Welcome to the Delta Air Lines third quarter 2007 financialresults conference call. (Operator Instructions) I would now like to turn the call over toMiss Jill Greer, Director of Investor Relations for Delta Air Lines. Pleaseproceed, ma'am. Jill Greer: Good morning, everyone and thank you for joining us todiscuss Delta's third quarter 2007 financial results. Speaking on today's callare Richard Anderson, our Chief Executive Officer; and Ed Bastian, ourPresident and Chief Financial Officer. Also joining us for the Q&A is GlenHauenstein, our Executive Vice President of Network and Revenue Management. Before we begin, please note this call is being transmittedlive via the web is and being recorded. If you decide to ask a question, itwill be included in both our live transmission as well as any future use ofthis recording. Any recording or other use or transmission of the text or audiofor today's call is not allowed without Delta's express written permission. Also today's discussion contains forward-looking statementsthat represent our beliefs or expectations about future events. Allforward-looking statements involve risks and uncertainties that could cause theactual results to differ in a material manner from the forward-lookingstatements. Some of the factors that may cause such differences are describedin Delta's SEC filings. We'll also discuss certain non-GAAP financial measures. Youcan find the reconciliation of those non-GAAP measures on our investorrelations website at Delta.com. Finally, I would like to ask that when we getto the Q&A portion of the call we limit each participate to one questionplus one follow-up. Now with that, I'd like to turn the call over to our ChiefExecutive Officer, Richard Anderson. Richard Anderson: Good morning and thanks to everyone for joining us today.I'm excited to have joined this very talented team at Delta. Since September 1stI have spent a great deal of time talking to our people across the system,…

Thanks, Richard. Good morning, everyone and thank you forjoining us today. This morning we reported a pre-tax profit of $363 million forthe September quarter, excluding last year's re-org items, this was a $432million improvement over the prior year. Net income was $220 million, or $0.56per share, on 394 million fully diluted shares. This compares favorably toconsensus of $0.42. Due to our significant NOL carryforwards, the $143 millionin tax expense for the quarter is strictly a non-cash expense. For that reason,we believe pre-tax earnings is the relevant measure to focus on to understandour year-over-year improvement. Our operating margin was 8.7%, a more than 5 pointimprovement over the prior-year quarter, driven by strong revenue improvementsand continued cost benefits from our restructuring. This result was slightlybetter than our last guidance due to a slight improvement in fuel prices andthe resolution of certain state tax-related matters. We're pleased to report these results include $79 million inprofit sharing accrued for the quarter to recognize the hard work of the Deltaemployees. This brings our year-to-date profit sharing accrual to $160 millionfor the Delta people. Our results for the quarter also include two non-cashitems, which when combined, largely offset each other. First Fresh Start accounting changes drove a $50 millionincrease to pre-tax income; and second, we reported $50 million in share-basedcompensation expense. While offsetting in total, these emergence-relatedchanges did affect various line item comparatives increasing consolidatedpassenger RASM by $0.0016, and increasing mainline CASM by $0.0021. Turning to the details of our performance, the successfulexecution of our network and revenue initiatives continue to deliver strongreturns for the business. In the September quarter we realized a net $246 millionrevenue improvement year over year. This factors in approximately $154 millionfrom the cost of international and regional capacity growth. Consolidated unit revenues improved by more than 6% on 3%higher capacity. Specifically,…

Your first question comes from William Greene - Morgan Stanley.

I'm wondering if you can add a little bit more color aboutthe fourth quarter RASM trend? Given what fuel has done, it seems that you'vegot some pretty robust expectations for RASM. I'm just trying to understand whyyou think that would continue, given the economic backdrop?

