Delta Air Lines, Inc.

Good morning everyone and welcome to the Delta Airlines December quarter and full year 2018 financial results conference call. My name is Augusta 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 like to now turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead ma'am.

Thanks Augusta. Good morning everyone and thanks for joining us. With us in Atlanta today are our CEO Ed Bastion, our President Glenn Howenson, and our CFO Paul Jacobson. Our entire leadership team is here in the room for the Q&A session. Ed will open the call and give an overview of Delta's financial performance. Glenn 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 filing. We'll also discuss non-GAAP financial measures. All results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at .Delta.com. And with that, here's Ed.

Thanks, Jill. Good morning, everyone. Thanks for joining us today. Earlier today, we reported our full year results, including a December quarter pre-tax profit of $1.2 billion and earnings per share of $1.30, both of which were at the top end of expectations that we gave you at the start of the quarter. Our top line grew 7% in the quarter. This solid performance combined with our best non-fuel unit cost result of the year offset a $500 million increase in fuel expense. The December quarter marked a successful step on our path to improve margin performance with our pre-tax margin expanding over last year's, even if excluding the one-time gain from our DGS transaction. 2018 was a successful year for Delta as we delivered strong results for our customers and our owners. Our earnings per share improved nearly 20% over the prior year, and we returned $2.5 billion back to our owners. We ended the year with an .6% pre-tax margin and a return on invested capital of 14.2%. Notably, our $5.1 billion in pre-tax income was only 3% below 2017, despite a 30% increase in our fuel expense. The last time we saw a 30% annual fuel increase was 2011, and that year earnings fell approximately 25%. This really sums up the resiliency of our business and how different Delta is. For our customers, Delta's operation is the best in the industry, and 2018 was another record-setting year. We ended the year with 143 days without a single cancellation across the entire Delta system, including both mainline and Delta connection, exceeding 2017's full-year record of 90 days. For our mainline product alone, we had a record-breaking 251 days without a cancellation, delivering an on-time arrival rate of 85.7%. This exceptional performance by our operations team resulted in Delta being named 2018's most global, excuse me, most on-time global airline by Flight Global for the second year in a row. Running a great operation is the foundation for high customer satisfaction. When combined with the great service our employees provide and the investments we've made in our product, we're creating some of the most loyal customers in the airline industry. We drove improvement in net promoter scores during 2018 in every region of the world. Our domestic net promoter score has tripled over the last decade and reached an all-time high in September of over 50%. All of these results are a reflection of the incredible work of the Delta people, and I'm pleased to recognize our employees' outstanding performance this year with over $1 billion in profit sharing for the fifth consecutive year. As we move into 2019, while fuel volatility has been a major story the last few months, prices now sit almost exactly where they were a year ago, and by the way, where we thought they would be. This, coupled with strong non-fuel unit cost control, should position us well for cost stability in the new year. The revenue environment remains solid. After 8% top line growth last year, we are assuming a modest reduction in global economic growth rates for 2019. We expect top line growth to be 5% this quarter, a rate we are also anticipating for the full year as we communicated last month at our investor day. Our revenues to China, a market that's driving some trade and travel concerns, grew 27% in the fourth quarter, and we expect a similar level of growth this quarter. Most importantly for Delta, the domestic revenue environment, which accounts for approximately 70% of our total passenger revenue, continues to do well. Corporate revenues grew 8% in 2018, and recent bookings show this trend continuing. Now, with respect to the government shutdown, we are seeing some pressure on our business. On the revenue front, we're experiencing about $25 million per month in lower government travel. The bigger impact is on our operation. With non-essential work at the FAA shutdown, our Airbus 220 start date is likely to be pushed back due to delays in the certification process. This is also hampering our ability to put seven other new aircraft deliveries into service. But it's our customers who are seeing the biggest impact with longer lines at airport security. We're working closely with TSA on any steps we can take to minimize these delays, including mobilizing Delta employees to perform non-essential aspects of the security process. We strongly encourage our elected officials to do their very best to resolve their differences and get our government fully open as quickly as possible. In summary, 2018 was a strong year for our customers, owners, and employees. We experienced significant top-line demand growth for our product, our operational reliability was record-setting, and our brand has never been more healthy. Despite a $2 billion fuel headwind, we generated double-digit margins, topping $5 billion in profits for the fourth year in a row. And we expect 2019 will build on these strengths and deliver a great year of returns for our stakeholders. The demand environment is solid, and our cost base should be stable, resulting in improved earnings and cash flows for our owners. And while we're certainly mindful of the challenges that exist, macro trends, currency headwinds, and extended government shutdown, our team has built a great foundation for our business and dealt as well-positioned for success in 2019. And now I'll turn it over to Glenn to discuss the revenue environment.

