Delta Air Lines, Inc. (DAL) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Delta Airlines December Quarter Financial Results Conference. My name is Kelly Anne, and I'll be your coordinator. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations. Please go ahead, ma'am.

Thanks, Kelly Anne. Good morning, everyone, and thanks for joining us for our December quarter call. Joining us from Atlanta today are Richard Anderson, our Chief Executive Officer; Ed Bastian, our President; and Paul Jacobson, our Chief Financial Officer. We also have the entire leadership team here with us for the Q&A session. Richard will open the call, Ed will then address our financial and revenue performance and Paul will conclude with a review of cost performance and cash flow. [Operator Instructions] Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures. All results exclude special items unless otherwise noted. You can find the reconciliation of our non-GAAP measures on the Investor Relations site at ir.delta.com. And with that, I'll turn the call over to our Chief Executive Officer, Richard Anderson.

Good morning. Today, we reported a $558 million net profit for the December quarter, closing out 2013 with a record $2.7 billion net profit for the full year. We earned $0.65 per share, beating consensus by $0.02. Our full year 2013 profit represents a 74% increase, or more than $1.1 billion, and a pretax margin expansion of nearly 3 points when compared to last year -- or compared to prior year. In addition, we generated a 15% return on invested capital, our fourth consecutive year above 10%. Operationally, we led the industry for the year in on-time performance at about 85%, completion factor of 99.7, including 72 days this year with 0 cancellations and #2 in the industry for baggage performance. This operational reliability has been a key driver of the doubling of our invested Net Promoter Score. Customer satisfaction drives revenue growth and ultimately comes back to our shareholders. We have aggressive plans in 2014 to continue improving for our customers. Across the board, this was an outstanding quarter and year. The credit for these achievements all go to the 78,000 Delta employees worldwide. We pride ourselves on having the best employee relations in the industry, which includes a commitment to our employees that we will share in Delta's success. I'm pleased to report that next month, on Valentine's Day, we will pay out over $500 million in profit sharing, or just over 8% of employees' pay, to recognize the critical role of our employees. This is in addition to more than $90 million in monthly operational incentives for the year. A great job by our entire team at Delta and congratulations for these accomplishments. As we communicated to you at Investor Day last month, we've been on a path to fundamentally transform Delta's business model and our results this year show that we are a high-quality S&P 500 enterprise with consistent earnings, double-digit returns on capital and, most importantly, strong free cash flow, the ultimate measure of our success. Looking forward to 2014, we are focused on executing our business plan to significantly improve our financial results in 2014 when compared to 2013. In addition, we will continue to improve our operational performance and customer satisfaction scores. We are off to a strong start in 2014, expecting a 6% to 8% operating margin in 1Q 2014. For our customers, we will continue to run a great operation and make prudent investments and quality products and services to enhance their experience. The key to our investment strategy is prudence. Paul will provide more detail, but we are reducing our CapEx forecast for 2014 from $2.5 billion to $2.3 billion. This investment strategy has consistently produced solid, sustainable revenue gains while we pay down debt and return cash to our shareholders. On the operations side, we are focused on running a customer-focused airline and that means a consistent, reliable operation across all Delta products, domestic and international. This means completion factors of 99.7% and 85-plus percent on-time arrivals across the system. We will continue to make prudent investments in the fleet, especially with our domestic upgauging. We have begun deploying the 737-900s, 717s and large regional jets that will replace nearly 2/3 of our 50-seat fleet over the next 2 years. These new airplanes provide a superior customer service while improving our cost efficiency. We're still in the early stages but have already seen solid margin improvement in the markets where these upgauged aircraft have been deployed. Our product is superior, our unit cost lower and we can keep our total aircraft count in check. On the product side, the installation of flat beds on our international fleet will be complete this spring and we recently announced our plans to invest more than $750 million over the next 3 years to roll out Wi-Fi to our international fleet and refurbish the interiors of our narrowbody fleet. These investments allow Delta to avoid new aircraft purchases by extending the life of our existing fleet. In New York, we will build on last year's profitability at LaGuardia to bring all of our New York operation to profitability this year through our immunized joint ventures with Air France-KLM and Virgin Atlantic. We now provide direct service to all of the top markets between the U.S. and Europe, including 7 daily flights between JFK and Heathrow. For investors, our focus remains on balanced capital deployment with continued investment in the business for high returns, reductions in leverage and pension expense and returns of capital to shareholders. Ultimately, our company must be measured on pretax margins; operating cash flow; and my personal favorites, return on invested capital and free cash flow. After announcing our initial capital return program in May 2013, we have moved aggressively against our original timeline. We have already returned $350 million of cash to shareholders through dividends and buybacks and we are targeting $700 million in total returns by May 1, 2014 to complete the first year of the program. We expect to complete the original $500 million buyback authorization by the end of June, 2 years ahead of schedule. At the direction of our board, we plan to announce our updated shareholder distribution policy before our next annual meeting. We will significantly improve our profitability in 2014 when compared to 2013. While efforts are well underway to execute on our 2014 plan, we've also laid out our long-term goals. Our goal is to produce an annual operating margin of 10% to 12%, achieve pretax EPS growth of 10% to 15% and generate $5 billion plus in annual operating cash flow. To achieve these results, we will take continued commitment across the enterprise to deliver top-tier operational performance, top-notch customer service, strong financial discipline and continued innovation and creativity. With that, I'll turn the call over to Ed and Paul to go through the details of the quarter. Thank you. Ed?

