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Article Excerpt
PARTICIPANTS
. Andrew Lacko, Northwest Airlines, Director of IR . Doug Steenland, Northwest Airlines, President & CEO . Dave Davis, Northwest Airlines, EVP & CFO . Gary Chase, Barclays Capital, Analyst . Tim Griffin, Northwest Airlines, EVP of Marketing and Distribution . William Greene, Morgan Stanley, Analyst . Jamie Baker, JPMorgan Chase & Co., Analyst . Ray Neidl, Calyon Securities Inc., Analyst . Daniel McKenzie, Credit Suisse, Analyst . Bob McAdoo, Avondale Partners, Analyst . Bill Mastoris, Broadpoint Capital, Analyst . Kevin Crissey, UBS, Analyst . Liz Fedor, Minneapolis Star Tribune, Media . Dan Reed, USA Today, Media . Josh Freed, Associated Press, Media . Susan Carey, Wall Street Journal, Media . Martin Moylan, Minnesota Public Radio, Media . Mary Jane Credeur, Bloomberg News, Media
OVERVIEW
NWA reported 3Q08 operating revenues of $3.8b. 3Q08 net loss was $317m or $1.20 per share. 3Q08 adjusted net income (excluding $410m charge associated with marking-to-market fuel hedges) was $93m or $0.35 per share.
FINANCIAL DATA
A. Key Data From Call 1. 3Q08 operating revenues = $3.8b. 2. 3Q08 net loss = $317m. 3. 3Q08 adjusted net income (excluding $410m charge associated with marking-to-market fuel hedges) = $93m. 4. 3Q08 loss per share = $1.20. 5. 3Q08 adjusted EPS (excluding $410m charge associated with marking-to-market fuel hedges) = $0.35. 6. 3Q08 OpEx = $3.6b. 7. 3Q08 CapEx = $318m. 8. 3Q08-end restricted cash = $185m. 9. 3Q08-end net debt = $6.8b.
PRESENTATION SUMMARY
S1. 3Q08 Business Review (D.S.) 1. Highlights: 1. Net loss, $317m. 2. Reported results include a $410m non-cash charge associated with marking-to-market out-of-period fuel hedges. 1. Excluding this charge: 1. Adjusted net income, $93m vs. $232m in 3Q07. 2. Pre-tax margin, 2.5%, which was highest among network carriers. 3. 3Q08-end unrestricted liquidity, $3.4b. 2. 2008 Operating Performance: 1. YTD, achieved 19 a 100% completion factor days worldwide and 29 a 100% completion factor days in North America. 1. This outstanding performance has continued beyond Sept. into Oct. 2. Through 10/20/08, had eight perfect system completion days and nine perfect North American completion factor days. 3. Recent DOT Reporting Data: 1. For Aug., NWA was the industry leader among network carriers in: 1. On-time performance. 2. Fewest mishandled bags. 3. Fewest customer complaints. 4. Highest completion factor. 2. YTD, NWA ranked first in: 1. Departure within zero performance. 2. Fewest mishandled bags. 3. Fewest customer complaints. 3. YTD, ranked second in completion factor and third in on-time performance. 1. This high-level performance is continuing. 4. In Sept., DOT A14 on-time performance, 89.5% and 91% month-to-date in Oct. 4. North American completion factor, 99.5% in Sept. and 99.9% in Oct. 5. DOT luggage handling performance in: 1. Sept., 2.2 mishandled bags per 1,000 passengers. 2. Oct. month-to-date, 1.8 mishandled bags per 1,000 passengers. 3. 3Q08 Financial Performance: 1. Earned almost $100m, despite $688m increase in YoverY fuel costs excluding impact of out-of-period fuel hedge losses. 2. Was able to grow topline revenue by 12.4% and consolidated passenger revenue by 11.3%. 3. Unit Passenger Revenue (PRASM): 1. Performance continues to be strong. 2. During 3Q08, grew domestic mainline PRASM by 10.7% and consolidated PRASM by 8.1%, due to: 1. Prudent capacity reductions implemented during 3Q08. 2. Disciplined industry-wide fare actions. 4. Continues to see strong ancillary revenue growth. 1. First and second checked bag fees are performing exceptionally well. 1. Based on the most recent data available, bag fee initiatives are generating an incremental $150-200m in additional revenues on an annualized basis. 