Bill, I think we have a couple of things going on here. Domesticseems to remain strong through the fourth quarter, and while we do have a fuelhit, certainly on the cost side, we have some very nice currency fluctuationsgoing on with the foreign currencies. That's really driving double-digit unitrevenue increases in the Trans-Atlantic and Latin American entities right now.So we see continued strength in the domestic and then really, what we areseeing on a year-over-year business is accelerating strength in the internationaldriving the total RASM numbers. William Greene - Morgan Stanley: I know you haven't given 2008 guidance, but if we seefurther weakness, what kind of flexibility do you have on the capacity front topull it back, relative to where we are at in the plan right now?

Bill, as a result of the restructuring, we've reduced thecost of our fleet substantially. In fact on comparative pre-restructuringlevels almost $500 million a year of fleet savings. The cost impact ofgrounding domestic capacity, particularly regional jets, is not going to besubstantial as compared to what it would have been previous to our work. So Ithink capacities, particularity on the domestic side, is the number one focusthat we deploy. William Greene - Morgan Stanley: But just to be clear,could we get to a situation where you'd have instead of a 3% capacity number,could it be as much as flat or slightly down, or is that too big of a change?

Again, our capacity for this year is flat for the domesticmarket. For mainline domestic, in fact, it's been down year over year. The onlycapacity growth we've got going on in domestic is the up-gauging of regionalsfrom 50-seat to 76-seaters, as we're getting rid of those 50-seaters. So fromour perspective the down gauging is working quite effectively in the domesticmarketplace, and the international markets that we're going into are newterritories with much, much more robust economic expectations and projectionswhich you're seeing that in our numbers currently. Richard Anderson: From a planning perspective, we're approaching 2008 withreally a dual approach, which is to take current economic trends and assume thatyou see the same kind of GDP growth that we have seen in 2007. Then we willhave a contingency plan that if we see an effect from the credit markets withrespect to the sub-prime issues that are in the credit markets, or other sortof effects on the economy, we will be prepared and have the airline positionedto be able to take out domestic capacity to match that demand appropriately. Wedon't want to be in a situation where our domestic capacity is out of balancewith where GDP and demand is.

A last comment on that is that our plan for 2008 hasdomestic capacity flat. Even where the environment is today, we are not planningon adding any additional domestic capacity. Richard Anderson: Given the large sizes that we have, we have the lowest CASMcost in terms of fleet costs in the industry, to reinforce Ed's point. We havea very flexible fleet in terms of the being able to move capacity prettyquickly.

Your next question comes from James Higgins - SoleilSecurities. James Higgins - Soleil Securities: You have got a lot of cross-currents on the interest expenseside. Can you give us an idea of what sort of quarterly numbers we should be lookingat there, looking ahead?

You are right. We did have some moving parts in the non-operatinginterest line. First off, as part of the refinancing of the GE spare partsdeal, we picked up a $14 million of benefit from the amortization of debtpremium that was on the balance sheet from that original financing. Then inaddition to that, in the second quarter we had written off about $20 million ofunamortized debt issuance costs related to the replacement of the retirement ofthe DIP, since we replaced the DIP on an accelerated basis from what theoriginal intent was for the life of the DIP. So the $20 million bad guy in thesecond quarter number is a $14 million good guy in the third quarter numbers. Then on top of that, we obviously have better rates from ourlower debt levels and better rates on our exit facility as compared to our DIP financing.The sum of those two numbers is about another $13 million on aquarter-over-quarter basis. James Higgins - Soleil Securities: So it's another $13million reduction?

In the third quarter.But that's the ongoing part. The $13 million is a continuing benefit. The firsttwo items I mentioned were unique to the quarter. In the fourth quarter, we'regoing to see another $20 million benefit coming in on the non-op line relatedto the same factor that I mentioned on the GE spare parts refinancing, with therefinancing of the aircraft and the new EETC we accelerated about $20 millionof debt premium, and that will flow through the non-op line as a good guy inthe fourth quarter as well. James Higgins - Soleil Securities: That's a one-time event in the fourth quarter?

That's right.