Thanks, Richard. Good morning, everyone. Thanks for joining us this morning. Earlier today, we announced the December quarter net profit of $558 million, which was a $321 million improvement over the prior year. Our December operating margin expanded by nearly 300 basis points to 8.5% and our pretax margins improved by 320 basis points. Our full year 2013 operating cash flow was $4.8 billion. Our free cash flow for 2013 was $2.1 billion and net debt was reduced to $9.4 billion. Congratulations to the entire Delta team for an exemplary year of performance on all fronts. And we all look forward to paying out that record profit-sharing payout next month. As our results show, our revenue performance remains solid despite the declining fuel price environment. Passenger revenues for the December quarter grew by 6.1%, or $451 million, on a 2.9% increase in capacity. Our ancillary products, which include first class upsell and Economy Comfort, contributed more than $635 million to our full year 2013 passenger revenues and were up more than 40% compared to last year. Domestic outperformed the other entities with a 5% improvement in unit revenues, driven by higher yields, strong Thanksgiving and Christmas holiday demand and particular strength in the New York markets. Improvements in New York led the domestic entity. Yields improved 10%, contributing to an 8% unit revenue gain with a 5.5% increase in capacity. LaGuardia led our New York entities with a strong 15% RASM gain in the quarter. Atlanta also did well, contributing a solid 7% unit revenue improvement driven by close in yield strength. Internationally, our unit revenues improved 2% in the Latin region, even with a 16% increase in capacity. Our partnerships with Aeroméxico and GOL contributed almost $25 million of incremental revenues during the quarter, stemming from increased traffic loads in those markets. In the trans-Atlantic, our unit revenues were flat on a 1.8% increase in capacity, with Amsterdam showing solid margin improvement during the quarter. New codeshare revenues from our Virgin Atlantic partnership generated $25 million of revenue over the last half of 2013. In the Pacific, our unit revenues declined 2% on a 1% higher capacity as the yen devaluation and associated weakened demand negatively impacted revenues by $65 million, particularly in the beach markets. As you know, the 25% yen devaluation has significantly impacted our revenues all year, leading to a $250 million revenue hit in 2013. However, this impact has almost entirely been mitigated on our net profit results due to the yen hedges we had in place and savings from yen-denominated cost. Turning to corporate revenues. Our ticketed revenues increased 7% compared to the same quarter last year, with double-digit gains in the banking, finance and the automotive sectors. Our recent survey of corporate accounts under 2014 plans indicates 90% plan to either grow or, at a minimum, maintain their spend levels in the new year, which is an encouraging sign for our business. So as we look ahead to 2014, we have a solid list of commercial initiatives to drive top line revenue growth and move us towards our long-term goal of 10% to 12% operating margins. These include capitalizing on our upgauging initiatives, leveraging our partner relationships, continuing to diversify and expand our global network, growing our corporate share and continued expansion of our merchandising of ancillary revenues. To give an update on our upgauging initiative, we expect to retire almost 1/3 of our 50-seat regional jets this year and replace them with a more fuel-efficient and higher-quality 2-cabin aircraft that will expand the product offering for our customers while generating higher margins in those markets. In 2009, we had over 500 small jets. We will end 2014 with less than 200. For 2014, we expect to grow our domestic capacity 2 points despite operating, overall, 20 less aircraft. With regard to Virgin Atlantic, starting January 1, we moved into a full profit-sharing model that will allow us to leverage strength of our immunized joint venture. This relationship will now provide us significant presence in all of the top 10 U.S. to European destinations and together, we represent 25% of the seats between the U.S. and Heathrow. We have published our first coordinated schedule going into effect in April this year and we're also collocating our facilities in New York and in London to create a more efficient and seamless travel experience for our customers. In the Pacific, our restructuring efforts are well underway as we're working to reduce the reliance on our Tokyo and Narita hubs and better utilize the gateways that we have in the U.S. compete in the major Asian markets. And we continue to aggressively manage the beach markets to mitigate the impact of the yen's weakness. In terms of guidance, our January revenues have been solid led by continuing strength in the domestic markets and we expect unit revenues to come in between 3% to 4% improvement on a 3% increase in capacity. For the March quarter, our bookings are in line with the 2% to 4% unit revenue guidance we previously gave. We expect to produce an operating margin of 6% to 8%, driven by the combination of revenue growth and lower fuel prices. This represents 300 basis points of margin expansion. We expect to grow our capacity 2% to 3% in the first quarter. So as we look forward to 2014, we have a full pipeline of opportunities to grow our top-line revenues and deliver continued operating margin improvement, consistent with our long-term goals. With that, I'll turn the call over to Paul to cover costs and cash flow.