Thanks, Ed, and good morning, everyone. 2018 was a strong year for Delta. Demand for our product and the affinity for the Delta brand has never been higher. I'd like to thank the Delta team for delivering record revenue and operational results this year and our customers for their continued loyalty and support. For the full year, revenue grew 8% to nearly $44 billion on unit revenue growth of 4.3%, with a record revenue premium of 112%. Passenger unit revenues improved in all entities for the first time since 2012, with demand strength in both corporate and leisure segments throughout the year. Corporate average fares improved 5% and returned to 2016 levels. Non-ticket revenue streams were strong as we diversified our revenue base. Argo revenue grew 16%, and MRO was up 19%, both producing double-digit margins. Our close relationship with American Express is a source of competitive advantage. In 2018, we drove $360 million of incremental value for a total contribution of $3.4 billion. During 2018, we set a new record with over 1 million co-brand acquisitions and spend -the-cart portfolio grew double digits. In the December quarter, revenue grew 7% on a .2% unit revenue improvement. Corporate revenues grew 7% in the December quarter on both volume and fare improvements, with growth across almost all sectors. Revenues from premium products were up 10% in the December quarter on a 4% increase in premium capacity. On December 7, Miles as a Currency launched, allowing our customers to redeem miles for post-purchase upgrades. Initial customer response has been strong, with over 30,000 flight upgrades purchased within the first month, driving a .5-point increase in upsell on Delta.com. Miles on mobile will roll out later this month, and we plan to deliver much more additional functionality as we move through 2019. Turning to specific entity performance in the quarter, domestic revenues increased .7% on .6% higher unit revenues. Both business and leisure revenues grew 8%, and we continue to set records for domestic revenue premium. This is noteworthy given an industry-leading increase in both stage length and gauge. Internationally, we saw the revenue growth of .8% on 2.3 points higher unit revenues. Our Latin region returned to positive unit revenue growth of 1% in the December quarter. The Caribbean was the best performing sub-entity with 5% unit revenue improvement, and we are really pleased to see recovery taking hold in Mexico, where we posted a 3% rise in growth. In the Pacific, unit revenues were relatively flat year over year, with significant increase in stage and currency headwinds offset by strong demand. Japan and Korea saw mid- to high single-digit unit revenue growth, with Korea posting the strongest performance. Transatlantic unit revenues increased 4.1 points, but we started to see some cautionary signs in the quarter, in addition to more pronounced currency headwinds. The strength of our absolute performance was unfortunately overshadowed by the one-point miss to our guidance mid-point. This was attributable to two main factors. First, we gave guidance near the peak of fuel prices, and expected fuel recapture initiatives did not materialize. Second, the early Thanksgiving in 2018 created the longest possible calendar period between the holidays, and revenue during these weeks, while strong, was not as robust as expected, potentially due to consumer fatigue during this extended period. Retailers have reported seeing similar trends. Good news here is that January traffic and yields have returned to pre-holiday levels and demand is back on plan. Looking forward, March quarter total revenue is expected to increase 4 to 6 percent, with adjusted unit revenue growth of flat to up to on a 4 percent higher capacity. The two-point sequential change in unit revenue from the December quarter is due to a half-point impact from Easter shifting to late April, a half-point from the timing of JV settlements, and a full point from trends in Europe currency and the government shutdown. We are optimistic about domestic performance for the March quarter. Leisure and corporate demand remain healthy, with strong bookings for the upcoming MLK and President's Day holidays, as well as the spring break period. And the overall outlook for corporate travel is positive. In our most recent survey, 90 percent of travel managers expected to maintain or increase their travel spend into 2019. This is a two-point improvement over the last survey we did a year ago. For January, on-hand corporate bookings are already up 7 percent year over year, with both fares and passenger volumes continuing to improve. Domestic capacity growth for the industry and for Delta is moderating compared to 2018, and we are seeing improved competitive outlooks in Delta hubs. For the March quarter, Latin will be our best performing international entity driven by the Caribbean and Mexico. Brazil remains challenging as Delta is committed to improving profitability by trimming marginal capacity. With capacity plans down approximately 20 percent in 2019, we expect Brazil to become RASM contributor as the year progresses. In the Pacific, stage length and currency headwinds will persist into the first half of 2019. For the March quarter, unit revenues are expected to remain flattish, but profitability will as we capitalize on cost efficiencies from new aircraft, upgraded products and services, and further integrate our Korean joint venture products. In the transatlantic, we see some cautionary signs in the March quarter. This is the entity expected to be the most challenged. We have seen leisure and corporate impacts in France due to the domestic unrest, and when you combine this with the uncertainty of Brexit, a more pronounced currency headwind, and the timing of Easter, which historically impacts this entity the most, we expect modest negative unit revenues for the March quarter. While current trends are not as robust as what we saw in 2018, we are confident that the summer will be strong based on early bookings. We are watching this region closely given the uncertainty and are prepared to adjust capacity as we approach the next shoulder season. In closing, a more diversified revenue base across geographies and products, along with a continued pipeline of Delta-specific initiatives, give us confidence in our plan of 4 to 6% revenue growth in 2019. Delivering on this target while also expanding margins is a top priority for Delta. And with that, I'd like to turn it over to my good friend Paul to discuss the financials.