Your next question comes from Bob McAdoo - AvondalePartners. Bob McAdoo - Avondale Partners: I am trying to get a little more flavor as to what is going onpost-Labor Day. You have what I would consider nonstandard destinations beyondthe big industries in Europe, Africaand some of the smaller European. I am just curious how those are going. In thepeak I understand they did well. I'm curious, any kind of sense of how they aregoing in the fall? How are those markets doing in the fall relative to the moretraditional European destinations?

I think the Middle East is having a banner fall. Africa isstrong throughout the fall, and winter looks like it's going to be back tosummer levels again. One of the great things about Africais it is contra-seasonal. Eastern Europe is a marketbasket of different results with things like Kiev,markets like Kiev continuing to beextremely strong. For example, Bucharestis one of the weaker markets, so we're reexamining the level of capacity wehave in the winter. That's coming off of a really wonderful summer for Bucharest.But in general the fall and winter, particularly in the Middle Eastand Africa and Indiaare very, very strong. There are a few weak spots that we will be addressing aswe plan next year. Bob McAdoo - Avondale Partners: So is it safe to saythat those are working and maybe counterbalancing some of the normal seasonalweakness you see in the traditional European destinations?

That certainly is theintent, to be able to rotate. This is the first year we have had the 767-400fleet. We're calling it the Follow The Sun Project, where we're taking it outof Europe in the summer and then we're putting it downinto Africa and into South Americain the winter. We think that is going to be very accretive to the winterP&Ls.

Your next question comes from Bill Malthurst - Bank of NewYork Capital. Bill Malthurst - Bank of New YorkCapital: Richard, you havebeen very public about the need for Delta to go ahead and continue tostrengthen their balance sheet. I'm wondering, could you just set forth somegoals as to where you would like to be and particularly in the context of maybeany new financings that might come up for let's say the ten aircraft? If you could also comment -- and I know this question has alot of different parts, I can appreciate that -- and just reassure the fixedincome side that any announcement that comes out of Parisis not going to be to the detriment of bondholders? Richard Anderson: I can tell that you any announcement coming out of Pariswill not be to the detriment of bondholders. With respect to the balance sheet, the industry and Deltahas to get to a return on capital in the 10% to 12% range. Along the way,loading the balance sheet up with a lot of debt to fund new airplanes issomething we have to be very careful about. Fortunately the work that Ed didleading the restructuring put the airline in great shape with respect to itsfleet. Aside from perhaps a handful of 777s that would be very accretive to theP&L over the next few years and the 757s that we have coming in from theafter-market, along with a handful of 737-700s, and the existing POR regionaljet deliveries, we're pretty well set on the fleet. So bottom line is, we want to be in a position to be able totake our cash flow and continue to be certain that we're paying down debt justlike we did in the last quarter. I think you are going to see us avoid capitalexpenditures that are not really disciplined capital expenditures that haveconservative assumptions that will produce real value over the long term. Youcan see the value of the debt pay down, the value that it already has on ourpre-tax. So as we look out in the next several years, in 2010, 2011and 2012, we have some significant maturities. A lot of that is EETC debt thatcan be refinanced. But want to stay pretty focused on a debt-to-equity ratio inthe 40% to 50% range over the long term. To do that is going to requireincredible discipline on the CapEx side as we build real equity on the balancesheet. Bill Malthurst - Bank of New YorkCapital: That debt-to-equityratio, that includes any type of activities relating to consolidation? Richard Anderson: No, that is on astandalone basis, Bill. Bill Malthurst - Bank of New YorkCapital: That debt to equity also includes and incorporates whatwould probably be a future EETC financing to fund the ten aircraft. Would thatbe correct there? Richard Anderson: We have not made adecision, Bill, as to how we're going to approach the deliveries. We'reconsidering quite honestly whether we should pay cash for some of them.

