Jan 12, 2017
Executives
Jill Greer - VP of Investor Relations Ed Bastian - Chief Executive Officer Glen Hauenstein - President Paul Jacobson – EVP, Chief Financial Officer Ned Walker - SVP and Chief Communications Officer Peter Carter - EVP and Chief Legal Officer
Analysts
Jamie Baker - JPMorgan Conor Cunningham - Cowen and Company Mike Linenberg - Deutsche Bank Dan McKenzie - Buckingham Research Duane Pfennigwerth - Evercore ISI Rajeev Lalwani - Morgan Stanley Savi Syth - Raymond James Hunter Keay - Wolfe Research David Vernon - Bernstein Andrew Didora - Bank of America Joseph DeNardi - Stifel Darryl Genovesi - UBS Susan Carey - The Wall Street Journal Alana Wise - Reuters Ted Reed - TheStreet Linda Loyd - The Philadelphia Inquirer
Operator
Good morning everyone and welcome to the Delta Air Lines December quarter financial results conference call. My name is Dana and I will 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. As a reminder, today's call is being recorded.
I would now like to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead.
Jill Greer
Thanks Dana. Good morning everyone and thanks for joining us for our December quarter call.
Joining us from Atlanta today are our CEO Ed Bastian, our President Glen Hauenstein and our birthday boy Paul Jacobson. Our entire leadership team is here in the room for the Q&A session.
Ed will open the call and give an overview of our financial performance. Glen will then address the revenue environment and Paul will conclude with a review of our cost performance and cash flow.
To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow-up. Today's discussion 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 will discuss non-GAAP financial measures. All results exclude special items unless otherwise noted.
You can find the reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I will turn the call over to Ed.
Ed Bastian
Thanks Jill. Good morning everyone.
Thank you for joining us. Earlier today, we reported our December quarter and full year results, including a December quarter pretax profit of $923 million and EPS of $0.82, in line with consensus.
Normalized for the out of quarter cost of the new pilot contract, our pretax income was $1.3 billion with a 15% pretax margin and EPS of $1.16. This rounds out what has been a record-breaking year across-the-board for Delta, financially, operationally and for our customers.
Financially, we produced $6.1 billion of pretax profits, 16.5% operating margin and a 26% pretax return on invested capital. It looks like we will be the only major to have grown its operating margin in 2016.
We generated $7 billion in operating cash flow and nearly $4 billion of pretax [loans] [ph] we used to reduce our adjusted net debt to $6.1 billion, achieved an investment grade credit rating and returned over $3 billion to our owners. Operationally, we ran the best operation in the industry by a wide margin and we continue to raise the bar on ourselves.
We ended 2016 with 241 days of no mainline cancellations and 81 days with no system cancellations, a level of performance that no airline has ever come close to producing on our scale. As we are doing that, at the same time we are regularly keeping on-time arrivals at nearly 87% and improving our bag scores by 13%, incredible work by Gil and the entire operations team.
We know that our operational reliability is a key driver of customer satisfaction and one reason why more customers than ever prefer flying Delta. With our operating performance, combined with the investments we have made in our fleet, products and facilities, we have seen a consistent improvement in our net promoter scores hitting a record 44% in November.
All of this is due to the outstanding efforts of 80,000 Delta people and it's an incredible honor to recognize that with over $1 billion in profit sharing for the third year in a row. Sharing the success of the company with our people is one of the things that makes Delta truly different.
The major theme at our Investor Day last month was the sustainability and durability of our business. And with fuel and labor costs rising, we must grow unit revenues if we were to sustain our margins.
So we are pleased to have seen our fourth quarter unit revenues come in better than not only our original guidance but also better than the guidance we gave in mid-December. While it's taken longer than we wanted to get here, we are cautiously optimistic that the revenue environment finally appears to have turned the corner and after a flat RASM in the month of December we expect unit revenues to turn positive for the first quarter.
That said, we are going to remain conservative with our capacity until we see two things. In the short term, we will need to see a further firming of current revenue trends.
And over the medium to longer term, we will keep our capacity in check until we are achieving our 17% to 19% operating margin target because as we also said at Investor Day, 2017 is going to be a bit of a transition year. While revenues are on a better trajectory, we expect margins will decline 100 to 200 basis points year-on-year in 2017, given the current forward curve and the expense of our labor cost reset.
However, we expect the margin pressure to peak in the March quarter and by the back half of this year, we would be in a position to expand margins as our unit revenue base improves. This should be a very good setup for 2018 and beyond.
So as we look ahead, I am optimistic. By executing flawlessly against our core principles, we are confident that we are the right path to return to an improving margin trajectory later in the year.
First, we will continue to be America's best-run airline focusing on producing the best operation every single day for our customers. Next, we will continue to strengthen our brand, improving our product and service in the eyes of our customers and generating a sustainable revenue premium versus our competition.
We will also expand our global reach through equity stakes, joint ventures and partnerships around the world. I am looking forward to completing our Aeromexico tender offer in the first half of the year.
Finally, we will maintain our solid foundation with cost and capital discipline, making sure that every dollar we spend is put to good use without burdening the business with high leverage. Put together, this will create the sustainable returns and cash flows that our owners expect over the long term delivered by the very best team of airline professionals in the business.
And with that, I am happy to turn the call over the Glen.
Glen Hauenstein
Thanks, Ed, and good morning everyone. I want to start this morning by thanking the Delta people for taking great care of our customers everyday.
It's your efforts that make Delta grand and drive our premium to the industry. I also want to give a special thanks for our commercial team for all of their very hard work that got us to flat RASM for the month of December and should return us to positive unit revenues in the first quarter.
While total demand remained strong throughout 2016, weak business yields were prevalent and drove RASM declines. To address this, in the December quarter, we adjusted our revenue management approach and capped our capacity growth below 1%.
Following the election in November, we began seeing improvements in business demand and the firming of business yields. These trends continued into December, which was the first month in over two years that yields improved on a year-over-year basis.
As a result, our fourth quarter unit revenues were down 2.7%, better than both our initial guidance and the updated outlook we gave at Investor Day. As we look ahead, we are encouraged by the trends that we see.