Thanks, Glenn. Good morning, everyone, and thank you for joining us. Changing our cost trajectory was the top priority for the finance team in 2018, and I'm pleased to say that December quarter non-fuel unit costs were down 0.5%. Importantly, our full-year unit cost growth of .4% marked an inflection in our cost trajectory, putting us back within our long-term target of keeping unit cost growth below 2%. I'd like to thank the entire Delta team for their hard work and innovative thinking. Our operating units are executing well on costs, achieving lower non-fuel chasm year over year, which is helping to offset overhead pressure from fleet and facility investments. My hats off to Gil and the operations team for a job well done. Our 2018 performance in the initiatives underway give us confidence in our path to 1% non-fuel unit cost growth in 2019. In the March quarter, we expect non-fuel unit costs to increase 1% to 2%. Relative to the December quarter, there is incremental cost pressure from maintenance timing ahead of summer flying, with about half of the full-year increase in maintenance occurring in the first quarter and creating approximately 1.5 points of pressure. Despite this pressure, and as evidenced by the midpoint of our chasm guide, we expect each quarter of the year to be .5% or lower, which this quarter is expected to be the high water mark and is consistent with our guidance at Investor Day. In 2019, we expect an additional $350 million of benefit from One Delta beyond the $150 million realized in 2018, and we'll continue to see benefits from refleeting as we replace aging narrowbodies throughout the year. Turning to fuel, our total fuel expense drove $508 million of pressure in the December quarter. Our all-in fuel price of $2.42 per gallon was 25% higher than prior year. While market prices moderated significantly from the beginning of the quarter, inventory pre-purchases and the scheduled maintenance turnaround at the refinery drove a 16-cent headwind during the quarter. For the March quarter, we expect our all-in fuel price to be roughly flat to last year. Some of this is driven by a loss at the refinery of approximately $40 million due to lower gasoline cracks. We currently forecast March quarter earnings of 70 to 90 cents per share, an approximately 10% improvement over prior year at the midpoint. This equates to a March quarter pre-tax margin in the range of 6.5 to .5% compared to last year's 7.1. Our full year results in 2018 were impacted by two unique items, the sale of 51% of our Delta Global Services business and early adoption of the new lease accounting standard. These two items together increased 2018 earnings per share by 14 cents, adjusted for profit with the majority of that benefit coming in non-operating expense. As we said at Investor Day in 2019, we expect non-operating expense to be $450 to $500 million. This is $350 to $400 million higher than 2018, primarily due to a lower pension benefit and the lapping of the gain from the DGS sale. And finally, our strong cash generation healthy balance sheet allowed Delta to execute on investment opportunities and consistently return capital to shareholders. During 2018, we generated $7 billion of operating cash flow and invested $4.7 billion back into the business, resulting in free cash flow of $2.3 billion. In 2019, we expect to produce roughly $8 billion in operating cash flow and free cash flow of $3 to $4 billion, which is more than 50% higher than last year and represents an approximate 10% free cash flow yield at our current stock price. As outlined at Investor Day, we are planning capital spending of $4.5 billion in 2019 as we continue to replace our fleet and invest in our product and technology. 80% of this spend is fleet related, including the replacement of less efficient narrowbodies. Our investments are transforming our fleet to drive margin benefits through higher customer satisfaction, increased premium seats, and significant cost efficiency gains. For the first quarter, we expect capital spending of roughly $1.3 billion as we take delivery of 29 aircraft in the quarter. We remain committed to consistent return of capital to our owners as well. In the December quarter, we returned $325 million in share repurchases and $238 million in dividends for a total of $2.5 billion returned to shareholders for the year. We expect a similar level in 2019 in line with our target of returning 70% of free cash flow to shareholders annually. Over the past five years, we have reduced our fully diluted share count by more than 20%, returning more than $12 billion through dividends and share buybacks with a current dividend yield of nearly 3%. Importantly, we've done that while also reducing our debt and our pension liability, improving the health of our balance sheet. We are comfortable with the current level of debt, and as we highlighted in Investor Day, we have moved to a long-term leverage ratio target of 1.5 to 2.5 times adjusted debt to EBITDA. This ratio was 1.9 at the end of 2018. Our targeted range should allow us to maintain investment grade ratings through a business cycle and also includes the incremental lease liabilities recognized with the adoption of lease accounting. At year end, our pension funded status was 68%, with an unfunded pension liability of $6.4 billion. Our 2018 planned asset returns underperformed our target of 9% by about 14 points. This return shortfall will reduce our pension benefit in 2019, contributing to the -over-year pressure and non-operating expense. Looking back on 2018, I am extremely proud of what we have accomplished at Delta. We successfully navigated challenges and have positioned the company for another year of solid top line growth and more importantly, margin expansion, which should drive double digit growth in our earnings and free cash flow in 2019. As Ed said at the outset of this call, this performance is enabled by the Delta difference. Our combination of the powerful brand coupled with our unmatched competitive advantages continue to deliver industry leading results and drive long term value for our owners. With that, I'll turn the call back over to Jill to begin the Q&A.

Thanks, Paul. Augusta, we are ready for questions from the analysts. If you could give instructions on how to get into the queue.

Certainly. The question and answer session will be conducted electronically. To ask a question, please press star one on your phone at this time. If you're on a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again that's star one to ask a question. We'll go first to Brandon Ogilinski with Barclays.

