Jul 27, 2011
Executives
Edward Bastian - President and Director Jill Greer - Director Investor Relations Richard Anderson - Chief Executive Officer and Director Glen Hauenstein - Executive Vice President of Revenue Management & Network Planning Hank Halter - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Analysts
William Greene - Morgan Stanley Kevin Crissey - UBS Investment Bank Andrew Compart Garrett Chase - Barclays Capital Karen Jacobs Kelly Yamanouchi - Denver Post Mary Jane Credeur - Bloomberg News Daniel McKenzie - Rodman & Renshaw, LLC Joshua Freed - The Associated Press Duane Pfennigwerth - Evercore Partners Inc. Glenn Engel - BofA Merrill Lynch Jamie Baker - JP Morgan Chase & Co Bob McAdoo - Avondale Partners, LLC Raymond Neidl - Calyon Securities Unknown Analyst - Helane Becker - Dahlman Rose & Company, LLC Michael Linenberg - Deutsche Bank AG
Operator
Good morning, ladies and gentlemen, and welcome to the Delta Air Lines June 2011 Quarter Financial Results Conference Call. My name is Cynthia, 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 Sullivan Greer, Managing Director of Investor Relations for Delta.
Please go ahead, ma'am.
Jill Greer
Thanks, Cindy. Good morning, everyone, and thanks for joining us on our June quarter call.
Joining us from Atlanta today are Richard Anderson, Delta's CEO; Ed Bastian, our President; Hank Halter, our CFO; Glen Hauenstein, our EVP of Network & Revenue Management; Steve Gorman, our Chief Operating Officer; Mike Campbell, our EVP of HR and Labor Relations; Paul Jacobson, our Treasurer; and Ben Hirst, our general counsel. Richard, Ed and Hank will open the call with remarks on the quarter's performance and we'll then move to the Q&A session.
To get in as many questions as possible during the Q&A, please limit yourselves to 2 questions. 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 discuss non-GAAP financial measures today. All results exclude special items unless otherwise noted, and you can find a reconciliation of our non-GAAP measures on the Investor Relations page at delta.com.
And with that, I will turn the call over to Richard.
Richard Anderson
Thank you. We reported $366 million profit for the June quarter with $1 billion higher fuel expense and a 7% operating margin.
The strength of our strategic plan and the dedication of our employees are evident in this performance in that we produced solid profit in the face of a steep challenge from higher fuel prices. We appreciate the hard work of our people.
We had solid revenue performance for the quarter, growing the top line by 12% and generating a revenue premium to the industry. We believe the high-fuel environment is here to stay and the permanency of that condition must be a reality for Delta.
While revenue gains offset 70% of our total cost increase, we must increase revenues, make further capacity reductions and nonfuel cost reductions, continue to be very disciplined about capital spending, and continue our march toward $10 billion in net debt. First, our primary means of recovering fuel increase is should be through higher revenues.
Our prices at delta have to reflect the cost of goods sold. We built good revenue momentum from our revenue initiatives, corporate contract gains, and revenues from new products and services.
Second, we've got to reduce capacity in markets where revenue has not kept pace with rising fuel costs. There are some markets, including a number of small markets we serve, that simply are not profitable at these fuel prices that at capacity will exit permanently.
Previously, our December quarter capacity plan has been a 4-point reduction given the economic uncertainty. We believe it prudent to reduce capacity further as a hedge against the economy and higher fuel prices.
Therefore, our fourth quarter capacity will be down 4% to 5% versus last year and down 20% versus the summer schedule. In the trans-Atlantic, we saw the weakest revenue performance last winter.
Delta and our JV partners, who represent 1/3 of the capacity across the Atlantic, established our winter capacity levels as a single entity, leading to a combined 7% to 9% reduction in the December quarter. Third, we're committed to bring in our nonfuel CASM down to 2010 levels by the end of the year.
With our fall capacity reduction, we will resize the airline's new flying levels and reduce the size of our fleet staff and facilities. We will retire 140 of our least efficient aircraft by the end of 2012, with half leaving the fleet this year.
2,000 employees elected to participate in voluntary exit programs. Those exits will begin when we begin pulling down flying in September and be completed by the end of the year.
We're consolidating facilities in Atlanta, Minneapolis, Cincinnati and Memphis that will reduce our facilities' footprint by 1.2 million square feet. Finally, we will hit our $7 billion debt reduction target to get to $10 billion in net debt.
We generated $700 million of free cash flow this quarter and reduced our adjusted net debt to $13.8 billion. In 18 months, we've used our cash flow to reduce our net debt by over $3 billion and making modest but prudent investments in our fleet product facilities and technology.
We will hold our capital spending to $1.2 billion this year, including all airplane acquisitions, and we'll hold to that number for the foreseeable future. Our goal is to consistently generate a 10% return on invested capital.
We have the right foundation in place, generating an 8.5% return on invested capital for the last 12 months with more than $2 billion of fuel increases during that time. We are pleased with the actions.
We know we have a lot more to do, and we are determined to fix the business for our owners. With that, I'll turn it over to Ed.
Edward Bastian
Thanks, Richard. Good morning, everyone.
Thanks for joining us on the call this morning. Excluding $168 million of special items, we reported a net income of $366 million for this quarter or $0.43 per share.
This is largely in line with First Call consensus of $0.44 per share. Our operating margin of 6.9% was down 4.5 points from last year.