At a macro level, consumer confidence remains strong and demand remains solid. And the outlook for corporate travel is positive.
In our most recent survey, 85% of our corporate customers expect that they will maintain or increase travel spend in the first quarter. This figure is up nine points from the previous outlook than last quarter and is the best outlook we have seen in two years.
In addition, we are maintaining our commitment to moderate capacity growth until we see further firming of the current revenue trends. Our capacity will decline about half a point in the first quarter of 2017 but excluding the impact of leap year, our run rate will continue to track below 1%.
Finally, while domestic business yields have turned positive, there is still a long way to go and a great opportunity for us before they are back to historical levels. These points, combined, give us confidence that we are on the right path and we expect system revenue RASM to increase 0% to 2% for the March quarter with February and March stronger than January.
Geographically, our path to positive RASM is heavily dependent on the domestic entity, given it's relative [indiscernible] in our network. For the December quarter, domestic unit revenues were down 3%, which is a four point improvement from what we saw during the third quarter and the momentum is continuing.
More than half of our domestic network is currently realizing positive RASM today, up from 20% we saw during the summer period. And our network investments continue to drive results with JFK, Los Angeles and Seattle notable bright spot for us as each posted positive RASM for the December quarter and have superior forward trends.
With the demand in yield improvement we are experiencing, we now expect domestic PRASM for the November through January period to be slightly positive versus our prior outlook of flat. We also expect that our domestic unit revenues will be positive for the March quarter.
We will continue to be prudent about our capacity increases as we work to maintain our revenue momentum and we expect domestic capacity to be up 1.5% in the first quarter. In addition to the benefits we anticipate from adjustments to our revenue management strategy, we will also begin lapping the domestic close in pricing weakness we started experiencing around February last year.
Internationally, we are seeing trends improve. While there are pockets of weakness around the world, we are taking the appropriate action to ensure our results continue moving in the right direction.
International capacity was down 2% for the December quarter and will be down 4% in the first quarter of 2017. Our LatAm unit revenues improved 5% year-over-year in the December quarter, the second consecutive positive result for the region and we anticipate the momentum will continue in the first quarter.
Brazil have led the turnaround in the region, but each sub-entity in Latin America has posted positive year-over-year RASM for the first time since the third quarter of 2011. We see momentum in LatAm continuing as we move through 2017.
In the Pacific, we continue to execute on our multiyear restructuring which deemphasizes our hub in Tokyo and continues to build on our partner hubs in Shanghai and Seoul. As a result of these changes, the spool of new domestic services and a challenging capacity environment, our Pacific entity unit revenues declined 9% on 6% less capacity.
Roughly half of this RASM decline was driven by lower Yen hedges on a year-over-year basis. We expect fourth quarter of 2016 will mark the trough for our Pacific unit revenue performance as our restructuring efforts take hold and industry capacity growth moderates.
Specifically, we expect a significant capacity growth in the U.S. to Shanghai and Beijing market, which has occurred over the last several years to slow in 2017 as both the Chinese and the U.S.
carriers will reach their respective frequency caps this summer. Turning to the Atlantic.
Our European portfolio remains challenged due to industry capacity and balance and currency headwinds. While our Transatlantic unit revenues declined 6% for the quarter, the region still produced one of its most profitable December quarters in history.
As we have seen the industry fare environment evolve, we have been thoughtful and proactive in our capacity adjustments and are planning 1Q 2017 Transatlantic capacity to be down 3%. In 2017, we will continue to build on our presence in our strategically advantaged hubs in London, Paris and Amsterdam, while deemphasizing high EU point-of-sale markets.
And as we move into the summer season, we expect point-of-sale U.S. demand to be at record levels, which will help mitigate the point-of-sale European weakness.
For our international network broadly, further strengthening of the U.S. dollar does pose some incremental risk to 2017.
However, we are well positioned to mitigate these potential headwinds though our capacity and fleet actions. At current rates, our year-over-year foreign exchange impact in 1Q of 2017 is expected to be a $25 million headwind.
With positive RASM in our line of sight, our next priority goes to consistently producing topline growth as we return to margin expansion in the back half of this year. To this end, it is our focus on the customer and our brand that will allow us to maintain our momentum and ultimately drive a better revenue outcome.
Branded fares remain a huge opportunity for us and will continue expanding and merchandising our suite of products that allow customers to tailor their travel experience. This year we expect to generate an incremental $300 million in revenue from our branded fare initiatives.
Our newest product, Delta Premium Select will debut in the first half of 2017 providing elevated service and improved amenities on Delta's longest flights. And the expansion of basic economy will also continue in 2017.
Today basic economy is over 40% of the domestic markets and we expect to have full domestic coverage by mid-2017. The broader international rollout will follow and we expect to be complete with basic economy in our entire network by 2018.
We are expanding the breadth of our products in the marketplace. We are investing in technology in commercial improvements to advance the way we offer these products.
We want to consistently have the right product at the right price at the right time for our customers. We continue to develop our international partnerships and we were pleased to be granted antitrust immunity by the DOT for our proposed JV with Aeromexico in December.
We expect the JV will become effective on April 1. We are excited about the opportunity that this presents both airlines in the largest business travel market between the U.S.
and Latin America. Finally, we will continue to invest roughly 50% of cash flow back into the business to improve the customer experience.
Whether it's new aircraft in our fleet, our new all-suite business class product, improvements to the Sky Club or the investments we are making in innovation like RFID or other customer facing technology, Delta continues to invest in having an industry-leading product. The opportunities to drive additional revenues are great and I cannot be more excited about the business in 2017 and beyond.
And with that, I would like to turn it over to our birthday boy and CFO, Paul Jacobson.
Paul Jacobson
Thanks Glen and good morning everybody. Thank you for joining us.
Once again, this quarter Delta team was able to demonstrate that despite challenges and cost pressure, we have built a durable business that can deliver consistent results. Total operating expenses increased $573 million in the quarter, primarily driven by $475 million of pressure from the new pilot contract with $380 million of that being related to the retro payment back to January 1.