Thank you, Ed. Good morning, everyone, and thank you for joining us this morning. The momentum behind our cost initiatives produced another quarter of good results to end the year. Total operating expenses for the December quarter increased 2.2% on a 2.9% increase in capacity. Almost half of that increase was driven by $56 million of higher profit-sharing expense. Our nonfuel unit costs increased 1.4% for the quarter and 2.4% for the year, much better than our initial estimate of 4% to 6% increase for the year, outlined in Investor Day 2012. Across the company, the teams have rallied together to manage these cost pressures and we intend to sustain that momentum as we move into 2014. This should put our unit cost growth between 0.5% and 1.5% for the March quarter and below 2% for the full year. On the fuel front, our all-in price per gallon for the quarter was $3.05. The Trainer refinery produced a $46 million loss for the quarter, but overall fuel expense for Delta declined $91 million from lower market fuel prices and nearly $60 million in hedge gains. Turning to the balance sheet. We reversed our tax valuation allowance in the December quarter as we discussed at Investor Day, which resulted in an $8 billion increase in assets on a corresponding noncash gain in the P&L, which we have called out as a special item. The reversal of the valuation allowance reflects our confidence in our expected future performance. We do not expect to pay cash taxes for the foreseeable future as we have net operating loss carryforwards to offset more than $15 billion in taxable income going forward. Starting in the March quarter, however, our net income will reflect a tax rate of 39%. Going forward, we will report both pretax and net results since we believe pretax results will provide investors the best comparisons of our performance, given our net operating losses. With the reversal of the tax valuation allowance, a $3 billion decrease in our pension liability driven by higher discount rates and our 2013 profitability, we now have a much stronger balance sheet. Our shareholders' equity balance was $11.6 billion at the end of the year and represents a $14 billion increase since the end of 2012. This puts our book debt-to-total capital ratio comfortably at 49%. Turning to cash flow. The strong cash generation of the business continues. During the quarter, we produced a $1.2 billion operating cash flow target, which is net of $250 million of incremental pension contributions. On the capital side, our December quarter spend was $900 million with the majority spent on fleet investment. The resulting free cash flow was used to pay down debt and return cash to shareholders. As Ed mentioned, we ended the year with $9.4 billion of adjusted net debt. Debt reduction produced a $28 million interest expense savings for the quarter. We also paid $50 million in dividends and bought back 5.5 million shares during the quarter at an average price of $27.39 for a total of $150 million. As we head into 2014, we are focused on managing costs and generating solid cash flows. Over the last couple of years, our cost initiatives have helped to stem the rate of growth in our nonfuel unit costs. We expect to see the benefits from those initiatives continue into 2014. As part of our domestic refleeting and maintenance initiatives, we expect to avoid maintenance costs by $250 million through 50-seat retirements and other initiatives. This a key driver in achieving our goal of keeping unit cost growth below 2%. On the fuel front, as of the January 17 forward curve, we are projecting a March quarter fuel price of $2.97 to $3.02 per gallon, including refinery and hedge impact. We expect to see only a modest loss for the Trainer refinery in the March quarter despite the pull-down of one of the main units for modifications. These modifications, as we've discussed, will allow the refinery to increase output of higher-value distillate fuels up to 40%. This is one of the major initiatives in improving Trainer's profitability for this year. For the year, we expect to see a modest profit from the Trainer operations, driven by the higher-value distillates and a significant increase in the supply of domestic crude. We expect to use approximately 50,000 barrels per day of domestic crude in the March quarter. Our domestic crude supply efforts will continue to ramp up through the year and we expect to average 70,000 barrels a day for 2014. This lower crude supply is expected to reduce our average crude cost for the refinery by $2 to $3 per barrel. We are also well positioned with our hedge book. At current forward curve levels, we would expect hedge gains of $250 million in 2014 from our existing positions. In terms of cash flow, we are focused on driving more than $5 billion in annual operating cash flows and, as we've discussed, plan to reinvest roughly 50% of those cash flows back into the business. Our 5-year plan outlined in May called for capital spending of $2 billion to $2.5 billion per year. As Richard mentioned, our current 2014 projection of $2.3 billion is in line with that plan. Using our balanced capital approach, we will use our free cash flow to continue to pay down debt, address our pension obligations, return additional cash to shareholders. We're targeting our adjusted net debt target of $7 billion by sometime during 2015. We have already, this year, made another $250 million incremental pension contribution, which completes $500 million of the $1 billion outlined in pension contributions for the 5-year plan. Finally, as Richard mentioned, we are on track to complete our buyback authorization by the end of June. Combined with our quarterly dividends, this would return an additional $350 million to shareholders in the first half of this year. One thing that remains unchanged is our ongoing commitment to keep taking this company to the next level. Our work to deliver and meet the expectations of our customers and shareholders continues and every member of the Delta team is committed to making this happen each and every day. To close, I want to echo Richard and Ed in saying thank you to the entire Delta team for an outstanding year. It took an incredible effort by all of our Delta employees worldwide and we are eternally grateful for the hard work and dedication they put in producing these results. Jill?

