thanks,
Mike.
Operator
Your
next question will come from the line of Dan McKenzie with Credit
Suisse.
Dan
McKenzie - Credit Suisse -
Analyst
Oh, yes,
hi, good morning. Economic conditions appear to be deteriorating pretty rapidly
in the Euro area, and Open Skies appears to be a counterpunch for Delta going
into London Heathrow. So I'm wondering what gives you the comfort that
international demand is going to keep pace with the capacity that's entering the
market looking ahead?
Glen
Hauenstein - Delta Air Lines,
Inc. - EVP, Network and Revenue Management
Well Dan,
it's Glen Hauenstein. How are you?
Dan
McKenzie - Credit Suisse -
Analyst
Thanks,
good morning, Glen.
Glen
Hauenstein - Delta Air Lines,
Inc. - EVP, Network and Revenue Management
Good
morning. We react to demand, and our commitment to our shareholders and
employees that we will react to demand changes relatively quickly. And I think
that you'd see from the domestic pull-down that we had this summer that we were
way out ahead of the industry in seeing what was happening last fall and we
reacted quickly. We are paring down some of our international growth and we're
taking the laggards out of the network for the fall anticipating, that the
robust growth that we've seen over the past two years in international traffic
and revenues will start to level out as we move into the fourth quarter. But
right now, everything is still remaining very strong from all indications,
including forward bookings and advanced yields. So as we see that softening, we
will react. We have a lot of opportunities to continue to move the asset base
around and maximize revenue. So I'm relatively confident that we will adjust
appropriately. But I do share your concern that we may see a softening in some
of the international markets moving forward.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Dan, this
is Ed. Remember also that our growth in the trans-Atlantic is largely going
across to new territories into Africa, into the Middle East, so it's not fully
in the Open Skies arena in terms of some of the classical European arrangements.
We've got a little bit of a different footprint than some of our
competitors.
Dan
McKenzie - Credit Suisse -
Analyst
Okay,
good. And just second question here, given the surprise on the integration
costs, wonder if you could highlight some of those, the big buckets where the
$600 million spend is going to be? And is there potentially more room for
improvement there?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
When we
announced the deal back in the April timeframe, we said not to, integration
costs would not exceed $1 billion, so we were confident at that point. But we
needed to do some more detailed work to get the number down to where you're
seeing it. Some of the big areas that we're going to be spending is obviously in
the technology space. It's going to be critical that we have an effective and
seamless technology integration of the two airlines. There's going to be money
spent in aircraft modifications in terms of bringing our product standards into
a consistent look and feel. We're going to be moving expeditiously to try to
bring from a customer perspective our brand together as rapidly as possible.
You're going to see some costs on the maintenance programs as well as we bring
our maintenance programs into a single standard so that we can receive a single
operating certificate, and you're also going to see transaction costs which
whether it be advisor fees -- and they aren't just Delta fees, obviously there's
Northwest Fees as well and cost on the financing side. So those are some of the
larger bucketed areas for the integration and we expect the $600 million to be
over three year timeframe. Our commitment to our shareholders is that we will
not get out ahead of the value of the deal. We will not be spending money,
waiting for value to show up. We're going to time the cost of the integration to
the value received.
Dan
McKenzie - Credit Suisse -
Analyst
Okay,
great. Thanks a lot. Appreciate it.
Operator
Your next
question will come from the line of Jamie Baker from
JPMorgan.
Jamie
Baker - JPMorgan Chase &
Co. - Analyst
Good
morning, everybody. Ed, just a question, wondering if you've changed your mind
regarding the decision to wait until after the deal closes to secure any
additional funding. Obviously there's some risk that whatever financing pool is
out there today could dry up between now and then.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Jamie, we
are, no, we've not changed our mind in a macro sense. We are working on some
targeted initiatives that we might be able to close pre the merger transaction
closing, and I know that Northwest team is working on some specific tactical
cash raising opportunities as well. But the bigger cash raising opportunities we
continue to believe will be following our close of the merger which will be in
the fourth quarter.
Jamie
Baker - JPMorgan Chase &
Co. - Analyst
Okay, and
as a follow-up to that, Ed, as you potentially bake off the affinity card
providers, off one another, any thought on the expected proceeds you might be
able to generate, particularly now that you can frame your optimism against what
Continental was able to achieve?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Jamie
this is Richard, how are you today?