Nonfuel CASM increased 10.6% in the quarter, roughly eight points of that pressure driven by the pilot agreement in the quarter. Excluding the portion of the contract expense not related to the quarter, Delta's normalized nonfuel cost increased approximately 4% That said, fourth quarter saw a bit more cost escalation than we have been seeing so far this year.
In addition to the impact of wage increases related to the ratified pilot agreement, there were timing issues in light items such as maintenance, contracted services and rents and landing fees that drove expense pressure in 4Q after having provided benefits in earlier quarters. However, fourth quarter and our full year results are consistent with the expectations we have had all year.
For the March quarter, we expect nonfuel cost to increase 5% to 7% on a reported basis as cost pressures in 2017 will be weighted towards the first half of the year. Normalizing 1Q 2016 cost to include the portion of the pilot contract related to that period, our nonfuel CASM is expected to increase in the 3% to 5% range in the first quarter, although we will strive to be in the low end of that range.
For the full year, we continue to expect our nonfuel unit cost to increase in the 2% to 3% range on capacity growth of 1% due to higher maintenance volumes, greater depreciation expense, reduced asset utilization and the continued investments we are making in our people. Turning to fuel.
Our total fuel expense declined by $240 million or about 15% despite higher crude oil prices, as we lapped hedge losses from 2015. While crude has moved higher, crack spreads have remained low, which has helped keep jet fuel prices relatively in check for the airline with pressures result at the refinery which lost $40 million for the quarter as expected.
For 2017, we expect our fuel cost pressures will be weighted for the first half of the year. As you remember, during the first quarter of last year crude prices averaged $35 a barrel and hit a low of $26 in late January before they began to increase steadily from there.
So for the first quarter, we expect our all-in fuel price to be in the range of $1.68 to $1.73 per gallon which is up roughly 30% year-over-year, hopefully the largest headwind from higher fuel we will see all year. With similar timing on our nonfuel cost pressures and the pace of our unit revenue improvements Glen discussed earlier, this should result in a March quarter operating margin of 11% to 13%.
As we move through the year, with our cost increases moderating and our RASM trajectory improving, we should be in a position to see margins stabilize in the second quarter and begin expanding again by the second half. Moving on to cash flow.
We generated more than $1.2 billion of operating cash flow in the quarter. Consistent with our balanced capital deployment strategy, a little over $600 million, roughly half of that cash flow, went directly back into the business for aircraft modifications, facility upgrades and technology improvements.
We expect core capital spending will be roughly $800 million in the first quarter, largely driven by aircraft related spend. Also in the March quarter and consistent with prior years, we have already contributed $1.1 billion to the pension plan.
With the DOT grant of antitrust immunity for our proposed joint venture with Aeromexico in mid-December, we now expect the tender offer to occur in the second quarter of 2017. While we continue to make investments in our business for the future, we are also strengthening our balance sheet as we work towards our $4 billion net adjusted debt goal for 2020.
We ended the December quarter with net debt of $6.1 billion, down roughly $500 million from yearend 2015. We generated $640 million in free cash flow and returned $450 million of that to our shareholders in the quarter.
For the year, we generated nearly $4 billion in free cash flow, more than $3 billion of which went back to our owners after investment in the airline. That is roughly an 80% return rate and our goal continues to be to return at least 70% of our free cash flow to our owners annually.
Looking back on 2016, it was a year in which the uniqueness of the Delta model and our disciplined approach to the business allowed us to deliver a result that was consistent with 2015 despite a lot of headwinds. I would like to thank each and every member of the Delta family for their hard work this year as we continue to show investors why they can rely on Delta and the Delta family.
As we move forward into 2017, we are committed to staying focused on cost and our balanced capital strategies because that is what differentiates Delta and that is what will provide for sustainability next year and over the long-term. With that, I will turn it back to Jill.
Jill Greer
Thanks Ed, Glen and Paul. And we will now go to questions from the analysts.
Dana, if you can provide the instructions.
Operator
[Operator Instructions]. And we will take our first question from Jamie Baker with JPMorgan.
Jamie Baker
Hi. Good morning everybody.
First question for Paul. I just wanted to delve a bit further into the comment that second half margins would show year-on-year expansion.
I think for the fourth quarter, that's a no-brainer given you booked the entire incremental pilot expense in fourth quarter 2016. If you had spread the retro payment over the quarters in 2016, would your comment that second half margins should show expansion, would that still be the most probable outcome?
Paul Jacobson
Good morning Jamie. Thanks for that question.
Yes, that is what is the most probable outcome. As we go through 2017, we are running the business on a normalized basis.
That's the run rate of the salaries and wages. So as we look at the effects of the pilot contract in 2016, we are trying to normalize for that flow and we feel confident that we will be able to achieve that in the second half of the year, even as we look through that adjustment.
Jamie Baker
Okay. That's helpful.
And a second question for Glen. Where are we in terms of achieving the 100% of domestic markets equipped, for a lack of a better term, with basic economy?
And more importantly, I suppose, when you convert a market to one that does offer basic economy, what sort of RASM impact does that have? Should we assume that it's the basic economized markets, for a lack of a better term, that are contributing to that statement that you made of half of your domestic market experiencing positive RASM?
Or is that reading too much into it?
Glen Hauenstein
I think that's reading too much into it. The huge driver in markets returning to positive unit revenues is getting momentum back in the business yields.
And even if you experience a 60% sell up rate which is slightly higher than we have experienced in the past, let's say 50% to make the math easy on an average sell up of $40, you are not talking about a huge amount of money. I think it's more of a competitive tool than it is a huge value driver in the long run.
So what we are really excited about are the branded fares on the premium side, the continuation of more usage in first class, continuation of the higher branded products like Comfort Plus and our new Premium Select that we are introducing later on this year.
Jamie Baker
Got it. Paul and Glen, thank you very much.
I appreciate it.
Operator
And we will take our next question from Helane Becker with Cowen and Company.
Conor Cunningham
Hi guys. It's actually Conor in for Helane.
I realize you made some cuts on the Atlantic side. Can you just discuss what gives you confidence that the Atlantic will eventually sort itself out?