EBITDAR was $1.1 billion for the June quarter. And over the last 12 months, we've generated $4 billion in EBITDAR.
We had $1 billion of operating cash flow and $700 million in free cash flow this quarter. Delta's June quarter top line revenue increased $985 million or 12% on a year-over-year basis.
Our passenger revenues grew 13% on a 2.5 point increase in capacity. Cargo revenues increased 25%, driven by higher yield and higher volumes.
Our other revenue grew $50 million due to increased MRO insourcing revenues. And for the quarter, our passenger unit revenue increased 10%.
I'd like to offer my thanks to the entire commercial and operating teams for the strong performance they delivered this quarter. Our revenue results led the industry, and we look forward to building on this momentum over the balance of the year.
We have strong domestic revenue performance as unit revenue domestically increased 12% due to a solid pricing environment as well as corporate revenue share gains. In the trans-Atlantic, our unit revenues were up in the high-single digits during this entity's seasonally strong period.
Our capacity adjustments have started to kick in as our trans-Atlantic capacity by June was flat on a year-over-year basis, which will certainly help our second half unit revenues. Our Latin unit revenue increased 14% due to strong yields and load factors in South America and the Caribbean, while Pacific unit revenues increased 6% during the quarter even with an approximately $125 million negative hit from the impact of the events in Japan.
Demand is recovering in the Pacific, particularly in the Asian beach markets and our Narita overflights. Our Japanese point-of-sale traffic has recovered at a much faster pace than our U.S.
point-of-sale flights for Japan. And for this reason, we sought and received a temporary waiver for 1 of our 2 Haneda flights.
We estimate that the impact in the September quarter from the Japanese events will be revenue hit of approximately $80 million. Our corporate revenue continues to gain strength for both domestic and international travel with total corporate revenues up 24% year-over-year for the first half of 2011.
And as we've previously discussed, we are targeting $1 billion of incremental revenue by 2013. To facilitate these new revenue streams, we're investing in delta.com and our new e-commerce capabilities to bring new products and services to the marketplace.
These will include our new international Economy Comfort product, which was launched in June and has been met with great success. We anticipate that these new products will generate $150 million to $200 million of new revenue streams in 2011 and a full $1 billion in new revenues by 2013.
Now with regard to the September quarter. We expect to be solidly profitable with a 7% to 9% operating margin despite having -- incurring over $1 billion in higher fuel expense.
Our summer bookings and yields remained solid. And we anticipate our July unit revenues to be up 8% to 9% over the prior year.
As we move into the second half of 2011, we continue to see high-single digit growth in unit revenues. And while we currently see no significant signs of demand weakness, our September capacity reduction should temper any slowdown in momentum.
For the September quarter, our system capacity will be flat, with our domestic capacity down 1% to 3% and our international capacity up 2% to 4%. Within the international, our trans-Atlantic capacity will be down 3% to 5%, offset by growth in the Pacific from our new Haneda service and Asian overflights.
For the December quarter, we're reducing capacity by 4% to 5%, with domestic down 1% to 3% and international down 4% to 6%. As part of that reduction, we're reducing our trans-Atlantic capacity by 10% to 12%, which is down over 30% from summer flying levels.
We believe that the revenue momentum we have in the business, coupled with the capacity changes we're making in underperforming markets gained our actions to get our nonfuel cost back to 2010 levels, will generate the margins we need to hit our return targets in this high fuel environment. With that, I'll turn the call over to Hank.
Hank Halter
Thanks, Ed. Good morning, everyone.
Turning to cost performance for the June quarter, operating expenses for the quarter increased $1.3 billion or 18% on a 2.5% increase in capacity. Fuel cost per gallon is up 39%, contributing to $1 billion in higher fuel expense.
Excluding fuel, the consolidated unit cost were up 4.8% due to maintenance volumes and higher revenue-related expenses, and nonoperating expense decreased $111 million or 29% versus prior year due in part to our delevering strategy. Looking to the September quarter cost performance, we anticipate September quarter nonfuel unit cost to be up 2% to 4% from prior year.
As Richard mentioned, we've begun a series of initiatives designed to bring our nonfuel unit cost flat by the end of this year. To accomplish this, we'll take out all the costs associated with our capacity reduction and then implement a series of initiatives to reduce costs further.
As part of these initiatives, we are expecting significant maintenance savings from our aircraft retirements. Retiring these maintenance-intensive aircraft will generate $250 million in maintenance savings for the second half of 2011 as compared to the first 6 months of this year.
In addition, we're consolidating facilities as well as reducing our headcount by more than 2,000 through voluntary programs. We're also lowering selling and distribution costs by shifting to a more efficient distribution system, including a 4-point increase in delta.com share of bookings.
We currently sell 37% of all tickets through delta.com, making it our largest distribution channel and significantly larger than all online travel agencies combined. With our merger integration completed, we will further reduce discretionary and overhead cost to ensure that we're running the most cost-efficient company that we can.
These initiatives, which target both fixed and variable costs, will bring down our nonfuel unit cost to 2010 levels by the end of this year. Delta has a long history of having the lowest unit cost of all legacy carriers and we intend to maintain that advantage.
In addition to reducing our operating expenses, we're also prudently managing our capital spending. Our capital spending will be $250 million in the September quarter and $1.2 billion for the full year.