Jamie
Baker - JPMorgan Chase &
Co. - Analyst
Hi,
Richard, good morning.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
There's a
very substantial opportunity there. When you think about the size of what this
Frequent Flier program will be and you just look at what our other revenue line
is at Delta and the other revenue line at Northwest and try to glean out sort of
what the size is, it's substantially more than the numbers that Continental
posted in their forward mileage sale. And we're pretty optimistic about that,
because the termination periods of the two affinity cards at each of Northwest
and Delta are pretty well in line. So we're actually pretty excited about that
opportunity.
Jamie
Baker - JPMorgan Chase &
Co. - Analyst
And while
I have you, Richard, based on the capacity cuts you and others have announced so
far and based on your view for 2009 -- do you think that model is working again
at $4 jet (inaudible) that you could be profitable next year, if enough capacity
comes out?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
I think
we're still in the planning process for '09, and I think probably what we would
look at doing is in the Q3 call is to try to give you a bit more of an update.
But I think we need to see where the final schedule tapes come in in the fall.
While there have been a number of announcements, we still need to see what the
final schedules are and I think we've got a bit more work to do on our business
plan looking out at '09. I think the model has got to, the whole industry model
has got to evolve much more quickly in that kind of a fuel environment, and
you've got to really be thinking through about -- you've got to really be
thinking through about what does the network look like and what size aircraft
will work at what demand levels. When you think about the amount of leisure
traffic, there's been a lot of capacity built in the United States over the past
decade to carry pretty much low end traffic. Unlike the Europeans by the way.
You think about the European model, European model is a model that doesn't have
as much sort of excess capacity to carry the lower end traffic, and it's
probably the lower end traffic that is not going to want to purchase at the
market clearing price that covers the cost of fuel. So we're spending a lot of
time rethinking what that model, what the industry model looks like, and how you
make it work at those levels. But a lot of of it is going to depend upon what
the total industry reaction is to these fuel price levels and how that reaction
is demonstrated in the capacity changes that are made over the next two
quarters.
Jamie
Baker - JPMorgan Chase &
Co. - Analyst
Okay,
good. Thanks for your thoughts on that, Richard. Appreciate
it.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
You
bet.
Operator
Your next
question will come from the line of Gary Chase with Lehman
Brothers.
Gary
Chase - Lehman Brothers -
Analyst
Good
morning, guys.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Good
morning, Gary.
Gary
Chase - Lehman Brothers -
Analyst
Just a
couple quick ones. Ed, you mentioned in the prepared commentary you're planning
to remove 100 regional jets or effectively remove the equivalent of 100 regional
jets by the end of the year. Is that foreshadowing additional capacity
reductions off the mainline, away from the mainline during 2009? Or should we
consider that pretty consistent with what you've talked about in terms of your
capacity plan for the fourth quarter and the run rate of
that?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
I think
it's consistent with what we're looking at for the fourth quarter but certainly,
Gary, you can't divorce the mainline and the regional portfolios from
themselves. When you look at this fuel environment, there's no question of the
most inefficient and least productive aircraft that we operate are the smaller
gauged regional jets. And that's why we're moving as aggressively as we are to
reduce that flying. We've announced some deals here very recently and we're
going to probably have some additional announcements coming over the next few
months, so I'd expect there to be some potential for some additional mainline
reductions going into next year.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
I think,
Gary, that's probably, it's hard to break out what portion of the 100, but it's
really a bit additive, if you will. In other words, there's some of that 100
that's in the domestic pull-down and I don't have the exact break out, but
there's some of it that's on top of that because we're just looking at what 50
seat airplanes look like on some of the longer stage lengths and it just doesn't
make sense on the longer stage lengths for sure. So this will be, some of those
will be additive and as we finish our capacity planning for the fourth quarter
and the first quarter, you should expect us to continue to trim on the regional
jet fleet.