Hey, good morning everyone and thanks for taking my question. So I guess Ed or Glenn, I mean you guys mentioned challenges from European economies that look maybe a little bit slower this year. The government shutdown here in the US, maybe some lingering challenges in the Pacific and Latin. So I guess when we look at capacity growth, I think scheduled right now in two queue is about 4.6. You know, what's the ability to take capacity down if some of these trends continue or even worsen from here?

Well, first of all, we're very encouraged by you kind of characterize this global slowdown as all the same and I'd like to put some qualifiers on there. We're actually quite excited about the Latin trajectory. If you recall, this is the first quarter after two quarters of it being negative that it's returned to positive and we see Latin accelerating as we move into one queue and then throughout the year, we see very solid returns in the domestic. And remember last year was a really great year for the transatlantic, one of the best years we've ever had. So being in the flattish in the off-peak season is really, I wouldn't characterize it as something that we're fearful of, but we're going to keep a very close eye as we read all these papers and we read the current events, we see what's going on in France, the still uncertainty over Brexit finally coming to a head here. And so what we're we have, but we know the summer in Europe is going to be great with lower fuel prices. So we're really looking more towards the back half of the year. And do we need to make additional adjustments when we get past the summer peak? And we'll keep a close eye on that and we'll report back to you.

OK, appreciate that, Glenn. And I guess, you know, like we've heard it from FedEx too, that, you know, maybe Europe is incrementally slow from here. So that's why I asked. But, you know, thinking more broadly, if the market's really concerned here that the economy will slow because it's not necessarily slowing right now with, you know, 35 percent of your passenger revenue tied up in premium products, should investors be thinking that maybe the Delta business now is more cyclical than maybe it was in the past? And I think at the end of the day, you guys tried to answer that, said, look, you know, the spread between a premium ticket and the economy ticket actually isn't that far off. So we don't think so. But can you give folks maybe some additional ideas on why this may not be as cyclical, folks think?

Well, I think there's two things we should talk about in that question. And the first is the disparity between the higher ending corporate travel and the lower ending leisure. The spread between those absent of the premium products is at an all time low. If you think about what's happened over the past couple of years, leisure fairs have continued to increase and we've had very stubborn corporate yields. And while we returned to 2016 levels, we're still far off the peaks that occurred many, many years back. So if you think about the last cycle or some of the big cycles, we had really big change. We had really big differentials in the realized fare from corporate versus leisure. And those at a macro level have never been closer if you were if you were thinking, how does the next cycle play out? So I think that's a very big issue we need to talk more about because that should make it the whole industry a lot less cyclical. And then in the premium products, I think if there was a tickdown in demand, we're more confident that all of the new products and services and the way we're distributing and the broadness that we're able to offer, including the pay with miles feature and things like that, we would be able to offset weakness and demand by bringing new ways to buy the product into the marketplace. So really confident on both those. And we should probably talk more about that as we move through the year. We hear a lot of your concerns about where we are in the cycle. And while we haven't really seen any weakness in domestic, we are mindful that we are, you know, many years into this expansion. And eventually we will face a recessionary or contractionary environment. And we're planning for it. And we should tell you more about some of why we feel so confident that we will weather the next cycle so much better. Thank you.

We'll go next to Michael Linenberg with Deutsche Bank.

Yeah, hey, two quick ones here. Glenn, just you had highlighted the headwinds on RASM in the March quarter. And I heard government shutdown in currency is like a point. Easter shift is a half a point. What was there was another thing you mentioned, another 50 basis points. What was that again?

There was foreign exchange and JV settlements.

Oh, JV. Okay. The JV settlement piece. Okay. And

that's really just the timing issue of when they come in and when they go out, that should balance out throughout the year.

Okay, great. And then just my second question. You know, there was commentary about, you know, how strong sales were to China. And then there was some positive commentary about Japan and Korea. And I noticed that the Pacific RASM was down a smidge. Is that, you know, what was driving that? Is that more stage length? Or is there another part of the Pacific like Australia, where you're just you're seeing a lot of weakness?

No, most of that, all of it is stage length, because in China, as you know, we discontinued the Narita to Shanghai route and replaced it with Atlanta to Shanghai. So the RASM, while it's lower, the profit potentials are significantly higher. And so that's what's driving a slightly negative Chinese unit revenue, but all based on stage length.

Great. That makes sense. Thank you.

Our next question comes from Savi Sites with Raymond James.

Hey, good morning. Just a clarification from Glenn on the domestic commentary, you mentioned solid trends. So just outside of Easter and maybe the kind of the government shutdown, should we assume that the kind of the magnitude is similar going at least on a core level?

Yeah, I think we're very confident we had that little blip in December right around the holiday. But as January and everybody came back from work, we are back on track and the corporate trends and the leisure demand look very similar to what we saw in the earlier part of 4Q.

Helpful. And just a follow up on the trainer, the color that you provided, Paul, that was helpful. Just trying to understand what's driving a lot of loss in 1Q and how we should think about it as kind of the year progresses.

Sure, Savi. Good morning and thanks for that question. There are two big impacts year over year with trainer. One is the difference in gasoline cracks. They're trading at pretty historic lows right now, which is putting some pressure on the production at trainer on a year over year basis. The second was we benefited last year from a slight revaluation of a RINZ liability that we were holding from 2017. So with those lower RINZ prices, RINZ has been traded relatively flat. We've satisfied our 2017 and 18 obligation to date. So that's a smaller impact, but it's primarily driven by those lower gasoline cracks, which we expect should reverse over the year, especially as we get into summer season.