I mean I realize that there's seems like there's going to be significant low cost growth for years to come. How does Delta and those JV partners expect to mitigate any market share losses to those guys?
Thanks.
Glen Hauenstein
Well, I am not sure that we would say we are going to mitigate any share losses. I think what we are going to do is preserve and accelerate our margins.
And I think that's where having partner hubs and becoming more and more reliant on the partner hubs where we have competitive advantages is a key to our strength moving forward. Clearly also in the segmentation of products, we have further segmentation to do and I think that's one of the reasons we look at the products we are introducing in the marketplace like Premium Select.
If you look at what Norwegian flight, they don't have flatbeds. If you look at what a lot about the ultra low cost carriers, they haven't made that investment in those types of products.
And we need to adjust to that new paradigm as high quality products for leisure customers who are willing to pay more than just standard coach fares. So we have some adjustments to make in our model.
We will continue to work with our partners to make sure that our model is more durable and I think we have a very good hand in Europe in the long run.
Conor Cunningham
Has there been some discussion of potentially bringing basic economy to the international side at all? Or is it just still a domestically focused product at this point?
Glen Hauenstein
In the call today, we said that we will have it ubiquitous in our entire system by 2018. So it will be in all of our international markets.
Conor Cunningham
Great. Thanks.
Operator
And we will take our next question from Mike Linenberg with Deutsche Bank.
Mike Linenberg
Yes. Hi.
Good morning everybody. Glen, I want to go back on the markets domestically.
You called out a couple of airports as notable bright spots. And I think you said that they had superior sort of demand trends going forward.
You called out LAX, Seattle, JFK. Where's LaGuardia in that?
Is it New York that you are seeing? Or is it just specifically JFK?
And LaGuardia maybe isn't strong enough to warrant a call out. Can you just comment on that?
Glen Hauenstein
In LaGuardia, as you know, one of the key business markets, Boston LaGuardia, has a new entrant who has extraordinarily low fares, which is putting a little bit of pressure on LaGuardia as well as all of that new service from New York to Florida. So I would say there is little bit more pressure on LaGuardia than there on Kennedy right now.
Mike Linenberg
Okay. Thank you.
And then just a question to Paul. Paul, where are you, I am not sure if you have the numbers yet but with respect to the pension, where that liability, the under funding, where that ended at yearend 2016.
Can you update us on that?
Paul Jacobson
Sure Mike and good morning.
Mike Linenberg
Good morning.
Paul Jacobson
We ended 2016 with a pension liability of about $10.6 billion of the unfunded liability. That's down a little more than $0.5 billion from 2015.
The rate improvements that we saw towards the end of the year largely offset the declines that we saw through the middle part of year. So it's up substantially from what the peak liability would have been intra-year, but the year-over-year change was moderated a little bit.
Mike Linenberg
Okay. Very good.
Thank you.
Operator
And we will take our next question from Dan McKenzie with Buckingham Research.
Dan McKenzie
Hi. Good morning.
Thanks. If I am interpreting the press release literally, it implies essentially no sequential improvement in unit revenue in the second quarter and from where I sit that, of course, doesn't make sense just given the value pricing that was going on in the second quarter.
So to get at your commentary, are you assuming a more conservative fuel price than is implied today by the futures for the stabilization of margins in the second quarter?
Ed Bastian
Hi Dan. It's Ed.
I don't know what your calculus is for the second quarter. But I would say your model has got some challenges in it.
So maybe you can take that offline.
Dan McKenzie
Well, okay. Well, I guess the point I am just trying to make is, we should continue to expect sequential improvement in unit revenue in the second quarter?
Ed Bastian
That was what I was inferring by my comment.
Dan McKenzie
Yes. Okay.
Perfect. And then second question here, Los Angeles was highlighted at Investor Day for infrastructure improvement.
And I am just wondering where you are at now just in terms of gates and where would you go with respect to gates after the improvements? And what kind of growth does that potentially unlock for Delta at Los Angeles?
Glen Hauenstein
We are substantially constrained at LAX today. We have, I believe, 15 gates currently in terminals five and six and when we get to terminals two and three, we have the possibility to come close to doubling the gate pods but it is going to take some time as we redevelop terminals two and three.
That's not overnight. And it will also take a little bit of the pressure off of the turns on the gate today.
We turned terminals five and six to highest levels in the system and once we get a better gate pod, we will be able to reduce some of the congestion at the airport. So, we will have more gates but that doesn't necessarily mean more direct flights as a result.
But net net, we absolutely will be increasing our footprint and our capacity in LAX over the next few years.
Dan McKenzie
Would that primarily --?
Glen Hauenstein
One of the big advantages to us today is we are not co-located with our partners in Los Angeles and this swap from terminals five and six to terminals two and three allows us to co-locate with our partners on a much more aggressive timeline. So we won't be busing people around the year or asking them to walk outside and go between terminals and really that drives a significant amount of value in the short run to be able to accomplish at a faster rate than we would otherwise do, particularly as we look to carriers like integrating with Aeromexico.
So we are very excited about that in the short run.
Dan McKenzie
Okay. Thanks guys.
Operator
And we will take our next question from Duane Pfennigwerth with Evercore ISI.
Duane Pfennigwerth
Hi. Good morning.
Thanks for taking the question. Just from a regulatory policy perspective, obviously very early days here, but maybe you could list for us your top three opportunities and risks you see.
What are the potential changes on the table that you are most excited about?
Ed Bastian
Hi Duane, this is Ed. There's a number of things we are excited about.
One of the things we are very excited about is the potential investment opportunities of the new administration, talk a lot about improving in airport facilities we have been doing, a considerable amount of investment alongside our public partners in LaGuardia, LA, Seattle, Salt Lake, Atlanta, but the ability to continue to work with the federal government to drive improvements to the infrastructure is clearly a big deal for us. We are very excited about the opportunities to present our case relative to the Middle Eastern situation with all the growth that those carriers have brought to this country on a subsidized basis where we are competing against governments, not the other airlines and the opportunity to let the Trump administration know how we can do, as an industry, a better job of protecting U.S.
jobs and U.S. opportunities going forward and also protecting trade deals and enforcing trade deals that are being violated in the present time.