With regard to fuel and hedging, our consolidated all-in fuel price was $3.22 per gallon for the June quarter, up $0.90 from prior year. During the June quarter, we hedged 54% of our fuel consumption, which resulted in $118 million of net gains for the quarter.
For the remainder of the year, we've hedged 49% of our consumption. As of Friday's forward curve, these positions are worth $225 million net of premiums.
We're anticipating that our all-in fuel price will be $3.20 per gallon for the September quarter and $3.31 per gallon for the December quarter. And with regard to our debt reduction program, as of June 30, our adjusted net debt was $13.8 billion, a $700 million reduction from the end of the March quarter.
We have now completed $3.2 billion of our stated $7 billion debt reduction goal while making important investments in our fleet, products and facilities. I'd like to thank the Delta team for their great work this quarter.
Throughout the entire operation, our employees pulled together to run a safe, clean and on-time operation while generating double-digit unit revenue improvements. And I'm confident that we will continue to build on our successes in the quarters to come.
Jill Greer
Thank you, Richard and Hank. We are now ready for questions from the analysts.
Cynthia, if you could please review the process for asking a question. And again, we ask everyone to limit themselves to 2 questions during the Q&A.
Operator
[Operator Instructions] We'll take our first question from Jamie Baker at JPMorgan.
Jamie Baker - JP Morgan Chase & Co
Richard, unfortunately, the 2 airlines [indiscernible] the airline that has ordered planes and the airline, yours, that is about to order planes. Obviously, there are other factors that play here [indiscernible], but I am curious if this level of value destruction has impacted your thinking about how you're going to allocate capital for new airplanes and whether they might be a plan b, vis-à-vis the narrowbody RFP that's currently outstanding?
Richard Anderson
Jamie, we obviously have a pretty conservative view given our focus on our net debt reductions. So whatever efforts we make in that regard have got to take into account our delevering initiatives and proper use of our free cash flow.
So when we think about those airplanes, one, it's replacement capacity. Number two, it's the intersection of where the cash flows are more positive.
We saw pressure in this quarter from maintenance expenses and we have a significant opportunity to take airplanes that are almost 30 years old that have very significant cash requirements to maintain. And so what you have to do, it's almost a shell-by-shell analysis of can you improve the P&L and the cash flow by taking a new airplane.
Our bias is much more toward owning airplanes, not leasing airplanes, because I think the only way you ultimately get a payback on an airplane is to own it for 30 years. It's a long-lived asset and you don't want to have the residual value belonging to somebody else.
So our view is a very conservative view of that, and we're not going to destroy value by doing that. We actually think that if we are modest in the number of airplanes that in fact, we can improve our P&L with it.
And if we can't improve our P&L with it, we're not going to do it.
Jamie Baker - JP Morgan Chase & Co
Okay, perfect. And just a clarification.
Hank, on the RASM and the margin guidance, I presume this excludes any one-time benefits associated with the FAA situation?
Hank Halter
That's correct.
Jamie Baker - JP Morgan Chase & Co
And also, I missed your comment on the 2010 x fuel CASM, your getting to a level commensurate with 2010 x fuel CASM, what was the timing that you indicated? Is that a full year 2012 or year end 2012?
Hank Halter
We'll end 2011 with our CASM flat to 2010 levels, so that would be at the end of 2011.
Richard Anderson
Our goal, Jamie, is to bring our 2012 nonfuel CASM into line with 2010 levels. Jamie, did I answer your question on the fleet?
Jamie Baker - JP Morgan Chase & Co
Yes, you did. I mean, the risk is that you're variable fuel exposure with fixed ownership cost or fixed lease cost, so your point on ownership is well taken.
Yes, that was a good answer.
Richard Anderson
But let me be crystal clear about it, because I think this is important for our shareholders. We're not buying shiny objects here.
Our goal here is to improve the P&L with a modest order of airplanes because if you look at the MMNR [ph] line, with 30- to 35-year-old airplanes have higher maintenance costs. If you can take down the maintenance cost and have more efficient operations, you improve CASM.
And if you stay within our march to get to $10 billion in net debt, you will actually improve the P&L of the airline if you integrate the airplanes the right way and take out much higher cost airplanes. And it really is conditioned upon owning the airplane and not leasing the airplane.
Operator
We'll take our next question from Dan McKenzie at Rodman & Renshaw.
Daniel McKenzie - Rodman & Renshaw, LLC
Now my first question is really a housecleaning question here, relating to the debt extinguishment. What were the upfront costs and what portion was recognized in the current quarter?
And then related to that, what are the total transactional savings you expect over a 2- and 5-year period?
Hank Halter
Dan, I don't have the numbers right in front of me. We can get back to you with the details.
It was not a significant amount of debt extinguishment in its current quarter. On a run-rate basis, we're anticipating that we're going to be -- we've already generated close to $200 million of go-forward P&L savings on our early debt extinguishment program, but we can get you the details on the specific quarter.
Daniel McKenzie - Rodman & Renshaw, LLC
Okay, and then related to the incremental cutting capacity, how was that being accomplished? Is that day of the weeks that is getting cut?
And I guess what I'm really getting at is whether investors should assume that these capacity cuts in the fourth quarter annualize in the 2012 or if they should assume that the capacity cuts are temporary?
Hank Halter
Well, I mean, obviously, there's some of both, right, because we are continuing to seasonalize our schedule. Our fourth quarter flying levels are going to be down 20% in total from where they were during the summer.