Gary
Chase - Lehman Brothers -
Analyst
Okay, and
then if I could ask you to tighten up a little bit, I think the stuff that
you've disclosed about how the synergies are going to look for next year is
important because you're talking about realizing more operational synergy than
you are cash integration costs. And in an environment like this where liquidity
is at a premium, as you've acknowledged that's really important. Can we talk
about the $500 million that you're expecting to generate in 2009 and just give
us a sense of what that is that's hitting and what your confidence level is in
that $500 million and the speed with which that will spool versus the $2 billion
you expect to get to over time?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Sure,
Gary. The bulk of the early savings or the synergy benefits, if you'll recall,
are going to come initially from the coupling of the networks together. So being
able to fully flow the fleet back and forth between the two networks is one of
the rationale why we wanted to get the unified pilot deal done prior to closing
as well as with an integrated seniority list prior to closing. So you'll see the
network synergies are probably the bulk of that $500 million in the first year.
And when we call it network synergies, that includes not just S-curve and
presence, but benefits also coming from our Frequent Flier program, benefits
coming from the affinity card program as well. Many of the cost synergies will
take a little bit longer to get at because some of those are technology oriented
and they also will require us to continue to work with the various labor groups
at Delta as well as Northwest. And there will be cost dissynergies attached to
those in the first year. So I think you can think about the first year as
largely being a revenue play and then by the second, we're starting to ramp up
the cost synergies and the network synergies are taking firmer
shape.
Gary
Chase - Lehman Brothers -
Analyst
Okay, and
then you mentioned -- I think you said a $3.2 billion liquidity target by the
end of the year.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Right.
Gary
Chase - Lehman Brothers -
Analyst
And you
noted, you expect to close the merger before the year ends and there might be
liquidity opportunities that follow that. Does the $3.2 billion contemplate any
additional financing or is that where you expect to end prior to additional
financing options you may pursue?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
The $3.2
billion is the Delta standalone estimated and it has no benefit from any
financing or cash raising opportunities that we're exploring.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
And Gary,
this is Richard. We would expect on the timeline that we have that between Delta
and Northwest, there will be fairly significant cash raising done prior to the
close. But the lion's share will come after the close. But we're pretty
comfortable with where we are on the liquidity position, because we know -- we
already have contemplated a couple of actions that -- one of which is the
affinity card we alluded to earlier -- a couple of actions that can
substantially increase the combined pre-liquidity of the merged
entity.
Gary
Chase - Lehman Brothers -
Analyst
Okay,
guys, appreciate it.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Okay,
Gary.
Operator
The next
question will come from the line of Ray Neidl from Calyon
Securities.
Ray
Neidl - Calyon Securities -
Analyst
With the
grounding of 100 regional aircraft, I was just wondering if you could go into a
little bit more detail on what you think your regional needs will be going
forward, both as Delta standalone and then after the merger. Will there be more
cutbacks and will you take Compass from Northwest and use your own pilots to fly
a lot of the regionals?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Ray, this
is Ed. One of the benefits that we've factored into the updated synergy analysis
is the fact that we'll be a fairly large scale customer, if you will, of the
regional jets. And in fact I think we're going to have roughly 40% of the
smaller gauge regional jets under Delta code between us and Northwest by at the
time we close this deal. So we do expect there's going to be rationalization of
the portfolio. We do expect that the 100 aircraft reduction that you see, there
will be additions to that, not in terms of reductions, not additional aircraft
but additional reductions. And I think more importantly, I think it gives us a
chance to sit down with our contract partners across both networks on the
regional jet front and talk about how we can do business more effectively
together and more efficiently together, because there's a lot of redundancy and
a lot of cost to operating as many contracts as both we and Northwest do. Then
we'll have a nice blend of owned carriers as well as contract carriers, and I
think there's going to be a substantial value that we can create over the next
couple years there.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Yes, this
is Richard again. The interesting thing on the owned side, when you take Comair,
Mesaba, and Compass, even though they will still continue to be operated as
separate carriers, there are very significant overhead and fleet commonality
opportunities that can come from operating those sort of more collectively. They
would each maintain their separate carrier status, but at the same time there
are many overhead and SG&A opportunities that can be rationalized because
that's in and of itself a very large airline, those three airlines combined in
terms of their fleets.