Thanks, everyone. Kelly Anne, we're now ready for the Q&A session with the analysts. If you could give the instructions, please?

[Operator Instructions] We'll go first to Michael Linenberg with Deutsche Bank.

Two questions here. I think, Ed, when you were going through your commentary, you talked about particularly -- you saw particularly the strength in the New York markets. What's behind this? And maybe this is for Glen as well. I mean, was this the start-up of the Virgin business? Is this the growth in corporate share? Is this LaGuardia really starting to mature now? What drove that?

Well, Mike, I think you answered your own question. It's all of the above, right? We've been investing in New York for the last 5 years and we're really starting to see the fruits come through. I'd say, one of the largest contributors was clearly the corporate share improvements that we're seeing, particularly in the banking sectors.

Okay, that's helpful. And then just my second question, maybe this is more for Paul. You talked about sort of where your fuel position was, your fuel hedge position in 2014. What about your yen hedge position? I know you were well protected in 2013. What does 2014 look like with respect to your yen hedge book?

Mike, 2014 actually looks pretty similar to 2013. We have approximately 100% of our net exposure hedged, which equates to about 50% of our total revenue base, which is a similar position that we had in 2013. I think if you look forward on the total book, because we do have some hedges out to 2016, we're still looking at about a $200 million mark-to-market on that book despite what's been paid out in '13.

We'll hear now from Jamie Baker with JPMorgan. Jamie N. Baker - JP Morgan Chase & Co, Research Division: Kind of picking up on the same theme as Mike was asking, you've disclosed that LaGuardia is profitable on a fully allocated basis, JFK is not. What are the specific building blocks that get you towards JFK profitability? Is it simply the rising tide? Is it another 3 points of corporate share? Is it going to be up to what post-merger American does? Or is it something that's actually from this point forward under your control? Any thoughts?