Thank you.

We'll go next to Joe Cayato with Credit Suisse.

Thanks very much. Good morning, everyone. First question is for Paul on unit costs. I appreciate the color on the timing of the maintenance spend here in Q1 and the expected cadence for the year, but at a high level, can you just talk about where you see the biggest risks and opportunities in your cost structure to either materially outperform or underperform your 1% Chasm X target for the year?

Sure. Good morning, Joe. You know, we've come out of 2018 with a lot of momentum that we expect to continue into 2019, so I'm optimistic on our One Delta initiatives in particular as we continue to progress and get better at that enterprise level thinking. But I'm also optimistic about the fleet efficiencies that we'll get. We'll take approximately 60 airplanes in the first half of the year. And as that phases in over time, we start to realize some of those efficiencies going forward. So again, I reiterate the optimism I conveyed at Investor Day. I feel very confident about our 1% goal and the timing of maintenance was fully expected in that when we gave that guidance on a quarterly basis.

OK, thanks. And then a question for Glenn on cargo. I was curious if you could give us some more color on what you're seeing in the cargo operation, particularly across the Pacific and what you're seeing there in terms of volumes and yields and whether or not it makes sense for us to think of that as potentially being a leading indicator of what we might see in passenger demand.

This is Gil West. I just comment a couple of comments on cargo. First, the cargo business had an exceptionally strong year in 2018. As you probably know, revenues were up over 100 million dollars or 16%, as Glenn mentioned, due large part to the yield performance. So despite lapping some pretty challenging comps year over year, we're seeing yield performance continue to hold strong. We do see some volume pressures, some geography to that, as you allude to. That's occurring. But I will say revenue growth, while it's moderating, is still up single digits, driven primarily by yield performance.

And should we view that as a potentially leading indicator of what we might see with with volumes on the passenger demand side? Or is that not the right way to think about it?

I think you've got to think about what's going on with the tariffs and in the more macro sense and how people are trying to offset tariffs, whether they're using air or sea. And, you know, I think we could always look at leading economic indicators, but we are very, very close when we look at the passenger revenue side and we don't see those same trends translating into the passenger revenue side. I think we don't try to get ahead of ourselves. We try and advise what the revenue is going to be as quickly as we can and then we make the appropriate decisions.

Understood. Appreciate all the color. Thanks, everyone.

We'll go next to Andrew D'Oro with Bank of America.

Hi, good morning, everyone. Thanks for taking questions. I have a first question for Glenn. Now that you're breaking out the premium product versus main cabin, I didn't notice that growth in premium revenues decelerate a little bit to up 10 and 4Q versus I think you were tracking a mid-teens rate earlier in the year. What changed here? And really interested in Glenn getting your thoughts on what's your read on this? Do you view this premium revenue bucket as a good read across for corporate spend?

No, I think you got one thing, two things going on. One is the base is increasing dramatically. So we didn't expect that we would be in the mid to high teens as the base continued to grow. And second is that the quarter had the least number of premium seats in it that we'll have over any quarter. So we were tracking at about plus eight on the premium seat counts. This quarter was about plus four. And as we go into 19, that number will go back up to plus six. So, you know, your premium ability to sell premium is also related to the inventory you have. And the 4Q number was the lowest inventory growth that we'll have for the next few quarters.

Oh, got it. That makes sense. And then my second question revolves around the more in the government shutdown. And look, I appreciate that this is a pretty fluid situation. But I know you guys called out the lack of corporate contracts on the government side traveling. But have you seen anything in your bookings or conversations with your corporate travel managers that would indicate that maybe corporates might be beginning to delay travel given the crowding issues that have popped up at the airports? Or is that not in the conversation yet? Thanks.

Andrew, this is Ed. No, we're not seeing any evidence that people are looking at this extended shutdown as anything other than something that's going to be resolved hopefully soon. Got it. Okay. Thank you.

We'll go next to Hunter Kaye with Wolf Research.

Thank you. Good morning. Hey, Paul. Good morning. So Paul, that pension plan return of negative 5%. What happened there? I think you guys said in your 10K, you got about 40, 50% of growth seeking assets. I'm wondering if that's what drove it. And how are you thinking about that pension plan asset allocation given some of the comments you made about maybe some concerns you may be starting to have around global economic growth?

Sure, Hunter. As you know, the pension plan has a pretty long life. And with an approximate 9% expected return, we tend to be heavily weighted toward equities. It was a challenging year in the equity markets across the board, but particularly in global stocks around emerging markets, et cetera. We're always looking at ways to tweak that, but we do that through a lens of a long-term expected return matching that liability profile. So be careful not to overreact. But at the same time, we want to manage that exposure prudently.