There's tax benefits that are being discussed. There is regulatory changes being discussed, whether it's in the RFS on RINs potentially or other means.
So there is a pretty good list of opportunities that we are -- I think we have already provided some input into the transition team and it will take some time over the next few months as things become a little more clear and individuals are staffed into new roles, but we are very excited.
Duane Pfennigwerth
I appreciate that. And then just on the airport investments that you are making in the New York area and it's tough, I guess, for me to know how much of this is conceptual versus committed at this point, but what is the annual investment that you have committed to at this point?
How long term are these projects? And how should we be thinking about your longer term cost structure at these airports in New York?
Thanks for taking the questions.
Ed Bastian
LaGuardia, it's premature to be talking, be giving numbers our because we don't have signed leases in place yet and we are working with various entities there. You are not going to see a significant spike in CapEx, if that's your question.
We are doing our best to work with various public partnerships and private partnerships to minimize that but no question, as the airport facilities come online you will see increase in the cost of the facility and we also think you will see improvement in revenues and the efficiency of the facility as well.
Duane Pfennigwerth
Thank you.
Operator
And not take our next question from Rajeev Lalwani with Morgan Stanley.
Rajeev Lalwani
Hi. Thanks for the time.
Actually a question for Paul and kind of following up on what Duane was asking. With all the chatter out there around border adjustment taxes, do you see the potential for maybe higher aircraft CapEx as a result of import tariffs or anything like that?
And then on corporate tax reform, what do you think the opportunity is for you either directly or indirectly, if you can, Paul?
Paul Jacobson
Sure. Good morning Rajeev.
On the first question, it's way too premature to speculate on what any specific impacts might be to the airlines. We are following it closely as everybody else is.
I think generally speaking, tax reform is good for the airline industry. It is a U.S.
centric business model and one that, we believe, it continues to be very, very important for the U.S. infrastructure.
So we feel optimistic that we can a net beneficiary of any tax reform and we are eager to see what the results are.
Rajeev Lalwani
And, Glen, a quick question for you, I guess more of a clarification. As we look ahead, would it be fair to say that capacity is more or less going to move in tandem with margin strength?
Or should we assume that capacity kind of remains in check until you get margins to that targeted 15% to 17% range or so?
Glen Hauenstein
I didn't quite understand the difference between those two questions you pose, but I think that's what you see is with a higher dollar and with the competitive environment we have internationally, we have been decreasing our offerings internationally in order to achieve margins. And as we get there, we would start looking at flattening our capacity and then eventually growing it.
Hope that answers your question.
Rajeev Lalwani
I guess I was asking, is capacity going to stay in check until margins get higher? Or should we look at --?
Glen Hauenstein
Absolutely. That's the plan.
Rajeev Lalwani
Okay. Thank you sir.
Operator
We will take our next question from Savi Syth with Raymond James.
Savi Syth
Good morning. Paul, a happy birthday.
Just had a question on the cost side of things. Outside of labor costs, could you talk about the items that are placing the greatest pressure on unit cost this year and maybe how they progress through the quarters?
Paul Jacobson
Sure. Thanks, Savi, for the birthday wishes.
You know, a gift would be not asking a question about CASM, but the biggest drivers, as we talked about in the calls for the first quarter and then what we saw in the fourth quarter is really timing of maintenance events. As you know, we tend to seasonally do that a lot in the winter and the off-peak periods.
But it's just a natural progression of things as you go throughout the year. And now we feel like as we start to normalize the business and go through the summer periods, we expect to see a lot of the continued benefits from upgauging throughout the business to moderate some of that cost pressure in the first half and get us to the point where we feel confident that were in the 2% to 3% range for the full year as we talked about.
Ed Bastian
Savi, this is Ed. If I could add to that, I know there is some choppiness in year as the quarters rollout.
But if you look at the full year of 2% to 3%, I would say, very high level, half of that's due to the labor reset that we have talked about and the other half is due to reduced utilization of the is run rate of airline's capacity. If you look at the reduced run rates of capacity, there is certainly a knock-on effect of nonfuel costs.
I would say, high level, those are the two big drivers.
Savi Syth
Got it. Helpful.
And then just a question on the product side. I know product segmentation has been kind of an important part of this, I think, the change in the industry as you kind of move away from having a commoditized product and I think customers have definitely benefited, improved operations and different things like that.
But I guess, do you have a litmus test that we don't repeat the sins of the past where you add a lot of frills on to the product and then come a downturn you have to take that away? How do you, in your thinking about introducing food in economy on trans-con and things like that, just what's the litmus test as to the sustainability of that and maybe the demand for it?
Glen Hauenstein
Savi, I think we respond to demand and I think in different parts of the economic cycle, different things are important to different customers in each segment. And that's why I think as we continue to refine our customer segmentation, we want to continue to provide what customers are willing to pay for us.
And in this part of the economic cycle, they are with consumer confidence side, with the consumer flush with cash, they are willing to pay for more frills. And you know, we make a mistake as an industry when we anticipate or try and be in the minds of consumers as opposed to responding to what's important at point in time.
And I think, as a successful airline through all parts of the cycle, we are going to have to continue to monitor what's important to customers, what they want from us at that time. And that's what we are doing today.
Savi Syth
So you could see in downtowns, where you do cut back on certain things --
Glen Hauenstein
Absolutely. If fares become more relevant to customers than some of the amenities we put on, absolutely.
I don't think you box yourself into the fact to say that what customers want today is what they want five years from now.
Savi Syth
Okay. Got it.
Thank you.
Operator
And we will take our next question from Hunter Keay with Wolfe Research.
Hunter Keay
Thank you. Good morning.
Glen, I know you said you are obviously optimistic about the outlook for corporate spend based on your survey but is there a practical risk that your corporate accounts may have reset their annual travel budgets a lot lower if they base it on the last couple year spend where corporate air fares were down so much? I don't think this would be uncommon with what's happened in prior airline cycles.
So maybe you get this pop in the first half on higher spend but as the year progresses some of your maybe more midsize corporate accounts end up bumping into the ceilings of their annual travel budget because it was based off of lower dollar amount in a lower fare environment. So is that something that you have seen before?