Hey, Jamie, it's Glen. I think there are several components for that and not the least of which is fleet. We have been working very hard, as you know, with our fleet plan and the retirement of the 50-seat regional jets, which are really not the optimal airplanes for the feeder markets in JFK as they play a critical role on the profitability of Kennedy. Add to that the partnerships that we have with Aeroméxico, Virgin and with GOL and I think you'll see how those components all fit together. And then last, but not least, would be the transcons where we have taken a different path than the other 2 major carriers who have reduced their exposure to coach and premium economy. And so we are, by far, now the largest carrier in terms of the coach seating between New York and San Francisco and Los Angeles, which we think is going to be very profitable for us as we enter 2014. Jamie N. Baker - JP Morgan Chase & Co, Research Division: Excellent. And as a follow-up, on a fully allocated basis, is JFK only -- is JFK, excuse me, your only unprofitable hub at the moment? And -- well, and as a follow-up to that, do you consider Seattle a hub in the stricter sense of the word? That's really what I'm really asking, obviously.

Jamie, we really don't comment on other hubs.

We'll hear now from Savi Syth with Raymond James. Savanthi Syth - Raymond James & Associates, Inc., Research Division: Just to clarify, was the capacity growth in 2014 up 2%? And I was wondering if that includes -- like how much is the kind of capacity growth that we're going to get from this recent investment in the fleet, are we going to get in 2014 versus 2015?

Savi, at Investor Day last month, we said our capacity in -- improvement in 2014 is 0% to 2% and we're still in that range. It's a little heavily weighted towards the first part of the year. Savanthi Syth - Raymond James & Associates, Inc., Research Division: Okay. And so is a lot of the investments in adding seats then going to be more in 2015?

The seats, those are spread throughout the year as the 50-seat regional jets retire.

Moving next to John Godyn with Morgan Stanley.

Richard, when we think sort of about the long-term history of the industry, the last time that the legacy airlines saw sort of the peakiest margins was in the '90s. Now, the GDP environment was very, very different back then. But just with the benefit of sort of a long historical perspective, do you feel like the combination of structural change in the industry and conservative capacity trends, is that enough to make up for sluggish GDP and take us back to peak over the next few years? Is that the environment that we should be thinking about?

Well, structurally, the changes that have taken place in the industry provide the right industrial organization for a network business that requires a lot of capital to be able to make sustainable investments over the long term. And it's clear now, we have 5 strong years of history at Delta that, in fact, that's the case. The second big factor is the fulcrum of fuel versus unit revenues. And when you think back in the '90s, the fuel was really playing the role that it played today because back in the '90s, fuel was $20 a barrel or $20 a barrel refined and deplaned at its peak. And today, you have a very different capital environment in a very different fuel environment, in a very different industrial organization. And when you take the combination of those 3 factors, so fuel no longer is the cheap part of the equation, it's the most expensive part of the equation. The industrial organization is correct in terms of big industrial businesses. And when you look at the interplay of fuel versus RASM, the interplay has worked very well. And we now have a model where, regardless of where the GDP is, we can capture the cost of fuel in our pricing model.

That's very helpful. And if I remember correctly, during the Investor Day, when the team was talking about sort of revisiting the shareholder returns plan, it was characterized as more of a June 2014 event. I thought I heard you say before June of 2014. I'm not sure, Richard, if you're trying to communicate that perhaps, if trends are good, it could be revisited much sooner than June or if that was just a nuance in the language.

It was a nuance in the language. What we said in the earnings script, call script, is that we would make a decision prior to our annual meeting, which is usually the last week in June. Prior to that, we have a board meeting in April and the board will undertake to analyze where we are in April as we update our outlook in 2014. We'll have 4 months of progress on 2014. And we would expect some time between that April time frame and our annual meeting that we would update our investor base on our plan, our new plan to return cash to shareholders.

And Glenn Engel with Bank of America has our next question.

On the people side, you have a big increase in headcount because of Endeavor. What would just the mainline headcount look like year-over-year? What is the pension savings? I think you've estimated $270 million in December, so an $80 million savings from the change. Has that changed very much? And finally, can you just tell us how many planes do you plan to retire, both from the mainline and the regional side this year?

Glenn, let me take the employment, the FTE matter. There are a number of -- if you just go right to the mainline, we operate the mainline airline with about 73,000 FTE, 72,000 to 73,000 FTEs, because, remember, we have other businesses in there. We have Delta Global Services, we have Endeavor, we have Delta Private Jets and we have our MRO business. So when you look at what the core of what it takes to run the Delta that we operate today, it's about 72,000 FTEs.

And that compares to what last year, on a like-for-like basis?