Your next question comes from William Greene - MorganStanley. William Greene - Morgan Stanley: When you are thinking about driving sort of shareholdervalue here you talked about consolidation, but can you offer any color on theother options that have been bantered around in the industry? From assetsspin-offs, whether it's MRO, or frequent flyer, or anything like that? Alsoyour views on dividend payments. I recognize those are board decisions but justhow you are thinking about that. Richard Anderson: First, the board is a very independent and strong board.This board was selected by the process out of the reorganization of thecreditors committees so you have a lot of very sophisticated and financiallyastute board members who are very focused on making sure that Delta continuesto operate from a position of strength. That includes making certain that we dothe right thing for the shareholders. So with that background, we have teed up the issue ofwhether we should own Com Air. I think you'll see us making a judgment in thatregard in the next quarter or so. We have the work underway doing the internalevaluation on whether we need to really basically have our balance sheet carrythat set of assets. Out of our nine regional carriers, it is the only one thatwe own. So you should expect us in the course of the next quarter or two, Iwould actually think in the next quarter, to make a judgment that regard. With respect to the other assets, the MRO business, DeltaGlobal Services, and Delta AirElite, given that we own those assets already,there really is an opportunity that is unique at Delta to use those assets andleverage those assets to provide some diversification, particularly if you arein an economic downturn. The MRO business is quite profitable on a fullyallocated basis. It's not labor intensive, it mostly relies…

Historically we had some contracts that were fixed rates,and now we have gone to floating discounts off of the various structures. Soessentially, most corporations as we continue to pass through rate increasesprimarily due to fuel, those pass right on through to our corporate clients. Yousaw this week the industry took another industry-wide fare increase, and thatwill be reflective in all of the discounts that we have with the majorcorporations.

Your next question comes from Bob McAdoo - AvondalePartners. Bob McAdoo - Avondale Partners: I know you said you have got a press conference tomorrowthere in Paris. Without asking youto disclose destinations and all that kind of thing, I think there is a Reutersstory that has gone over here in the last hour or so which talks about a lot ofthe same kinds of things, about a joint venture between you guys and AirFrance. I'm curious not so much as to asking you about what destinations orexactly what might be coming out that way, but more if there is a joint ventureannounced, how does that impact our financials? How should we be thinking aboutthat in terms of modeling, assuming there's a particular route or two out ofHeathrow that do in fact get announced, how should we be thinking about it? Whatdoes that do to you and how does it flow through in terms of revenues andexpenses and bottom line? Richard Anderson: Well, we have to becareful, Bob, we're not going to preannounce. Bob McAdoo - Avondale Partners: I'm not asking you to tell us what you are going to doexactly. But if you end up in a joint venture, how does that end up working? Richard Anderson: It's not going tohave a dramatic impact on the balance sheet, if that's your question, or thenature by which the results will be reported. It will be very positive. You canbe assured it will be accretive but it will not fundamentally change thereporting structure of the entity. Bob McAdoo - Avondale Partners: In those kind of situations, if you guys share seats onwhether it is this particular one or in future joint ventures, should we justassume that you share the revenues and you share the expenses on a particularflight that may be a part of that joint venture? Richard Anderson: I think it's fair tosay that it would be more oriented toward the profit of the entities than thespecific revenues and costs. They won't go into a new entity.

Bob, you might think about it in terms of continuing to fuelincreased RASM across the Atlantic. In other words, itsdemonstration will come from the fact that you can leverage the two largestcarriers together across the Trans-Atlantic, and the goal would be to continueto help fuel our RASM improvement across the Atlantic. Bob McAdoo - Avondale Partners: If you have X number of round trips across the NorthAtlantic today, it's going to look a lot like that, but basically net-net allwe need to worry about is it ought to help the RASM on that?

It will help theRASM. It will definitely help the RASM. Richard Anderson: That's about all wecan say on that right now, Bob.

Your next question comes from Robert Barry – Goldman Sachs. Robert Barry - Goldman Sachs: There was an early question about international PRASM growthand there was a mention of significant FX benefit. Could you tell us how muchof the PRASM growth in Atlantic and Latin was related tocurrency? Richard Anderson: We think it's about 4points of year-over-year PRASM increase attributable to currency. Robert Barry - Goldman Sachs: Does any of that make it to your bottom line? Or is thatjust the revenue impact? Richard Anderson: I think a fair chunk of it does, Rob. Robert Barry - Goldman Sachs: Any ability toquantify how much? Richard Anderson: We don't have the numbers here. We're over in Paris.You can follow up with Jill after. We'll get you that number. Robert Barry - Goldman Sachs: There was a mention just a couple of minutes ago about therecent fare increase. In what percentage of your markets did that fare increasestick?