5. Fuel continues to be NWA single largest cost item. 1. As of 10/20/08, price of crude oil has declined over $70 a barrel. 2. As of [10/22/08], price of fuel has gone down to $68 a barrel. 1. For every $1 per barrel reduction in price of oil, Co.'s fuel costs are lowered by approx. $40m annually. 6. Mainline ex-fuel CASM fell by 1.1%, despite 1.3% reduction in capacity. 1. Historic run-up in fuel prices earlier this year led to unprecedented industry capacity reductions that have recently been implemented. 1. Co. believes this is unique situation because prior economic slowdowns were not accompanied by capacity reductions of this magnitude that were implemented in advance of economic slowdown. 2. These capacity reductions combined with significantly lower fuel prices create the conditions for sustained profitability. 4. Merger with Delta: 1. On 09/25/08, NWA shareholders overwhelmingly voted in favor of merger agreement with more than 98% of shares voted supporting the transaction. 1. Delta shareholders approved the merger on 09/25/08. 2. On closing of the merger, which Co. expects to occur soon, two carriers will begin to realize annual synergies now estimated at $2b by 2012. 3. One-time integration costs are now estimated to be approx. $600m spread over three years. 1. Combined carrier will have among the strongest balance sheets and liquidity positions in the industry. 4. Continues to make significant progress on integration planning and expects a smooth transition to creating new Delta.
S2. 3Q08 Financial Review (D.D.) 1. Highlights: 1. Net loss, $317m or $1.20 per share. 2. Excluding $410m charge associated with marking-to-market fuel hedges, adjusted net income was $93m or $0.35 per share vs. $232m in 3Q07. 2. Revenue: 1. Operating revenues, $3.8b, up 12.4% from 3Q07. 2. Consolidated passenger revenue increased by 11.3% and consolidated ASMs were up by 2.9% YoverY. 3. Consolidated PRASM growth, 8.1%. 4. YoverY PRASM Improvement: 1. Domestic mainline PRASM, up 10.7% on 9.9% fewer ASMs. 1. Consolidated PRASM including regionals was up 10.9% on 1.7% fewer ASMs. 2. 3Q08 domestic PRASM performance was largely result of capacity reductions implemented in early Aug. and favorable industry fare actions. 2. Regional PRASM decreased by 4.1% on YoverY basis on 52.9% more ASMs. 1. Decline resulted from large increase in regional capacity during 3Q08 as the delivery of [70] regional jets continued. 2. Expects to take last of 76-seaters in Dec. 5. International Operation: 1. Pacific PRASM increased by 7.1% on 1.9% more ASMs. 1. Driven by strong yields and substantial increases in YoverY fuel surcharges. 2. Atlantic PRASM increased by 1.6% on 22.4% increase in ASMs. 1. Increased capacity was largely driven by annualization of new transatlantic service launched last year in conjunction with JV partner KLM. 2. Total JV PRASM was up 8% on 13.6% increase in JV ASMs. 3. Co. expects to lap itself on a YoverY basis during 4Q08 at which Atlantic capacity growth will moderate. 6. Cargo: 1. 3Q08 cargo ton miles (CTM) decreased by 24% but cargo revenue fell by only 5.2% or $11m to $201m. 1. Cargo revenue per ton mile increased a very strong 25.2% for 3Q08. 3. Costs: 1. OpEx, $3.6b. 1. Excluding adjustments associated with marking-to-market out-of-period fuel hedges, OpEx was up $673m or 23% YoverY due to $688m increase in fuel expense. 2. Excluding fuel costs, OpEx decreased by $15m YoverY. 2. Mainline unit costs, excluding fuel, were down 1.1% vs. last year, which is favorable to previous guidance. 3. Favorable CASM performance on 1.3% fewer ASMs...
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