Is that something you are considering or planning for as we move through the year?
Glen Hauenstein
Well, Hunter, I think if you look at the travel spend on a lot of corporates, particularly in major lane segments of domestic U.S., they are considered to be the primary business segments, that the fares were down 30%, 40% on historical basis. And I don't think we have to get a significant, we are not expecting them to go back to the historical levels in our current plan.
This is a journey. It's not a race.
And so I do think that if the economy holds out, which we are forecasting today that it will and business continues to travel which we are forecasting it will, that the opportunity to raise fares in that environment with a lower level of capacity offering from the industry is significant and it gets better as we move throughout the year because the fare has got to be so low for business travel by midyear last year. If you take one of the primary business markets in Atlanta to City X, that used to be $750 for a day trip, it got down to $119 for a day trip today.
It is sitting at $350 for a day trip. Could it go to $400?
Could it go to $450? We see no propensity to decrease travel going from $750 to $100 and I don't think we will see it our way back.
Hunter Keay
Okay. Alright.
That's good. Thanks.
And then sorry for the modeling question but I think this is relevant. The other revenue is up about 11% in the fourth quarter.
How much of that was maybe refinery third party sales and how much of that is just sort of like good run rate core revenue that's going to repeat, not based on the price of oil?
Paul Jacobson
Hunter, this is Paul. The third party revenues in the refinery were about $90 million that was equally offset by cost in the other cash cost line.
Hunter Keay
So other revenue outlook for 2017? Ballpark?
Paul Jacobson
For the full year?
Hunter Keay
Yes. If you don't mind?
Paul Jacobson
We can get back to you on the modeling questions.
Hunter Keay
Okay. Thank you Paul.
Thank you Glen.
Operator
We will take our next question from David Vernon with Bernstein.
David Vernon
Hi. Good morning guys and thanks for taking the question.
I guess at a high level, I would like to understand what your thoughts are as far as how quickly you think you can get back to that 17% to 19% margin guidance after this coming year of 100 to 200 basis points of compression?
Paul Jacobson
David, it would be premature to speculate on a time frame. We gave you our best view on 2017.
It's a year of some transition. Our goal would be, as I said in my opening comments, I think 2018 is going to be a good year, from what we can tell, but it's a long ways away.
So we see the trajectory starting to turn back by mid-year and that's important.
David Vernon
Well, I guess internally how do you guys think about that long-term target then? Is it a multi-year thing?
Is it an ambitious goal? Like how should we be thinking about it from a modeling perspective?
Paul Jacobson
It's our long term target and it still is and we are optimistic we will get ourselves there.
David Vernon
Okay. And then I guess maybe just as a quick follow-up.
As you look at the --
Paul Jacobson
If I could add a point, David.
David Vernon
Sure.
Paul Jacobson
If you look at our 2016 results, we are right at the low-end of that target range, 16.5%. So it's not some wildly ambitious goal.
That's the run rate this business has been on or has been on in terms of building towards it. We had a speed bump RASM, no question about it.
And as RASM starts to improve, I think we will continue the trajectory to get better.
David Vernon
Okay. And maybe just as a quick follow-up.
If you think of that 100 to 200 basis points of compression, how much of that would be just because fuel prices are going up? And how much of that is just that timing issue of getting RASM and cost ex-fuel right?
Paul Jacobson
I think there is lot of geography given that this time last year fuel prices were $30 a barrel and today they are $55 a barrel. So it's going to take a couple of quarters and I think that's a sizable amount of that 100 basis point compression we are talking about and that is front loaded to the front half of the year plan and probably by the second half I think we w ill on margin expansion.
David Vernon
Excellent. Thanks a lot for the time, guys.
Operator
We will take our next question from Andrew Didora with Bank of America.
Andrew Didora
Hi. Good morning everyone.
Glen, just a follow-up on some international commentary. I guess we have been hearing from some other global carriers that both Pacific and Transatlantic may have been holding up a little bit better than some expected given the capacity growth out there.
In your prepared remarks, it didn't seem like you are seeing the same thing. Is that a fair assessment?
And then from a corporate volume perspective, are you seeing a similar type of corporate uptick on your international routes? Or right now is it mostly domestic based?
Thanks.
Glen Hauenstein
Andrew, the entities are a bit different. I think we probably would, when all this is said and done, underperformed in the Pacific, because we had the biggest restructuring going on in the Pacific and we did have Yen year-over-year hedged less hedge gains.
So that had a lot of pressure on it. The core demand is very strong but it's not keeping pace, as an industry, with all of that capacity.
We are optimistic as you get to the summer. When you look at Japan, it's very stable.
When you look at China, we think there is going to be stability because we are out of the frequencies. So we think there is a really good opportunity in the back half of this year to start making up some ground on the Pacific.
As you know, we have also announced the retirement of our 747-400 fleet, which should be fully out by the end of this year. That should have some impact as we take some of the seats our of the lane sectors that plane was built for different network than we have today.
So we are optimistic there as well. So we have a lot of changes in the Pacific and I would expect that when all is said and done that, that would be entity for us versus our competitive set that's most under pressure.
In the Atlantic, we have seen strong business demand and strong business yield continue. But again, there is a lot of currency going on in Europe.
And when you look evaluate currency, that accounts for a significant portion of the declines we have seen. It's really not a core demand issue.
Andrew Didora
And then just like from a corporate volume perspective, are you seeing it coming back internationally as well? Or is it more domestic?
Glen Hauenstein
If you think about the nuances of what we have said, we didn't say that core demand for business in the U.S. was suffering in 2016.
As a matter of fact, it was relatively real plus. What we saw was essentially a corporate fare war that occurred for various reasons that spread throughout the domestic U.S.
network. That did not occur in the international entities.
So the rate at which those yields improve or recover from more historical level is much more heavily weighted towards the U.S.
Andrew Didora
Fair enough. Thanks a lot.
Operator
We will take our next question from Joseph DeNardi with Stifel.
Joseph DeNardi
Yes. Thanks very much.