So there's going to be a little bit more of that. But I'd say, we're more than that.
They are going to be permanent in nature and it's adjusted to this higher fuel level. And as we look to the end of the year, we anticipate fuel levels are probably going to rise from today's levels.
Operator
We'll take our next question from Garrett Chase of Barclays Capital.
Garrett Chase - Barclays Capital
I'm wondering if you could just give us a little bit more precision on how revenue played through this quarter, the RASM month-by-month, so it doesn't clean up, so we understand sort of how the sequential trends are progressing into that July number you gave.
Hank Halter
During the second quarter, you're talking, Gary?
Garrett Chase - Barclays Capital
Right. I think you've started with May of 6 then you -- or April of 6 and you said -- in mid-May, you said plus 12 but what were the actual?
Hank Halter
May came in a little stronger than that. It came in closer to 14 and June is in the range that we're seeing for July in the 9 to 10 range.
Garrett Chase - Barclays Capital
All right. More importantly, I wanted to kind of follow-up a little bit on this, on the cost guidance and sort of how you're thinking about it.
If I'm getting this right, what led to some of the cost creep, to begin with, was you’re dissatisfied with the level of operating performance that you had achieved last summer. As you think about sort of taking the cost structure down and I know you want to make that permanent, what kind of safeguards do you have in place?
Or how should we feel confident that we're not going to go a little too deep again in net debt? 2012 goal isn't a little too aggressive for the kind of operation you want to run.
Richard Anderson
We -- it's a fair question, Gary, and certainly, it's the balance that we need to maintain. We are running a wonderful operation in our summer stats certainly for the month of June, led any of our network peers.
I think there were levels of investment that have been made over the last year to finish out the integration of the 2 airlines. And now that we have a full year of operating performance under our belt and we know what it takes to run and get back to running a great operation.
I think we can go through and surgically pull out some of the buffer and some of the cost that got built in. I will tell you a good chunk of the savings we anticipate are in the maintenance area.
And that is -- it was much more of a catch-up nature in terms of volumes and some return to service cost than anything that's going to affect our go-forward maintenance reliability program. So we're confident we can get there.
Operator
We'll take our next question from Glenn Engel with Bank of America Merrill Lynch.
Glenn Engel - BofA Merrill Lynch
Starting on maintenance, so you averaged 45 in the first quarter -- in the first 2 quarters. You're implying about 360 a quarter and the third and fourth.
What's normal?
Hank Halter
The run rates you'll see in the second half of the year, Glenn, are going to be down about $250 million, I believe, from the first half of the year. And while again, there is a seasonality to maintenance because we deal a little bit more in the shoulder periods.
That run rate, you should expect to see that run rate of about $250 million of savings continue into 2012.
Glenn Engel - BofA Merrill Lynch
So the second half is what you will consider a more normal rate?
Hank Halter
Well, there's, I wouldn't say a full $250 million repeated again in the first half of the year, but certainly, our maintenance costs will come down in that level. So if you look at the second half of '11, you should see that balance to the second half of '12.
And certainly, we'd expect some reductions in the first half of '12 as well.
Richard Anderson
Glenn, this is Richard. Just a little more color on that.
One, we're taking a number of older airplanes and retiring the airplanes. So the DC9s are going to be retired and we have some 75s that are going to be retired.
So the cost on higher maintenance airplanes are going to be out permanently. And then second, we still have some integration costs that we're absorbing.
Obviously, at the end of 2010, we stopped any separate call out on integration costs. But we still have a fair amount of integration work going on that's flowing through the P&L, but it will be done in 1Q '12.
Glenn Engel - BofA Merrill Lynch
Question is on other revenue. I guess you implied that since it was MRO activity driving is that the ancillary revenues weren't growing much at all.
So if I'm looking out in the third quarter, should I assume very little growth in the other revenue line?
Richard Anderson
In the second quarter, our cargo revenues are up strongly as you can see. We did have a reduction in baggage fees.
Our baggage fee revenues were down $30 million in the quarter. Some of that is our new American Express program, some of that is waivers on our Elites, and some are just volume.
However, other ancillary revenues are offsetting a large part of that. So net-net, the second quarter, I'd say, our ancillaries were close to flat but we anticipate starting to grow that stream again as we get into the new e-commerce and merchandising activities that we've been talking about.
Glenn Engel - BofA Merrill Lynch
Finally, can you go over corporate share, how corporate travel revenues are doing?
Richard Anderson
Corporate travel revenues are doing well. We're up 24% first half of the year over last half.
Our share goals continue to improve.
Operator
We'll take our next question from Kevin Crissey at UBS.
Kevin Crissey - UBS Investment Bank
Is it July -- 8% to 9% RASM in July and then kind of running in high single digits for the remainder, is that what I heard?
Richard Anderson
That's what you heard.
Kevin Crissey - UBS Investment Bank
Did I do the math wrong on your guidance? Because it looked more like a 5% to 8% to get to your operating margin or was there something going on in other line items that might -- that I might have done wrong, burning unusual amount of fuel or something else that was going on?
Because if I kind of take the midpoint, I get more of a 5% to 8%. Maybe I did the calculation wrong because I did it quickly this morning but if you're...
Richard Anderson
Kevin, obviously fuel prices have increased. Since we last gave guidance, we took a snapshot based on current markets.
Our revenues are going to be in the high single digits for the September quarter. So I'm not sure what's in your model but that's leading to it.