Ray
Neidl - Calyon Securities -
Analyst
Okay. And
the second thing, being that Delta is one of the leaders in writing a letter to
Congress for investigation on the futures markets in oil, would you like to go
into a little bit more detail on why you think that market may be manipulated
and more importantly, what you think the positive aspects of investigation will
do in possibly lowering oil prices?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Well,
when you think about what's happened in money-markets generally, the bond
market, the stock market, the mortgage lending market -- pretty much all of the
other places for money to go the last two years have not been very good. And
when you look at where the large investment banks are making a lot of their
money these days, it's in the commodities market, and if you look over the last
three or four years, all investment advisors to endowments and pension funds and
trusts have now moved into the new category class of "commodities". So, since
2004 you've had about $350 billion move into the futures market, and when you
look at just the pure paper trading on a daily basis versus what the actual
consumption is, it's significantly higher, and these are very unregulated
markets. And while the lobby on the other side of this is incredibly powerful,
the NYMEX and Chicago Mercantile Exchange and Goldman Sachs and firms like that
make an enormous amount of money in turning these futures markets. And I think
there's a fundamental public policy that with respect to food and fuel, are you
going to have that kind of speculation in the market that drives price? When you
have price of a barrel of oil go up $11 or $10 as we had it happen one day
earlier this summer, when an investment bank issues a report saying oil is going
to $150 or $200 and then immediately everybody rolls their futures, there's
something more going on in the market. In a relatively unregulated market,
there's more going on there than just hooking supply to demand. So we think that
just like yesterday, the SEC reacted very quickly to speculation in the stock
market. We haven't seen that kind of reaction in the commodities market, and
because all these other markets are doing so poorly and PEs are down so low, all
that money is flooding into the long commodity market. So you're seeing it in
wheat, corn, in oil. And ultimately, there have to be some public policy
decisions made about whether or not that's the right public
policy.
Ray
Neidl - Calyon Securities -
Analyst
And would
you be in favor of more transparent SEC investigations of the short players and
stocks?
Richard
Anderson - Delta Air Lines,
Inc. - CEO
Well, I
think the work that the SEC is doing right now is the right work. I mean, I
think that from a policy standpoint, what they're trying to do is make the
markets work, and when markets don't work, because of aberrant behavior like
this, it's not good for anybody.
Ray
Neidl - Calyon Securities -
Analyst
Okay,
great. Thank you very much.
Operator
Your next
question will come from the line of Sir William Greene from Morgan
Stanley.
Bill
Greene - Morgan Stanley -
Analyst
Hi, it's
Bill Greene. Richard, or just the team generally, can we just come back to the
synergies here and can I ask you a couple questions about them? One, do you have
an impact from Continental leaving SkyTeam in there, two do you have any
assumptions of more mergers coming down later on, and three, is the SkyTeam ATI
incremental to the synergy or is it within the synergy?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Bill,
this is Ed. Yes, when we did the deal, we fully were aware that there was a high
risk that Continental would be leaving SkyTeam, so we factored that into our
thinking. I would tell you that it's not a big number in our view. What's your
second question?
Bill
Greene - Morgan Stanley -
Analyst
Well, I
wanted, before we go on to the second one, just Continental, I thought Northwest
said it was around $125 million to $200 million, somewhere around that from the
joint venture that they have?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
There's
clearly some value on the Northwest side, but at the end of the day, it's
probably as it relates to SkyTeam in and of itself it's not a big
number.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
It's not
much at all, Bill. Over time with yield management mapping and steps that had
been taken over time between the two carriers, it's not a very material amount
of money.
Bill
Greene - Morgan Stanley -
Analyst
Okay, and
then in your synergies do you assume there are more mergers or no, this is
it?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Well our
synergies, again, they were -- the focus was putting our two networks together
against the economic backdrop that we can see today. When we did this work, are
we assuming there's going to be a follow on deal? You tell me. I think at some
point, we certainly thought there was going to be and now it appears there may
not be for a little bit of time. So I'm not certain that it's shaded plus or
minus as the industry consolidates. We do believe long term there probably will
be some additional consolidation, but it's certainly not going to be in the near
term.
Bill
Greene - Morgan Stanley -
Analyst
All
right, and then is the SkyTeam ATI benefit in the synergy number or
no?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Yes.