Glen, I was wondering if we could just talk about the SkyMiles program a little bit. At the Investor Day, you guys had a chart that showed total contributions from your Amex relationship and about a $2 billion total increase from 2014 to 2021.
My understanding that, of that incremental revenue that's about 100% margin similar to what American Airlines has disclosed. So is it fair to say that by 2021 you will have conservatively $2 billion in EBIT coming strictly from the SkyMiles Amex relationship?
Not to box you in at all, Glen, but I feel like that's kind of a yes or no answer.
Glen Hauenstein
Or no comment, right? It could be the third option.
And I think that's the one we are going to go with here. We don't disclose the core economics of the Delta Amex relationship.
So I am going to take box number three and then hand it over to Ed for additional comments.
Ed Bastian
Joe, this is Ed. I agree.
We are not going to give the future margin on the Amex. But your topline numbers are right that when we did the deal a couple of years ago with Amex that the goal was to double our revenue contribution from Amex.
We are right on pace there. And you would be safe to assume there is a very high margin contribution on those revenues.
I wouldn't say it's a 100%, but it's a high contribution.
Joseph DeNardi
Okay. Would you say that the incremental revenue year-to-year is 100%, that all of that flows down to pretax income?
That's simply what American Airlines has disclosed as well.
Ed Bastian
I don't know what American Airlines deal is. They sound like they got a good deal.
But I will tell you what our deal is. It's a high margin contribution for us.
I will leave it at that.
Joseph DeNardi
Okay.
Ed Bastian
And ultimately those miles have to be redeemed for travel. So I don't know exactly how they are saying 100% of growth.
Joseph DeNardi
Sure. Well, that revenue flows through a different bucket, but be that as it may.
So I think what that ignores a little bit is the remainder of the revenue, say that $2 billion where you started in 2014, quite a bit of that is also very high margin. So can you tell us, I guess you have answered this, can you tell us what the margin revenue of that stream is?
Or could you at least tell us what the marketing revenue from that program is currently? It seems like an enormously profitable part of your business that most investors completely under-appreciate.
Our analysis suggests that you guys earned roughly $2 billion in EBIT currently just from SkyMiles. So can you provide us some color around that?
Ed Bastian
We are not going to provide the details, Joe. I will disappoint you on that.
But what I can tell you though is that it's not all margin. There is a significant cost of fulfillment.
We don't give SkyMiles out and not deliver the travel service. So it's a source of revenue.
It's far from a 100% flow-through. I would say, on the incremental structure going forward, yes, I think there is much higher margin compliment on the go forward, given that we have already got the base program being served, but no, on the first $2 billion it's a great program, but it's nowhere close to a high margin compliment.
Joseph DeNardi
Okay. Thank you.
Jill Greer
Dana, we are going to have time for one more question from the analysts.
Operator
Thank you. And we will take our final question from Darryl Genovesi with UBS.
Darryl Genovesi
Hi guys. Thanks for the time.
I guess maybe just to dig in a little bit, Glen, on some of the stuff you said on both the Atlantic and the Pacific. It sounded like you were experiencing some RASM headwinds as a result of the restructuring and then it also sounded like perhaps, so just I guess there's an opportunity there as that restructuring wraps up and some of these new markets start to mature and then also across the Atlantic, it sounded like you said you are going to try to reallocate some capacity into stronger U.S.
point-of-sale markets. Between those two, either individually or on a combined basis, is there a significant RASM tailwind to come as these prophecies play out independent of what's happening with the underlying market?
Glen Hauenstein
The big question mark, I would say, is currency. If I had one issue that I would be a bit of a cautionary issue is if the dollar continues to appreciate, that would put a little bit more pressure on foreign point-of-sale.
But core demand as strong and capacity levels seems to be generally in a better spot this year than they were last year looking forward. So I am cautiously optimistic that absent of another run in the dollar, another significant run in the dollar, that this is, as we have said, in the Pacific, that the fourth quarter would be our low point and that we would move forward from there and that summer in the Transatlantic with heavy point of sale U.S.
would be a very good summer.
Darryl Genovesi
Okay. And then I guess, if you were to just take your RASM guidance for the first quarter and assuming you come in line with the midpoint of that guidance based on normal seasonality if you just assume that there was no further improvement from there, where do you think you would end up for the year?
Glen Hauenstein
We are not going to speculate on a full year RASM guide. That's a good shot, though.
But if you look at --
Darryl Genovesi
I was just asking if you were flat, what would that kind of imply? But okay.
I get it. And then maybe if I could squeeze one in for -- sorry?
Glen Hauenstein
Let me just add one thing though, I think you do have to look at comps and comps get considerably easier as we proceed through the year. So that would infer an improving RASM performance.
Darryl Genovesi
Thank you. And then if I could, just a quick one last one in for Paul.
Paul, you had commented that asset utilization was down. Is that kind of by design?
Or would you anticipate, if we are not in a situation where you are accelerating the SM growth looking out a few quarters or a year, would you expect the longer term CapEx guidance to start to get revised down?
Paul Jacobson
Well, good morning Darryl. I think the asset utilization being down is wholly consistent with the plans for the year, as we talked about at Investor Day and the current revenue environment.
So I wouldn't take anything more or less out of it than that. And we are where we expect to be on the long term with capacity down a bit.
CASM 2% to 3% is still in that long-range strategic view of what we said to be consistently up to with about 2% capacity growth. So we feel good about our cost performance in running the business for margins and doing it the right way.
Darryl Genovesi
Great. Thanks a lot and best wishes for a happy birthday.
Paul Jacobson
Thank you Darryl.
Jill Greer
A great way to wrap up the analyst portion of the phone call. I will now turn it over to our Chief Communications Officer, Ned Walker.
Ned Walker
Hi. Thanks Jill.
As we begin the media Q&A, I would like to ask everyone that they could have one question and one follow it up with a brief follow-up question. And with that, Dana, could you review the process to get into queue to ask those questions?
Operator
[Operator Instructions]. And we will take our first question from Susan Carey.
Susan Carey
I ask you about Aeromexico. You say you anticipate closing your equity investment in the second quarter.
I am wondering what regulatory approvals are still required? And can you give us some kind of idea about the estimated cost of this investment?