Kevin Crissey - UBS Investment Bank
And on the move towards more delta.com distribution, and I applaud that, covering both OTAs and the airlines, it's good to see from the airline side, at least. But what has caused this shift?
Is it the KAYAK issues or strategy? And then what will lead to so much more in the future?
It doesn't necessarily feel like it's a natural thing to have more share shift go to you.
Richard Anderson
Well, I think, Kevin, it has to do with the value that's created by those travel sites. So we've taken a number of steps in our strategy.
One, very significant investments in delta.com to make it much more functional, much more easy to use. And we've seen about 400 basis point improvement in our share.
Second, we -- our view on OTA is fairly straightforward. We've terminated 21 small OTAs.
And our strategy really is to control our content, both with respect to combinability and scheduled display criteria, so that we make certain that our schedules are accurately displayed and that there's no combinability. We've signed a fair logic agreement and we've removed OTA links from meta-search sites so meta-search sites can only be linked to delta.com.
So when a meta-search completes, it has to come to delta.com or we won't maintain our relationship. And ultimately, if our fair rules are followed and our display and content rules are followed by OTAs, then the only question is their fees have got to be similar to what it would cost us to distribute directly on delta.com.
So it's a pretty straightforward strategy. I just don't think it's a practical matter.
Well, the OTAs are a good partner and we want to work with them. It's important that you add value in that chain.
And I just, there's -- that OTA distribution has turned into a more of a commodity than a value add for consumers. And I think that's where our delta.com strategy gives us an advantage.
Operator
We'll take our next question from Bill Greene at Morgan Stanley.
William Greene - Morgan Stanley
Hey, Richard, I was thinking about the industry's return profile. And as we think about it, someone argued you can't really do much unless you fix the industry structure.
And you guys are doing a lot at the Delta side to try to fix the company's returns. But how much patience do you have to sort of see if these actions play out before you have to return to the theme of consolidation?
Richard Anderson
Bill, you always ask that question.
William Greene - Morgan Stanley
Yes, keep thinking I might get a different answer.
Richard Anderson
Well, you got a pretty straightforward answer at our Investor Day last December, you'll recall. First, the slot swap transaction that we got tentative approval of with U.S.
Air is a really important step in making the industry or making Delta more viable. And I said at Investors -- at our Investor Day last December, I recall, saying that the industry is probably 3/4 of the way there in terms of having a profile that will give a return on capital.
The biggest pressure is fuel prices. Our fuel prices, when you look at where crack spreads are these days per WTI, we're -- the fuel prices are very high and that's going to continue to put pressure on Delta.
And we're determined to continue to have free cash flow to put on our balance sheet. So we're determined that we're going to figure out and continue to make progress in figuring out how to have return for our shareholders.
William Greene - Morgan Stanley
Okay, can I just ask one question on the capacity cuts? Is it safe to say that we should be thinking about capacity impacting RASM, kind of a one-for-one basis or do you see sort of trends in the data that suggest, no, it's not going to quite offset that much when we get to the fall.
I'm not quite sure how to think about that.
Richard Anderson
We haven't heard from Glen on this call.
Glen Hauenstein
Thanks, Richard. I think what we're looking for in the fall, and again just to give you a little bit more clarity on the revenue side, is we have about 2/3 of August both in end.
August actually looks a little bit better for us going into the month than July did, realizing that we have about 1/3 of the revenue to go. And then in September when our first capacity cut started to hit, we do see a bump in the forward yields and the forward booking curves.
So I think it's a slightly better than one-for-one trade that we're getting and we'll see as we get to September. Of course, it's very early to call September.
We have 2/3 of our bookings still to go but the early indications are, that it's doing what we have anticipated and hoped for it to do.
William Greene - Morgan Stanley
Just one question on -- any change in AirTran behavior since Southwest took over?
Richard Anderson
We would never comment on that, Bill. That was a nice try, though.
Operator
We'll take our next question from Michael Linenberg with Deutsche Bank.
Michael Linenberg - Deutsche Bank AG
Richard, this is a question for you. I mean, in the past you've been on this path to reduce debt.
And in the past, you've talked about that being probably one of the most attractive uses of cash. When you look at the stock and today, you're down almost 90%.
I mean, at what point does it make sense to, at least, consider maybe repurchasing stock and where the calculus make sense? And I recognize you have several times indicated that you do aspire to have investment grade.
And so I do recognize that, the repo of stock would maybe be in congruence with that. But it's got to be, at some point, just looking at it, where it becomes an attractive use of some excess cash.
What are your thoughts on that?
Richard Anderson
Well, we're still focused on the debt reduction because the debt reduction is important for our non-op expense. And we still have -- we had to ride in.
I think our merger write up on debt was $1.8 billion. So we're still carrying a lot of non-op, some of it is noncash, but it's very accretive to our shareholders to continue to pay that down.
Obviously, we want our stock price to go up and we think that's the best lever to get it up. But given where our debt ratios are, the capital priority needs to be to delever the balance sheet.
Michael Linenberg - Deutsche Bank AG
Okay, and then my second question and, I guess, this is another one for Glen. We've had -- there's been a lot of changes in the forward schedule for the industry.
Anything notable in your markets, competitive capacity changes that you could comment on?
Glen Hauenstein
Well, clearly, I think that our results in the industry show that we are in a relatively good competitive position. And so when you look at the bulk capacity tip, not only ours but those of the other carriers, I think that we are quite pleased just where we sit.