Okay. And then maybe this is a question for Glenn. Do you know how many seats, if you want me to take a stab at quantifying this, Glenn, do you know how many seats go unsold relative to your target, like maybe seven or 10 days before the flight today? And maybe how that's changed in the era of low oil prices or higher industry capacity growth? I'm basically wondering if the industry is just a little bit more geared, particularly you guys, I should say Delta, is just a little bit more geared towards that last-minute seven-day AP window than maybe you were five, six years ago. Can you provide any data around that for me?

Yeah, I think when you look at where we have been going into each one of the months in 2018 and into 2019, we've entered the months actually ahead in load factor. So we've actually become a little bit less reliant on the very close-in demands. And that's really where we want to continue to position ourselves in 18 is with a little bit less risk on the table as we head into each one of the months.

Okay, thanks.

We'll go next to Duane Fenningworth with Evercore ISI.

Hey, thanks. Just with your commentary about aircraft induction delays, I think I understand the A220 and certification process, but I think you mentioned some other aircraft types. Can you just expand on why this shutdown is driving delays?

Gil, of course the A220 we've talked about, I think there is some potential impact on some other fleets, namely the A330-900 Neos, and it gets back into certification issues that we certify seats and crew rest and things of that nature, Wi-Fi systems that with the government shutdown become problematic for. So there's not an immediate impact, but it certainly could have an impact downstream on us.

Thanks, that's helpful. And then with the A220s specifically, can you just remind us what aircraft types are those replacing? So in other words, are you going to be parking 717s and are these delays part of what is driving maybe some maintenance pressure in the short run as you keep these older aircraft around?

Duane, I think you're overthinking it. We're not expecting this to be an extended delay in the primary aircraft, the initial A220s are replacing our really long-range two-class RJs, of course some MD80s as well.

Okay, thank you.

We'll go next to Jamie Baker with JP Morgan.

Hey, good morning everybody. First one for Glenn, I'm guessing the majority of your passengers that do fly on government fares have SkyMiles accounts. Can you give us a feel for how much these passengers drive in terms of non-government spend? I think for somebody in tech or finance, their personal spend is a fraction of what their annual corporate spend probably is. I just don't really know how that dynamic looks for a typical government employee, obviously trying to figure out the knock-on effect on leisure spend even if the government were to reopen tomorrow.

Right, we're trying to quantify that right now. It's very, as you might imagine, it's kind of difficult to figure out all of the implications because you have multiple dimensions there. But that's our estimate of 25 million includes all of those components. So it's not just... Oh, it does.

But presumably any reduced leisure spend by government employees in January wouldn't have manifested in January. I mean, you don't come back from vacation and then start working and then go on another vacation, right? So that's in your future, somewhere else in the quarter, in other words.

Exactly. We'll see how long this occurs and we could revise that if it's so long and expands. But right now, that's what we're thinking, 25 million.

Okay. And second, and probably for Paul, Ed answered the question about at one point, A220 delays my pressure exfuel chasm. But is there any lingering impact from all the tariff noise? I haven't been paying close attention recently, not sure which plant you're taking the aircraft from. Also, have you figured out the network impact? Are these going to be spread far and wide eventually? Or should we think of the 220 as, I don't know, more of a Boston plane or a Seattle plane or something like that? Just wondering how they fit within the domestic network construct.

I think you're right in your assumption that they'll be primarily focused on the coastal gateways as opposed to the interior hubs where we can drive more fuel, more cost efficiency and higher volumes.

Okay, fair enough. Thank you very much.

We'll go next to Helene Becker with Cowan.

Thanks very much.

Helene, we can't hear you. Could you repeat your question?

Oh, can you hear?

No, we can't hear you.

Well, operator, can you open the right line?

There you are, Helene.

Is that better?

Yes.

Oh, good. Okay. I think there's just a problem with me calling in from London and my office calling in from New York. Just a question on tech ops. I didn't hear you talk about that, but could you just talk about the cadence for revenue growth in that business and how that's shaping up here in maybe the first half of the year that would offset some of the other pressures that you're seeing at the end?

Sure. This is Gil. So, our MRO business in tech ops, you know, again, had a great year in 2018, pushed a little over 700 million up 100 million year over year. We see a similar trend in 2019, a little more moderated growth, but still pushing probably close to 800 million. Longer term, though, as you probably know, we've made investments in our capabilities, new engine shop, new pest cell, all that is the foundation to introduce two new engine type fleets into our MRO network, the geared turbofan Pratt Whitney engine and the Rolls-Royce Trent series engine. And then longer term as that revenue ramps, we'll see over a billion dollars a year incremental revenue from those two engine types.

And those alone, not including the other engines. Great. Okay. Well, thanks everybody. Thanks for being patient.

Thanks Laine,

We'll go next to Joseph Donardi with Stiefel.

Good morning. Paul, the ROA of 9% is about as high an assumption as I've seen. Can you just talk about the sustainability of that, what the knock-on effects would be if you lowered it, and whether lowering it is contemplated in your earnings guidance for 19?

Sure, Joe. Good morning. The 9 percent expected return assumption is at the high end of corporate plans, but remember that our plan is unique, not only to Delta and the airline industry, but to all corporate plans because of airline relief. So what we have done is taken an approach where we've proactively funded with a little bit more of an aggressive return profile because we have the time to do that with airline relief, with having fully met our minimum obligations through 2024. So it has always been in our plans that we would work on reducing the risk in that portfolio as we get closer to fully funded. But what I would say is the long-term returns of that plan, as we've thought about it over the last 10 years, have been wholly consistent with that strategy of trying to drive a better funded status through both contributions and investment returns. And that will change over time, but there's no change contemplated in the rate in 2019.