Ed Bastian
Hi Susan, it's Ed.
Susan Carey
Hi.
Ed Bastian
How are you?
Susan Carey
Good.
Ed Bastian
We are in the process of working through the remedies that are required in order to get the antitrust immunity and we have to have it done sometime the slot divestitures and the JV itself implemented prior to being able close on the deal. So I would say, we are looking at as probably a 60 to 90 day process here to get all the regulatory approvals, the divestitures in place.
Relative to cost, I don't have a current, it's going down given the decline in the Peso. It's in the $400 million range, I think.
Susan Carey
And the regulatory approvals needed?
Ed Bastian
The regulatory approvals are in place. We just need to comply with the requirements.
But we are waiting on additional regulatory rules.
Susan Carey
Thank you.
Peter Carter
Susan, this is Peter. Hi Susan.
There is one thing we are waiting for, the Mexican securities authority to approve the transaction.
Ed Bastian
That's a tender.
Peter Carter
The tender offer. So we are waiting for that approval.
Susan Carey
Alright. Thank you.
Peter Carter
We do not anticipate any issues with the securities regulator there.
Susan Carey
Thank you.
Operator
And we will take our next question from Alana Wise with Reuters.
Alana Wise
Hi. Good morning everybody.
Ed Bastian
Good morning.
Alana Wise
So my question is, I am looking at our sheet right now and see that you guys' stock is down about 3% this morning. So I was just wondering if there was any sort of comment on the guidance you guys provided as to why think this might be?
Ed Bastian
I could not understand what you were saying.
Alana Wise
I can hear you.
Ed Bastian
Yes. It is better now.
Can you just ask your question again?
Alana Wise
Sure. So I am looking and I see that your stock this morning is down about 3%.
And I was just hoping for any sort of comment you guys can provide around that? Why it might be?
Or any sort of guidance you can give on that?
Ed Bastian
So the stock price was up this morning. It's down a little bit.
The market is down today. So we don't, I think it's up currently, so we don't comment on the moves hour-by-hour, now.
I think our results came generally in line with expectations. So it should have a significant impact on the stock.
Alana Wise
Thank you.
Operator
We will take our next question from Ted Reed with TheStreet.
Ted Reed
Thank you. I have two questions.
I guess, first for Glen. You said that basic economy is going to be 40% of domestic markets and I know you are adding a premium product in coach also.
So listening to you makes me think that some day there won't be coach plans as we know it or there will be hardly any coach class as we know it because of all these various products. Is that fair?
Glen Hauenstein
No Ted. I think actually for the foreseeable future that the main cabin is where a preponderance of our customers sit and that a vast majority of our revenues reside.
So the death of the main cabin, I think, is premature to prognosticate on that. But what the offering is in each one of these cabins, think about what United is doing in basic economy, which is very different than what we are doing.
We have this all changes as we respond to what consumers really want to buy from airlines is going to be fascinating to watch.
Ted Reed
Alright. Thank you.
My second is for Ed. It's mainly because I could barely hear you, Ed, when you talk about what you expect from the Trump administration.
I understand there is more business travel and there will be more support for you in these cases with the Mid East carriers and Norwegian, but I couldn't hear you. So I would like you to address that.
Thank you.
Ed Bastian
Sorry that you could not hear me, Ted. I thought I was clear.
There is going to be a number of opportunities for us to present our views to the new administration, which we very much look forward to. I mentioned that we are going add more opportunities in infrastructure, given the level of investment we already are making in our airports and facilities and partnering with the government to do even more.
That would be a great opportunity. I mentioned the Middle Eastern situation, how we are competing against governments, not airlines in the Middle East.
The blatant violation that we see relative to subsidized air services, $50 billion of subsidies over the last 10 years and our opportunity to have the governments move to enforce its trade agreements as compared to victim of it as well as protect U.S. jobs all alongside that.
And then the other item that I mentioned is the tax reform that's being discussed. I see Delta certainly being the beneficiary of that, though it's hard to speculate as to the form it will take given it's very early.
Ted Reed
Alright. Thank you, Ed.
Ned Walker
Okay. Dana.
we have time for two more quick questions. I think we have one from The Wall Street Journal coming up again as well as The Philadelphia Inquirer.
Operator
Yes, sir. And we will go to Linda Loyd with The Philadelphia Inquirer.
Linda Loyd
Thanks for taking my question. You mentioned that the Trainer refinery lost $40 million in the fourth quarter.
What's the outlook for the refinery in 2017? And when, if at any time this year, might you expect a profit, the refinery to turn a profit?
Paul Jacobson
Hi Linda. Good morning.
This is Paul Jacobson. The refinery, we are expecting to produce a profit of around $100 million this year, based on where the current crack spreads and margins look like.
We are projecting a slight profit in the first quarter based on where the current environment is. But the refinery continues to perform well against our broad-based strategy, what we look at.
We were up there visiting with the refinery employees in December and morale remains high and we remain committed to that investment despite some of the challenges across the industry and the cyclicality.
Linda Loyd
Thank you. Thanks very much.
Operator
And we have a follow-up question from Susan Carey with The Wall Street Journal.
Susan Carey
Thanks fellows. Condolences on this, but I have to ask.
On the Fort Lauderdale situation, have we determined that all the injured and deceased were Delta customers? And have we seen any kind of tingling or paperwork filed for lawsuits on this situation?
Glen Hauenstein
Susan, it's an active investigation. So we are pretty limited to what we can discuss.
It did happen in our terminal. So yes, Delta customers were impacted.
But we really can't provide much more than that.
Ned Walker
Yes. Susan, I would suggest you talk with the FBI.
They have asked to be the coordinator for all information pertaining to the investigation. So I would turn it over to their PIO down in Fort Lauderdale.
Susan Carey
Alright guys. Thank you.
A - Ned Walker
No. Thanks for the question.
Thank you Ed, Glen, Paul and Peter. That wraps up the December 2016 quarter call.
We will be back in April for the March 2017 call. Thanks so much everyone.
Have a good day.
Operator
Thank you. And that does conclude today's conference.
Thank you for your participation. You may now disconnect.