Richard
Anderson - Delta Air Lines,
Inc. - CEO
It's
understated, it's in the synergy benefit but I would say that overall, we
haven't really leveraged the full impact of what having 30% of the market in an
immunized joint venture with KLM, Air France, Northwest and Delta, is long term
really going to be able to create. Because if you look at the margins that
Northwest has across the trans-Atlantic, they're among the highest margin in any
airline business anywhere in the world, and when you think about being able to
leverage that across a network that's three times as big, it has significant
opportunities.
Bill
Greene - Morgan Stanley -
Analyst
Okay, and
if I turn to the cost segment, how much did the cost synergy change as a result
of the pilot deal?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
The cost
synergy number didn't change in aggregate much. The timing moved a little bit
up, so we have the cost synergies kicking in on the Northwest side day one
whereas when we announced a deal in April we didn't have a deal so that was
viewed as being a slower ramp. That said also the revenue benefits have kicked
in day one on a much enhanced basis, so there's substantial accretion given to
the fact that we actually have this deal done.
Bill
Greene - Morgan Stanley -
Analyst
And then
just last question for Glen. If you look at the capacity cuts that you got
planned for the fourth quarter, how much above that sort of absolute value of
that capacity cut should we expect RASM to go up? How much yield managing can
you really do above and beyond the cut?
Glen
Hauenstein - Delta Air Lines,
Inc. - EVP, Network and Revenue Management
Well,
Bill, I think that's the $64,000 question, isn't it? Unprecedented industry
capacity reductions, will that translate, what will the actual economic back
drop be, what will be able to be translated into unit revenue increases? And
while we're cautiously optimistic, we don't know if that's enough yet, if that's
enough capacity from the industry. And to add to Richard's comment earlier, more
industry capacity has to come out. And the question is, where does it have to
come from? Does it have to come from those carriers that don't have business
plans that are languishing in bankruptcy court or does it have to come from the
legacy carriers, and I guess the markets will determine that too. So there's a
lot out on the plate waiting to see how this evolves into the fall, and our
commitment to our shareholders and to our employees is to stay ahead. And I
think we've done a good job to date staying ahead and we plan on continuing to
stay ahead as these trends develop, but we don't have great visibility into
October and November for revenue yet, and that's when a lot of the capacity
actually hits. So cautiously optimistic, would hope that it needs to be double
digit numbers to cover fuel, right? And so we're hoping we get there and we're
hoping that the industry environment stays in a rational pricing and that demand
holds out.
Bill
Greene - Morgan Stanley -
Analyst
All
right, thanks for your help.
Operator
Your next
question will come from the line of Kevin Crissey from UBS.
Kevin
Crissey - UBS -
Analyst
Good
morning, everybody. Can you talk about the merger review process outside of the
US and the status in the EU?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Kevin,
this is Ed. That process is moving on quite well. I know there's was a recent
announcement about a suspension of the review -- that's apparently, my
understanding is that's a fairly small detail that needs to be wrinkled out. We
do not expect there to be any delay as a result of that, the EU review process
and our ability to close the deal by the end of this
year.
Kevin
Crissey - UBS -
Analyst
Okay and
then could you talk about -- AirTran, according to the stock market and our
numbers, AirTran is in significant number. Could you talk about your approach to
AirTran Markets and capacity cuts as it relates to those
markets?
Glen
Hauenstein - Delta Air Lines,
Inc. - EVP, Network and Revenue Management
There are
no capacity cuts in AirTran Markets. As a matter of fact, despite the fact we're
down in general capacity by about 13 to 14% in the fall domestically, we're
actually up in AirTran competitive markets into and out of Atlanta, some of the
point to point flying we have taken reductions in. But into and out of Atlanta
-- of course Atlanta being our core strength market, we are continuing to leave
that capacity in.
Kevin
Crissey - UBS -
Analyst
Okay, and
finally if I could, in terms of the first bag fee, I think Northwest has it and
you don't and where is that heading?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
We are,
we will study it. We will continue to study it but we have no plans to implement
it at this point.
Kevin
Crissey - UBS -
Analyst
Thank you
very much.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
You're
welcome.
Operator
Your next
question will come from the line of Chris Cuomo from Goldman
Sachs.