It's flat year-on-year.

Okay. And the pension, is it any different than what you thought it would be back in Investor Day when you thought it would be $270 million versus $350 million.

Glenn, this is Paul. Our current view is that it'll be pretty consistent with what we outlined at Investor Day.

And then finally, I know you've got 717s coming in and new planes. How many mainline planes are actually going to be leaving? And how many regional jet planes are actually going to be leaving in 2014?

Glenn, this is Ed. We can give you the specific details. It's at a high level. On the mainline, we're going to end the year 2014 with 30 more overall planes than we start the year and we've got some movements between the 717s and 73s and 75s coming out. We can give you the specific details. And on the regionals, we're going to end the year with 50 less overall regional planes. We'll be increasing the CRJ900 count by about 28. And the small jets, we're going to have, I think, close to 80 retirements of small jets over the course of the year.

We'll move on to Helane Becker with Cowen and Company.

I just had 2 questions. One, kind of a maintenance-related question. Your maintenance costs were up about 18% in the quarter and I was just kind of wondering if that kind of run rate is what we should be expecting or if there was something special in there. And the other question I had is with respect to maintenance. Are you comfortable that you have enough maintenance personnel to handle what your fleet needs over the next -- or really over the foreseeable future?

You want to start, Richard?

I'll take the question on maintenance capability. I think Delta has a firm specific capability and knowledge that's unusual among global airlines in the sense that we have a deep capability to operate a large and diverse fleet with the very best reliability in the industry. And that is a strength that we will continue to leverage because it gives us the ability to take 717s and MD-90s at much, much lower capital costs, much higher levels of customer satisfaction and superior operating performance to all of our competitors. And we continue to expand that capability and we have no problem at all with attracting the kind of talent we need, both in our hangars but also among engineers, reliability analysts and the other staff that we need to continue this investment strategy.

Yes, I think -- Helane, this is Paul. When you're looking at expense, too, you're always going to see a little bit of lumpiness based on the timing of certain events. The fourth quarter happened to be a heavy quarter for airframe checks, specifically. But as you look at 2014 versus 2013, I think the operations team has done a phenomenal job and we expect maintenance expenses to be up slightly to flat for the year.

We'll hear now from Duane Pfennigwerth with Evercore.

Just wondering on a couple of impacts on the March quarter. If you think about the holiday shift to the second quarter, which is a drag and then we're also beginning to lap the impact of the sequester, how do you think about the impact of these on a net basis? And it feels like the June quarter represents a much easier revenue comparison for the industry and for Delta, specifically. Is this fair?

Duane, this is Ed. I think the -- certainly, in March, we're going to be impacted by the Easter shift. Our view is it's not necessarily going to be a significant shift. We're looking at, for January, a 3% to 4% unit revenue growth. And as we forecast, over the balance of the quarter, we think that's a run rate that we can largely sustain heading into February and March and that does factor in the impact of the sequester, as well, which should be a positive for us, offset somewhat by the calendar shift. For June quarter, I haven't looked carefully enough at what calendar items we have other than Easter going on in June. But at the macro level, realize that we still have a very small percent of our bookings in for the June quarter at the present time. I think on a macro level, everything feels relatively solid, particularly on the domestic part of the business. And the international entities, early indications are they should do quite well in the summer.

Okay, appreciate that. And then just on Virgin Atlantic, I wonder if you could comment on the fourth quarter, how this contribution would have looked like year-to-year on a pro forma basis? Would you have seen net improvement there? And then how should we be thinking about the seasonality of Virgin's contribution to Delta going forward?

Well, on the second part of your question, seasonality will look very much like our European businesses. So very, very strong. Second and third quarters, seasonally weaker in particularly in the first quarter of the year. Virgin is on a run rate for -- on a go-forward basis to be profitable, is our expectation in 2014. And that is in our plan. We are already starting to see some pretty significant revenue benefits coming from the initial part of the codeshare. And then as we get into the JV for 2014, we think those -- that revenue stream will start to kick up. I think we're looking at somewhere about $50 million of run rate improvement coming out of synergies, primarily on revenue for 2014.

And Thomas Kim with Goldman Sachs has our next question.

Can you just give us a sense of what you anticipate industry capacity for trans-Atlantic and trans-Pacific during the course of the year and how you're seeing the pricing environment on those 2 routes?