I really don't want to go into specific geographies but all across our network I think we feel very good about our offering and the competitive offering that's around us.
Operator
We'll take our next question from Helane Becker with Dahlman Rose.
Helane Becker - Dahlman Rose & Company, LLC
Richard, I really applaud this whole decision to pull capacity down, especially in the fourth quarter. And I think what you managed to do with the joint venture on the North Atlantic is even more impressive.
But you can't do this alone. The peer -- your peer group seems to be still focused on either maintaining capacity or maintaining -- or growing capacity.
How do you handle market share or profitability in an environment where some of your competitors keep putting more capacity in roots that have historically been strong Delta roots?
Richard Anderson
I may have Glen speak specifically to your latter point, but we are just really focused on free cash flow. And while I can't speak and won't speak to what anybody else does, we know what our flat profitably system shows at these fuel prices.
And if you assume that these fuel prices are here to stay, we have made a decision within Delta that those kinds of market shares at cash flow off levels are not good for our shareholders. So we're very focused on being certain that the flying we do is -- creates positive cash flow.
It's that simple. And I can't -- I won't -- we're going to act unilaterally at Delta to do what we need to do, to make sure we're successful.
Glen Hauenstein
This is Glen. Just to add a little commentary.
I think one of the issues that we have in the industry is that the winter schedules have not been completely loaded yet. So if you look out into the November and December time period, our complete schedule is not loaded.
It won't be loaded over the next several weeks here and we're hopeful -- and we know that Air France and KLM have not been loaded yet for that period either so we'll see where the capacity for the exact winter winds up. But when you say end markets with their historically, Delta, we don't see a lot of competitive incursions into what we would consider to be our core strength's markets in Europe.
So if you ask specifics, we could probably deal with that offline.
Operator
We'll take our next question from Hunter Keay with Wolfe Trahan.
Hunter Keay
Richard, this is one for you. I guess I ask you as not just the CEO of Delta but as President of ATA.
And I understand -- I want to talk about the European, the EU emissions trading scheme for a second. I understand the industry's philosophical pushback on this when you never want to have undue taxes imposed on you.
But I'm having trouble conceptualizing the imposition of this ETS as something that's not going to help this industry significantly. If you assume for a second that these airlines are -- it gets back to everybody's question, Helane's too, still some of the International flags that you're competing against are either adding capacity irrationally.
If they benchmark capacity to, say, 85% of some predetermined metric, how is that not an absolute slam dunk positive for this industry if you consider the trans-Atlantic PRASM has been suffering only because of excess capacity in the first half of this year?
Richard Anderson
Well, set aside those capacity issues. Just as a basic point, even the U.S.
government is on the side of the U.S. industry to stop the ETS trading scheme.
One, it's a patchwork. And our position at the Air Transport Association and we have a position paper on this is that you -- because this is a global business, you can't have a patchwork of emission regulation around the world because the airplanes flow all around, over different continents in a 24- to 48-hour period.
So you need a consistent approach. And number two, that's just an additional cost.
And we're trying to, as we said earlier in our call, we're working very hard to manage our costs. And when you add those kinds of fees, particularly given that this industry probably has the best track record for fuel efficiency of -- we've matched ourselves against any industry.
If you look over the past 30 years, this industry has done a phenomenal job. We probably have almost 100% improvement in fuel efficiency in the last 30 years.
We're taking the equivalent of 18 million cars off the road. So bottom line is, don't add unnecessary costs on the environmental side that create an incomplete patchwork of regulation around the world for an industry that has, by far, the very best environmental track record.
Hunter Keay
And, I guess, maybe one for Hank. As I'm looking at my model here, we stripped out -- you guys stripped out the insourcing expense, the costs associated with MRO, which I understand, but it jumped up pretty significantly here in the second quarter.
It looks like it was $230 million and that's well above the run rate for prior quarters. And if you actually assume maybe $170-ish million in the quarter, which is what it was roughly for the last 4 quarters, your kind of actually jumping something closer to 6%.
So how shall we think about modeling that out in the back half of the year, particularly as we're trying to model to this CASM ex-fuel number flat to 2010 levels. How is that going to trend?
Hank Halter
Well, Hunter, the MRO expense, as well as the expenses of similar businesses, has backed out of our CASM calculations when we show a consolidated non-fuel CASM that is excluded in both years. While we were up 4.8% in the June quarter, the initiatives are kicking in.
And as we go forward, you'll see the non-fuel CASM up in the 2% to 4% range for the third quarter, and then as we said, will be flat by the end of 2011. So this is an unusual year because we have so many initiatives kicking in that causes the change.
But overall, you should be modeling the reductions and again, making sure that your model is free of those year-over-year variances due to MRO and similar businesses.
Operator
We'll take our next question from Ray Neidl with Maxim Group.
Raymond Neidl - Calyon Securities
Just the overview with your long-term commitment to bring down debt. It looks like your liquidity cash position now is a little bit light compared to other airlines, compared to 12 month revenues.
And I'm just wondering, is your being, heading into cloudy economic environment here, would it be wise to maybe get your cash position up? And if you did that, would that slow down your commitment to taking down debt and possibly CapEx as well, maybe the JFK terminal project?
Edward Bastian
Ray, this is Ed. We have, unlike many of our peers, we have $1.8 billion of revolver capacity, all of which is undrawn that's available to us when we need it.