Well, it's the entirenetwork ex the low-cost carrier network. So it's about 40% to 50% of themarkets. I will fully expect that we see some traction from various low-costcarriers over the next few weeks here as fuel continues to remain certainlyhigh in the mid-80s. Robert Barry - Goldman Sachs: Finally, I was wondering if you could update us on theprogress you're making with the regionals and in particular how you feel thingsare going since you took over the ground handling this summer? Richard Anderson: Good progress. Twoimportant things occurring there. One, we brought Don Bornhorst up, he was theCEO of Comair. We brought him up to Delta, and have pulled together all thevarious parts of Delta under Don to take control of all of our contract carrierrelationships. That's the first important development. The second thing is we had ASA reached an agreement with itspilots on a new contract going forward. Third, we took over the ground handling at Atlanta,and we have begun to see improvement in the on-time performance and completionfactor. It's a work in progress, but we feel pretty good about where we aregiven the most recent DOT numbers.

Your next question comes from Jamie Baker – JP Morgan. Jamie Baker - JP Morgan: Richard, I'm actually seeing a headline cross here that AfricanAirlines must merge, says industry chief. I'm guessing that's not what you werespeaking about earlier. When you talk about incremental aircraft, you talkedabout a demonstrable return on equity. I was hoping you could quantify a bitabout what sort of return you look for? This is actually a concept that seemsto be lost on some of your competitors. Richard Anderson: When you sit down to make that decision, you've got to makea decision that's based upon some reasonable assumptions over time about thecost and the revenue performance that you can assume. You have to weigh thatagainst what happens if you are in a downturn and you have a fleet that's allcovered by fixed obligations and you don't have variable capacity that's free atthe bottom of your fleet. We target a return on capital, a return on investment ofsomewhere around 15% when we make those decisions. Candidly, that's going tocome down, Jamie, to what are you going to assume about what costs are going tobe over time, and what are you going to assume about what your revenueperformance is going to be over time? So you have to be careful about thoseinput assumptions. We target that, by the way, when we're making investmentlike winglets and seat reconfigurations. Ed talked about these seatreconfigurations. In many instances on the seat reconfigurations we're gettinga much better product for our customer and we're able to put more seats on theairplane without affecting pitch. So when you look into each one of these investmentswe're making, we're targeting a 15% return on investment, and the company isvery disciplined, I mean that's what Ed does so well, is make certain that whenwe do go and…

Your next question comes from Andrew Shapiro – FTN MidwestSecurities. Andrew Shapiro - FTN Midwest Securities: Other revenues looked like they were up very strong in thequarter, though maybe it wasn't quite as strong as it initially appears,because it looks like you did restatements to both mainline and other revenuesin the prior period. I would like to better understand what was driving otherrevenues in the quarter, and how we should think about the growth rates goingforward?

Other revenues wereimpacted by Fresh Start accounting. I think that was about $10 million on ayear-over-year basis. The other big change in the other revenue line was thebreakout of the TOC, our MRO business. In-sourcing activities. We now grossthem up. That was an incremental $25 million on a year-over-year basis. So eventhough we restated the prior year in terms of grossing up the prior year forreclassification purposes, we grew the business by $25 million this quarterover the third quarter a year ago. Those are the two largest changes in there.We have increased fees for administrative service charges, we've got someSkyMile benefits as well. Andrew Shapiro - FTN Midwest Securities: How should we think about the growth rate going forward?

I would think thatthe rate you saw here for the third quarter is probably not too different thanwhat you should expect to see going forward.