Okay, that's helpful. And then, Glen, I just have a two-part revenue question for you. First is, I think your agreement with Amex probably comes up in a couple of years, typically when both parties are happy, they'll extend that early. So can you just talk about the timing of that and what sort of revenue opportunity that could offer you? And then, whether you've changed the way that you guide based on kind of the challenge you've had over the past couple of years of hitting guidance, whether first quarter guidance is different than it has been. Thank you.

Well, we don't comment on any potential negotiations, so I'll defer on the first one. But on the second one, we clearly have heard our investors that they want us to make sure that we hit our targets. And while we did hit inside the range, 3.2 is in the range of 3.5. We know that we lowered in quarter, and so we're examining that, and I'd say we don't want to miss again. It's too painful for everybody.

Thank you.

We'll go next to Katherine O'Brien with Goldman Sachs.

Good morning, everyone. Thanks for the time. So first question just on business travel. I usually think about business travel being booked within seven days, but I could imagine booking curves for international business travel could be slightly longer on average. So could you maybe talk about the differences in the booking window you see between regions? And then, is there a region in particular maybe where that booking curve is longer or shorter, where you build in more cushion or less cushion to your forecast? Thanks. That's my first question.

Sure, yes. You can kind of think of the booking curve related to how far the trip is. So the further you go around the world, the earlier the general booking curve is. Very short haul things like Atlanta to Jacksonville, Atlanta to Orlando, New York to Atlanta have close in booking windows, while New York to China or New York to Japan or Atlanta to Japan would have very long booking windows. So that's the general rule of thumb. Was there another part to that?

Yeah. And then the second part was just keeping that in mind. Do you build in more or less cushion given some of these longer booking windows for international into your forecast than you might for domestic?

Oh, of course. The way we build our forecast is really what's happening in the last few weeks versus what happened in the last few months versus what's happened in the last few years. So it's a very complicated mathematical equation. And for those that have longer booking windows, we clearly take that into account.

Understood. And if I could just ask a quick follow up on the government shutdown math. So when you're saying 25 million a month, are you just in the March quarter guidance? Are you just making that in for the month of January? Or I know that you said there's a point for Europe's flowing government shutdown and maybe FX. Is the government shutdown most of that point? Or how should we think about that?

Yeah, this is that. We're not going to speculate what's going to happen with the government shutdown. We commented on the 25 million so people can see what the current run rate is. It's one of the risks that we considered in coming up with our overall unit revenue guide. But I don't think we should get that level of precision into the guidance.

Thank you very much.

I guess we're going to have time for one more question from the analysts.

And that will come from David Vernon with Bernstein.

Thanks for taking the question. The first question is really again a continuation of some of the government questions. But I guess maybe baked into the one quarter guide associated with the shutdown or how long this thing would have to go before you have to be worried about some of the cost guidance for the year?

David, we lost your first part of your question. Could you refit it?

Oh, sorry. The question was trying to dimension whether or not there's any of the government shutdown costs associated with aircraft delays, stuff like that, in the guidance. And how long we would need to see this go before you'd be worried about an impact to the unit cost guide either in one queue or for the year?

We don't expect it to have a meaningful impact on the unit cost guide in either the quarter or the year.

Okay. And then Paul, maybe just as a quick follow-up, could you give us a sense for how non-op expense should look for the full year?

As we talked about, David, non-op expense is going to be pretty even throughout the year. That pressure from the pension gets spread evenly throughout the year. So it should be pretty consistent.

Okay. Thank you very much for the clarification.

That's going to wrap up the annals portion of the call. I'll hand it over to Ned Walker.

Okay. Hey, thanks very much, Jill. Good day, everyone. We'll go ahead and begin the media Q&A at this time. I'd like to ask everyone if they could ask one question with a brief follow-up that we should be able to accommodate most everyone. And Augusta, if you could review the process for asking a question, we'll go ahead and begin.

Thank you. Again, it is now the media portion of the question and answer session. To ask a question, please press star one on your telephone. If you're on a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, that's star one to ask a question. We'll pause for just a moment. We'll go first to Andrew Tangle with the Wall Street Journal.

Hi there. Wondering about the shutdown and long lines. Can you give us some idea of how much you're seeing in the way of passengers getting delayed, missing flights, maybe missing connections at customs if there are shorting staffages, and what kind of financial impact is that having on Delta? And have you been able to measure that? Is it material in any way in terms of the rebooking cost and so forth?

Andrew, this is Ed. We're not seeing a meaningful impact. The operations are running on schedule, on time. Our team is doing a great job of working with the TSA to help the queues moving forward. I mentioned earlier today that the TSA published yesterday they had an unscheduled absence rate of 7%. That compares to a 3% rate they typically run. In isolated airports, we're having some longer lines, but it's not a system wide issue at all. To the extent that customers are impacted by delayed lines, we're reaccommodating them and getting them to their destinations in good manner.