So we feel from a cash efficiencies perspective and asset utilization perspective, that's the best hedge we can have. Again, some of those downturns, you don't have to carry such a large cash balance on hand when you have access to it at a very, very small incremental cost.
So we feel very comfortable with our cash flow levels going into the next year.
Raymond Neidl - Calyon Securities
And just one little item I saw this morning, Senator Rockefeller was warning the airlines not to put the FAA tax savings into the bank. He wants them -- do you have any comment on that?
Glen Hauenstein
Ben?
Richard B. Hirst
Well, the tax on passengers and on -- what the industry has done is simply to maintain prices at market-clearing levels. We're not quite sure what Senator Rockefeller is expecting the industry to do but we're not planning to do anything in response to it.
Operator
We'll take our next question from Bob McAdoo at Avondale Partners.
Bob McAdoo - Avondale Partners, LLC
Just a couple of quick ones. Can somebody go over kind of what the timing of what you see going on relative to the slot swap in terms of when -- because it look like it really is going to get approved finally, and not, I mean, in terms of the final approval.
And if there's anybody in sort of any kind of objections in this comment period? And I guess then, assuming it goes through, when would we see what kind of steps, kind of the big chunks?
Richard B. Hirst
Bobby, this is Ben Hirst again. The DOT approved the transaction on July 21, and they called for comments within a 30-day period.
The approval order was very thoroughly written and analyzed, well thought out. It establishes some divestiture conditions that are acceptable to Delta.
And we would anticipate that shortly after the 30-day comment period closes, DOT will issue a final order confirming the show cause order issued on the 21st. At the same time, the transaction is being reviewed by the Justice Department under the Clayton Act.
We do not see any Clayton Act problems with the transaction. And the Justice Department review process should be complete, at the latest, by the end of September.
We would anticipate being in a position given the 2 reviews that are underway to close the transaction at the end of September or in October. But that's the timetable that we see playing out here.
Bob McAdoo - Avondale Partners, LLC
And then one other thing, backing up over to the discussion about the OTAs. When you use the term non -- no combinability, what specifically are you prohibiting there?
What are you keeping someone from doing?
Richard Anderson
What we don't want to happen is to have our brand header at the top of a product that is not a Delta product. So several of the OTAs in previous [ph] were selling under the Delta header, a combination ticket where Delta was not the exclusive carrier.
And we do not want that to be represented to our customers because then we could say, taking Delta from here, to Denver or to Bangkok. And then thought you purchased a Delta ticket and you realize that you're interlining with a carrier and then we won't be responsible for the entire carrier.
If you know most of the OTAs has -- have mixed carrier itinerary. Somehow that [ph] into whoever the first carrier was, was the branded carrier wrong product.
And so we did not want that to occur so we terminated that ability of the OTAs to continue to sell non-Delta flights on Delta.
Bob McAdoo - Avondale Partners, LLC
So do you still participate in the mixed itineraries and just don't let them label it that way or your don't even anticipate in those types of itineraries?
Glen Hauenstein
We changed the rule. For mixed itineraries, we've changed the rules in which, for example, on a lot -- the pricing we did not appreciate were pricing that consumers would never buy so if you are going from Cleveland to Atlanta and you have 7 minutes between the time you arrive in Atlanta and departed back to Cleveland because of some arcane construction that they are making.
We really clamped down on the ability of the OTAs to do that by putting more rules in place. They are more -- we are more customer friendly.
Richard Anderson
Right, because then we end up with a complaint. Because it was...
Bob McAdoo - Avondale Partners, LLC
I can understand that, yes.
Operator
We'll take our last question today from Duane Pfennigwerth with Evercore Partners.
Duane Pfennigwerth - Evercore Partners Inc.
Just wanted to check your thinking on the AMR order and specifically, with respect to delivery position availability and maybe the rate at which you're retiring MD-80s, does this at all put pressure on you to put a larger order in maybe sooner than you otherwise would have?
Richard Anderson
Absolutely not.
Duane Pfennigwerth - Evercore Partners Inc.
And then just a little one, can you disclose what the hedge impact you expect in your 3Q fuel guidance?
Richard Anderson
I think, Dwayne, we're looking at about a $0.10 per gallon benefit based on where market is today.
Duane Pfennigwerth - Evercore Partners Inc.
Perfect, and I'll sneak more one in. The currency impact on your RASM in the second quarter...
Richard Anderson
We don't have that number in front of us, Dwayne. We can get back to you with the exact number.
Obviously, we got a little bit of a benefit but it was in the 1.1 to 2 points. But we'll give you the exact number.
Jill Greer
[Operator Instructions]
Operator
[Operator Instructions] And we'll take our first question today from Mary Jane Credeur with Bloomberg News.
Mary Jane Credeur - Bloomberg News
Can you tell us a little bit more about where that additional one point of capacity reduction is coming from? Maybe give us some regions or is most of it domestic?
Atlantic?
Richard Anderson
Mary Jane, we haven't loaded the schedules yet. It's going to be a little bit from both regions across the trans-Atlantic, as well as a little bit domestically.
Mary Jane Credeur - Bloomberg News
And then can you also give us any update on your discussions with that certain carrier in the U.K. that's looking for a partner?
Richard Anderson
We do not comment on discussions with other carriers.
Operator
We'll take our next question from Josh Freed with The Associated Press.