Sure. In Europe, we see a little bit more capacity than we like and we think that capacity will probably exceed GDP rates between the eurozone and the U.S. Having said that, that capacity -- or pieces of that are really in place now. So if you look at the capacity that's in the winter schedules, it's running a little bit further ahead than it had in the last few quarters and it's already ahead of GDP forecast for the first quarter -- or the fourth quarter for Europe and the U.S. And under that environment, we've been able to continue to grow unit revenues. So we're pretty satisfied with the results we're seeing come out of the low season in Europe. And hopefully, as we get to the high season, those trends will continue. In the case of the Pacific, we see a much better capacity balance in terms of what the industry is offering, particularly in Japan. And as you know, Japan accounts for about 35% of our -- or the trans-Pacific Japan part of our network accounts for about 35% to 40% of our total trans-Pacific. In that case, for the first time in 3 years, we actually see capacity being offered by the industry down into the peak summer months. Combined with the fact that the yen should stabilize -- or we believe the yen would stabilize here at about 100 to 105, that would provide some very good tailwinds as we head to the summer in Japan. And the rest of Asia, it really is -- it's country by country, what's being offered. But I think Japan is really where our heavy concentration remains.

Okay, great. That's very helpful. And if I could just ask a follow-up on the Virgin side. Is the increase in the non-op expense attributable to the Virgin? If we can get a little bit more color in terms of what would be driving the year-on-year increase in the non-op expense, that would be helpful.

Yes, if you're talking about the first quarter of '14, that's correct. That's the weakest quarter of the year for all the trans-Atlantic entities and Virgin is no different.

We'll hear now from David Fintzen with Barclays.

Just a quick question on the seasonality of margins going forward. I mean, you're obviously now putting up, what, 10 years ago, were extraordinary margins in sort of the off-peaks and another 3 points of margin expansion in the first quarter. I mean, should we be thinking about the bulk of margin expansion now coming in these off-peaks to kind of balance the year off a little bit more? Or should we be sort of extrapolating it for more margin expansion into the summer months? Just kind of curious how you think about an improved industry structure mean for the seasonality in margins?

Yes, David, we're seeing it in both the peak as well as the off-peak, but I think you're probably right. The biggest opportunity for us has been to manage the off-peaks better and we're doing, I think, a great job of that. But we're also expecting to see a strong second and third quarters, which you should see expansion there as well.

Okay, great. And then maybe a quick follow-up, probably for Glen. As you're getting the regionals in and the upgauging is sort of -- is carrying through, just any thoughts around sort of the RASM dilution that you might be seeing? Obviously, it's margin positive.

We monitor our unit revenues very carefully. And we're 2, 2.5 years into the upgauge and what we've seen is we've been able to maintain our mainline North America premiums. And so we're expecting that to continue through this year. And I think what you're seeing is we're able to offset with the demand for a better product. And with demand for the increased connectivity that we're able to provide, we're able to offset the increase in gauge.

Kelly, we have time for one more question from the analysts.

That will come from Hunter Keay with Wolfe Research.

Glen, what is your mix of local and connecting traffic in Seattle? And where do you want it to be at the end of this year and maybe longer term?

Well, right now, we're primarily local because we're not connecting very much, but I expect that we will see increased connectivity as we continue to add the international feed that we have loaded in the advanced schedules for the summer.

Okay. So I mean, is it fair to assume that like less than 10% of your traffic there is connecting? Some very small, miniscule number?

10% to 20% today.

Okay, appreciate that. And maybe one for Paul. Kind of curious to know, you're planning on financing and paying for these upcoming aircraft deliveries, the A330s and the A321s. A, are you planning on buying them with cash? B, if you're planning on financing them, should we think about maybe an LTV that's a little less customary than the, say, typical 80-20 finance debt/equity split when airlines take delivery of planes? I mean, obviously, you've done such great work keeping debt off the balance sheet. Is it maybe fair to assume that if you do think about financing some of these planes with debt, it's really more maybe of a 50-50 type LTV?

Well, I think, Hunter, when you're looking at our cash flow performance that we have currently, we're generating enough cash to be able to pay for these airplanes. I think the financing decision is one that really comes about at the time of delivery in terms of looking at the balanced capital structure and how we think about that. The A330 and the A321 deliveries are still pretty far out there as we look out on the horizon. So we'll take that as it comes.