Just as a follow up on the A220, you mentioned in your remarks that the shutdown is costing $25 million from government workers. With the A220, how much money will you be leaving on the table if the launch is delayed for weeks and weeks? Is there a way you could quantify that?

We're not anticipating that outcome. That's probably the short answer. We are not leaving any money on the table. We're not going to be canceling routes or flights. We'll just delay the introduction of that specific aircraft type.

Thanks.

We'll go next to Mary Schlingenstein with Bloomberg News.

You talked earlier in the call about the dip in the corporate travel and the bookings right before Christmas and how that rebounded. Can you talk a little bit more on that in general terms? Was it just the one week or did that one week extend into the start of the new year and you've rebounded since then?

It was really specific to the long period between Thanksgiving and Christmas. And it wasn't corporate. It was really just an across the board lull. As you know, once every seven years this occurs where the first day of the year is on a Thursday in November and it creates the very longest possible period between the holidays. I think you've seen a lot of people talk about this not only in our industry where that long period probably is not an advantage for airlines or retail. So next year it moves again and it'll move a lot closer and we're not expecting that to reoccur. And yes, all the trends did go back online right after the holidays.

And Mary, this is Ed. Just to affirm, we had a great Christmas all-time record in terms of volumes that we carried so it wasn't a low. It was just the impact on pricing was a little softer than we anticipated but it was a very, very strong Christmas and holiday season for us.

Great. And if I could just ask on the seven planes that are being delayed into entry, does that include the A220s and if so how many? And then the other question is related to that. Were the others all A330-900s or were there some other fleet types in there?

We're not going to get into all those details. It's primarily the Airbus 220, yeah. But as Gild mentioned earlier, the 330 Neil could also be impacted here.

Great. Thank you.

We'll go next to Leslie Josephs with

CNBC. My question. I just wanted to clarify. It's $25 million a month in lost revenue or just January and also on the shutdown, what else can you not do? I mean, you mentioned the 330 Neo and then Internet. Can you launch new routes? What can you not do with FAA furloughed?

On the revenue estimate, $25 million is what we're seeing in the month of January. Obviously, if it was to continue, we think that's an order of magnitude number but we don't know what those impacts could be. And we're not seeing any significant operational challenges. The introduction of new aircraft types for us is primarily the Airbus 220 and the 330 Neo and that's where our concerns are limited to.

Is there any issue, especially on the tech ops, with hiring mechanics with some FAA furloughed or hiring in any aspect of the business?

We're not seeing any meaningful changes. Certainly, the onboarding is delayed a little bit for any new hires in that space. But again, it's something hopefully that we're going to be moving through relatively quickly. We're not making any changes in our procedures.

Okay. Thank you.

We'll go next to Tracy Rosinski with Readers.

Hi. My questions have already been answered but just one more shutdown-related question. You said that you haven't seen any impact on bookings but has there been any rise in passengers canceling travel plans this month that can be attributed to the shutdown?

We're not seeing that. The $25 million estimate we gave for the month of January is inclusive of all of the above, all those factors.

Oh, that's not just government contractors.

It's government contractors and any knockout effects that we can see that are related to that, the best that we can tell.

Okay. Thanks. Next, we'll hear from Benjamin Zane with Business Insider.

Good morning, gentlemen. I just had a quick question about the 52% revenues coming from premium products and non-picket sources. You guys mentioned there's a 14% or sorry, double-digit increase in that. What do you foresee for 2018? Do you expect that growth to continue at that pace?

Yes, we expect that we'll continue to grow premium products and services more than we grow the base fare products. So, if you think about our total growth of 46% next year, that would indicate that we're growing significantly higher on the premium product side. So, probably close to that 10% to 15% as we have in the past few years.

Great. Thank you.

Okay. I guess we have time for one more question.

Thank you. That will come from Elliott Blackburn with Argus Media.

Good morning. Thanks for making time for me. You guys had a process late last year exploring a partnership options at the refinery. Just curious if you could give us an update on what you determined in that or if it continues. Also, curious just more broadly if Delta is looking at making any other non-maintenance investments, maybe logistics to bring in crude from the MIGCON and that refinery to improve performance.

Good morning. We have continued with that process and have received some interest in having discussions with parties. There's no update on the strategy broadly as we articulated. We're looking for ways to enhance the value and the strategic value to Delta of the refinery through a partnership and those discussions can be complicated. But right now, we're focused on running and operating the refinery as efficiently as we can. We just came out of a major turnaround investment that is done every five to six years and the refinery is running quite well. So, nothing needed in terms of enhancing the performance.

Okay. So, you're satisfied with the access that you have to crude right now. You don't feel like you need to build anything onto that?

Absolutely. So, we take a wide variety of crude. Sometimes we swing domestically and some internationally and we have the logistics to be able to take advantage of that as those opportunities present themselves.

All right. Thanks very much.

Okay. Thanks, Ed, Glenn, Paul, and Gil. And that does conclude our December quarter and full year 2018 earnings call. We'll be back here again in April when we report our March quarter 2019 earnings. Have a good day, everyone.

That concludes today's conference. Thank you for participating today.