Joshua Freed - The Associated Press
I was wondering if you could say a little more about Japan flying and sort of at what point the capacity to Japan sort of hit the bottom after margin and starts to come back up. Is there anything you can say about kind of where you are headed with Japan, whether you think you've taken as much flying out there as you're going to, or maybe there's more to come?
Richard Anderson
Well, actually, we have planned to expand into Japan this year, with the opening of the Haneda and the 2 new markets from Detroit and Los Angeles. No good details on [ph].
We didn't foresee the tragic events at 3/11 and the ensuing decline in traffic when we applied for those routes over a year ago. And Japan had been a very strong market for us.
Now the good news is the Japanese are continuing to travel and the bad news is that the Americans have not yet started traveling in the same numbers back, and that's a slow and steady build. But what we are experiencing in the Airline business right now is a little -- this equilibrium in -- with the Haneda opening and the earthquake combining together, we're a little bit behind in terms of demand from the United States, not from Japan.
And we believe that, that will continue at the current rates and will continue to build larger historic levels by the fourth quarter. So we're pretty optimistic about where Japan is headed for next year and we think that the reconstruction of the Northern Japan will take a lot of resources and a lot of investment and a lot of that will come from U.S.
companies and U.S. travelers.
Joshua Freed - The Associated Press
And related to that, we're seeing a lot of different uses of the 747 fleet and it's coming off of one of the particular Japan route some. [ph] Are you sort of on your way towards possibly having more 747s than you need?
I mean, do you end up parking some or do you have lots of other places to use them. Just taking the combination of the Japan situation plus the Atlantic capacity reduction, it makes you wonder if you got more big airplanes than you need right now?
Glen Hauenstein
Clearly, one of the opportunities we have is to redistribute. And that's one of the things that the merger brought, the combined Delta and Northwest.
And so we feel very comfortable that we will find good homes for those in other parts of the world until such time as they require back into Asia.
Joshua Freed - The Associated Press
Okay, but do you say -- do you have particular plans for them now or is that still kind of a work in progress?
Glen Hauenstein
Some of them have been disclosed, some of them are work in progress. So I think that not knowing which ones have been public and which ones have not, I'd probably like to defer the entire question.
Operator
We'll take our next question from Kelly Yamanouchi at the Atlanta Journal Constitution.
Kelly Yamanouchi - Denver Post
I'm wondering how much in additional revenue per day or per week Delta is receiving or expects to receive from the discontinuation of the ticket taxes?
Richard Anderson
The excise taxes are about $4 million to $5 million a day.
Kelly Yamanouchi - Denver Post
And I was also wondering if the buyouts are meeting your expectations and whether any layoffs or furloughs may be needed?
Richard Anderson
They have met our expectations and we're not anticipating any problems now.
Operator
We'll take our next question from Karen Jacobs with Reuters.
Karen Jacobs
I wanted to refer back to the question on the cost from Jamie Baker about the possible plane orders. What do you mean by modest order of planes in terms of numbers?
Richard Anderson
We haven't given out that information, Karen. Modest means living within our means.
Karen Jacobs
Could modest be 200, 100?
Richard Anderson
We have not shared any information on that.
Operator
We'll take our next question from Andy Compart with Aviation Week.
Andrew Compart
Just want to get back to that Capitol Hill issue on the FAA bill. There's some legislators who are complaining that, or asserting that, Delta is behind the House Republicans hardline on the NMB issue in the FAA bill.
Do you have any response to that?
Richard B. Hirst
This is Ben Hirst again. The issue on the FAA Bill was an essential air service.
The Republicans insisted that as a condition of expending the FAA funding that 13 markets, which were pretty clearly able to function without subsidy, ceased to receive subsidy. There was no labor-related condition attached to that.
Andrew Compart
Right, except that Representative Mike stated himself that he put that in there for -- to give leverage on that issue.
Richard B. Hirst
Well, there's really nothing to that. That's an issue for the Republicans.
Andrew Compart
So is Delta pushing on that? If any -- not to put their complaint is from some Democrats?
Richard B. Hirst
That's not really a -- that's really, at this stage, not a Delta issue. This is an issue between the Republicans and Democrats in Congress.
Andrew Compart
And just to clarify on the excise tax. Is that $4 million to $5 million -- are you just referring to the federal excise tax or to all the taxes and fees that are in suspension?
Richard B. Hirst
Those are the excise taxes that are suspended currently.
Operator
Our last question from the media side today will come from Richard with Commercial Appeal.[ph]
Unknown Analyst -
I want to ask you about the Memphis-Amsterdam flight. You've already said it's going down from daily to 4 days week in September and I wondered if the slightest reduction in trans-Atlantic volume this winter is going to take it down to even further.
Glen Hauenstein
We have no additional plans to reduce Memphis-Amsterdam on what's announced for the winter.
Unknown Analyst -
Okay, and also just the overall capacity is supposed to be down 8% to 10% in Memphis as of this fall and I wondered if your latest calculations show even greater decrease here.
Glen Hauenstein
I think we are sticking with the previous plan. There's been really no change to our plan -- our announced plan in Memphis.
Jill Greer
Thanks, everybody. That is going to wrap up our June quarter call.
Thanks for joining us and thanks for the entire team here in Atlanta. And we look forward to speaking to everybody again on our October call.
Operator
And again, that does conclude today's conference. Thank you for your participation today.