Jamie, if you are still on the line, I did identify thefourth quarter, our forecast is in the $90 million to $100 million range forthe fourth quarter, if you are listening.

Your next question comes from Gary Chase – Lehman Brothers. Gary Chase - Lehman Brothers: A couple of questions for Richard as it relates to therestructuring plan. I know you voiced support for what I would call the majorpillars of the plan, anyway. Are there any tweaks that we ought to be thinkingneed to be made looking forward? Secondly, I have heard you make reference acouple of times now to cost opportunity, and I was wondering if you couldelaborate. Do you think that is a function of offsetting inflation in thestructure, or do you really believe that there is an opportunity to drive costsfundamentally lower than what was contemplated in that plan? Richard Anderson: I think it is goingto initially be offsetting inflation. We have industry-leading non-fuel CASM,and I do think that we can sustain industry-leading non-fuel CASM. There arereal innovation opportunities still ahead of us. The team has done a very nicejob through the restructuring process. But you have to continually find newways of doing business that can take those costs out, and we have a pretty longlist of things that we're going to be examining in the planning process for2008, especially when you see fuel trending up the way fuel is trending up. But in summary, I think you can count on our staying at thetop of the industry in terms of network non-fuel CASM. A couple of other points to your first question. One of theareas that we can leverage the plan even further is the reason why we're herein Paris, and Glen has done a nice job leading the effort there, but theopportunity that we have with Air France across the Trans-Atlantic could createa very powerful entity. We have anti-trust immunity with Air Franceand we have the number one position across the Atlanticfrom the U.S. They…

The state tax is.That was the reason if you look at our performance, we guided operating marginof 6% to 8%. I think we came in at 8.7%, the lion's share of that 0.7% was froma state tax resolution that came in at the very end of the quarter. We didn'thave visibility to the settlement when we gave guidance. The insurancesettlement was smaller. We have got some ongoing discussions that relate to businessinterruptions down from the Hurricane Rita and Wilma and Katrina from the Gulf Coast in 2005. We still have someongoing discussions and I would expect further settlements in the future quarteror two, not sizable enough to call out. We also obviously have some otherthings going the other direction I didn't call out either. Gary Chase - Lehman Brothers: Was there any story domestically on a regional level? Obviouslythe overall performance looked very good for the quarter. Anything stand out onthe upside or the down side?

Well, certainly, JFKis making the most progress for us and with Jet Blue continuing to strugglethere and they are perpetually raising fares, the unit revenues in JFK arerising less dramatically. The rest of the network is relatively well balanced,but that certainly is the stand out.

Just one last one that came to mind that we are looking atin terms of longer-term free cash flow, which is, do we have to take all of theairplanes that we have in the POR, the new airplanes, and whether or not thereare some options on fleeting that would in fact reduce our CapEx going forwardin the plan of reorganization. So we're looking pretty hard at the POR, andfiguring out what we can do to free up more cash flow from the original PRO.I'm not ready to announce them yet. There may be some creative things we can doon the fleet side to avoid some of the new aircraft purchases that we had assumedin that fleet plan. So, bottom line, it's a great POR, can we really acceleratethe free cash flow?

To follow-on what Richard was saying in terms of additionalcost coming out on the business. We're going to be looking at on an ongoing basis,somewhere between a 3 to 5 points of additional cost coming out each year. Nowsome of those we're going to have to go fund new cost pressures each year, butif you are trying to put a target on the size of the benefits, we think you canstill draw out of the network. Some of it relates to growth in terms of thebenefit of growth, but in average it's kind of 3 to 5 points of unit costbenefit, some of that's invested back in, whether it be product or some othercost pressures. Richard Anderson: When you think about growing the airline, modest growthrequires that you that, so that you can grow the airline at the marginal unitof production. Otherwise you end up with fully allocated cost for everyadditional unit of capacity that you add, and you don't want to do that or youwon't get the value of the marginal economics.

This concludes your presentation for today. Ladies andgentlemen, you may now disconnect. Have a wonderful day.