Chris
Cuomo - Goldman Sachs -
Analyst
Hi, good
morning, everyone.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Good
morning.
Chris
Cuomo - Goldman Sachs -
Analyst
For Glen,
if you could just perhaps just dig a little bit deeper into the pricing activity
that you're seeing in the here and now, sort of in the domestic market as
opposed to what you expect in looking forward. Just the with respect to
competitor action, your own action, you are cutting domestic capacity reasonably
significantly, but only generating modest yield gains in Q2. Just could you
comment on what's driving that, why is that the case?
Glen
Hauenstein - Delta Air Lines,
Inc. - EVP, Network and Revenue Management
Well, I
think there's a couple of issues that are going on and we're studying each one
of these individually because there have been unprecedented moves in pricing by
the legacy carriers in the non-LCC competitive market. And there are a lot of
satellite airports, and we're seeing changes in traffic pattern which is we're
having to react to by either going back on some of the pricing increases and the
fuel surcharges to move the traffic back into the appropriate airports or
cutting capacity, so we are in a transition process here. The whole industry is,
and I think what you've seen, we've given our increase in length of haul is that
our capacity cuts have put us at the upper end of the range of where the
industry is at as far as unit revenues go, and we think there's a lot more
opportunity as we finetune this. We've never as an industry seen pricing move as
quickly as we have, of course in response to their run up in fuel, and that
creates an entirely different demand set. So now we have to go back and analyze,
individual market, every individual market, was that the right move? Is there
more upward mobility in pricing? Do we have to move back on some markets or
should we take capacity out? And that's the process is we're in right now and
that's why I think we're not doing more capacity cuts right now. We're waiting
to see essentially where this equilibrium goes and how, when we finetune it,
what more we get out and as the industry starts to come to the party in the fall
what the implication of that is. But there are carriers out there pricing for
cash.
And
that's really continuing to put a big dampening on the impact. So while I'm
optimistic Delta will be in a great relative position, I'm also wondering --
maybe you could help me answer this -- is we hear there's a global demand for
narrow body equipment, yet carriers that are in bankruptcy today, those planes
are not leaving. And so what is the global demand environment and is it softer
than we think?
Chris
Cuomo - Goldman Sachs -
Analyst
Understood.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Chris,
this is Ed. One further point. Remember also that a significant amount of our
capacity reductions really kick in at the end of the summer season, so you
haven't seen the yield effects yet of the large scale domestic pull-down. It
will be taken in in the August to September timeframe.
Chris
Cuomo - Goldman Sachs -
Analyst
Okay,
very good. How about just quickly on the other revenue line? Obviously you and
many other carriers have instituted a number of additional fees and charges.
Have you put a target out there or sort of all in bucket that you're seeking to
achieve? And broadly speaking, just broadly how are you tracking with respect to
your initial goals?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
We are
tracking on to the plus on the initial goals. We're seeing on the other revenue
line about a 25 to 30% growth rate all in when you factor in not just the fees
and the additional charges from decoupling the pricing environment and actually
charging for services rendered. But also look at what we have on our SkyMiles
program, when you look at what we're doing in cargo, when you look at what we're
doing in our third party MRO business, we're expecting non-passenger revenues
for Delta this year, full year, to end the year at about $2.8 billion, a
substantial business, and that's growing at a 25% growth rate and we continue to
see that growth into next year, as well. So it's a big part of our strategy with
with respect to how the business model is changing and the type of revenue we're
needing to generate to cover this higher fuel cost.
Chris
Cuomo - Goldman Sachs -
Analyst
Very
good. And then just real quick, the real important question. What's your second
half crude oil assumption? What are you going with, a forward
curve?
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
We use
the forward curve on our guidance. I think we gave guidance on fuel for the
third quarter. Roughly in the $135 range, crude assumption is the
assumption.
Chris
Cuomo - Goldman Sachs -
Analyst
Great.
All right, thanks a lot, guys.
Ed
Bastian - Delta Air Lines,
Inc. - President & CFO
Thanks,
Chris.
Operator
That
concludes the question and answer session for today's conference call. Thank you
very much for your participation. You may now disconnect your lines. Have a
wonderful day.