Okay. So if you're looking at an interest rate environment, that's like north of 5%, 6%, 7%, you would potentially theoretically consider if you have the capability of doing it or the bandwidth of doing it, just buying -- just writing a check for a widebody plane?

Absolutely.

And that concludes the analyst portion of the call. I'm now going to turn it over to Ned Walker, our Chief Communications Officer, for the media portion.

Okay. Thank you very much, Jill. Kelly Anne, if you could once again review the process for asking a question. [Operator Instructions] Thanks so much.

[Operator Instructions] And we'll go first to Josh Freed with the Associated Press.

In the release, the quote is attributed to Ed talks a little bit about ramping up merchandising efforts going forward and I was wondering if you could say a little more about what you have in mind with that, specifically, what it is you're looking to do more merchandising on and time frame, that kind of thing.

Sure, this is Glen Hauenstein. What we're trying to do is we're trying to get closer to what consumers want. And I think for some consumers, all they want is basic transportation to get there on the most reliable airline the country. And that goes all the way up to people who want to travel in first class and have a first-class experience. And historically, we have been not very good as an industry in terms of being able to offer different experiences to different people. And I think that's really what our focus was centered on over the next 2 years as being able to offer the best in category, whether or not you just want to buy a seat and get there on time or whether or not you want to buy a lot of the other amenities that we're able to offer these days. And so we're working very, very hard to try and figure out what consumers want to buy from us so we can then sell those products to them.

So it seems -- it sounds like you're headed in a direction that is sort of further splitting out services from the base fare. I mean, can you give us any ideas, specific ideas where you might be headed on that?

Well, I think we will announce when we're ready to announce them, but I think right now we're working on a lot of research that says what our customers really want to buy and how do you judge which customers would like to buy what products and then what would they also not only like to buy at the time of the sale but what would they like to be offered after the sale itself. And like any other merchandising model, I think airlines have been slow to the party in terms of being able to match what customers want to pay with what we're offering.

We'll hear next from Mary Schlangenstein with Bloomberg News.

I just wanted to ask quickly on the status of your 787 orders that you just ordered out to 2020 and 2022. Are those the same status? Or have you made any changes to those pending orders?

This is Richard. Those are same status and under certain conditions, we have the right to cancel those orders. But they remain in our Disclosure Statement unchanged.

And we'll move next to Kelly Yamanouchi with the Atlanta Journal Constitution.

I just wanted to ask about a little more detail on what is driving the close in yield strength for Atlanta that you mentioned during the narrative.

We couldn't hear you. Could you repeat the question?

Sorry. I just wanted to ask about what in Atlanta is driving the close in yield strength that's driving the unit revenue improvement.

Kelly, I don't think we specifically called out Atlanta in the close in yield strength. What we're seeing is close in yield strength across the entire domestic system and that's really because business travel is actually fairly robust right now. And so we're hoping that continues on for the year and it looks as though from all the forecast for 2014, that we should expect that.

Hey, Kelly, this is Ed. We did -- just to correct one, sorry, we did mention Atlanta as one of the contributors. New York was -- had the greatest strength. But we did mention that we did have some nice close in yield strength in Atlanta as well. And Glen was absolutely right, it was strength of the corporate marketplace that was driving that.

We'll go next to Karen Jacobs with Reuters.

I wanted to ask a question about the Virgin Atlantic joint venture, which is now up and running. Do you -- have you seen increased interest from corporate customers in the wake of the venture starting in earnest?

Yes, we have. We've seen significant interest in corporate customer -- in our corporate customer base, particularly from the banking community in New York because now we have a competitive shuttle product between JFK and London-Heathrow.

And I also have a follow-up question about the Trainer refinery. Are you expecting a modest profit for the refinery in the first quarter? I just want to make sure I didn't misunderstand from the call.

Karen, what we said was that we expect a small loss in the first quarter but a modest profit for the full year.

Did you have a follow-up on that?

No. That's it for my question.

Kelly Anne, can you review the process once again to ask a question to see if there are any other media who would like to ask a question to the group?

[Operator Instructions]

And at this point, it appears we concluded that. So Richard, Ed, Glen and Paul, thank you all very much. That concludes our 2013 December quarter call. We'll be back here in 3 months with our June quarter call. Thank you all very much. Take care.

And again, that will conclude today's conference. Thank you, all, for your participation.