Delta Air Lines, Inc. (DAL) Earnings Call Transcript & Summary

Hey everybody, Good morning. I'm Hunter Keay. Sorry for the couple of minutes late start here. I'm here with Paul Jacobson. He is the -- well, is it the former-future-ex-CFO of Delta?

Correct.

And current CFO. Can we say that? Okay. So we have 0.5 hour, and I want to, Paul, give you the opportunity to make a couple of opening remarks. I've got a million questions. I'm going to ask your audience questions first. So Paul, do you want to start off with a couple of remarks before I go right into it?

Great. Thank you, Hunter, and thank you, everybody, for joining us in this most unusual Wolfe conference. Suffice it to say, as much as the technology is working, I hope this is the last one of these we'll ever have to do. And I look forward to seeing many of you in person, preferably in another city that you don't live. Before we start today, I'd like to say that today's presentation does include forward-looking statements, and those are subject to a number of risks and uncertainties. You can read more about these risks at ir.delta.com. So what I want to do is just spend a few minutes talking about what we outlined on our earnings call and just kind of give a little bit of an update on what we see today. And I think what you've heard from others is very consistent from us in that we have seen a little bit of a bounce off the bottom, but my caution is not to draw too much in the way of conclusions because the data set that we have just really isn't that meaningful when you look at the aggregate and how we're thinking about it. But that being said, there are reasons to be encouraged about what we're doing at Delta and certainly some of the things that we're seeing throughout the industry. So as we outlined on our earnings call, our response to this crisis has really been focused on 3 priorities. Number one, protect the health and safety of our people and our customers. First and foremost, that's really going to be table stakes going forward into whatever recovery looks like. It will be a long time, I think, before we start to resolve some of the concerns that people have that are -- that led to social distancing and staying apart. Many of those things are going to permeate and continue into a recovered demand world. Second, and I think Ken Morge and the Treasury team have done an amazing job of securing sufficient liquidity. When we have the uncertainty that we do around demand and when it might come back and what it might look like when it comes back, we need to have a really secure liquidity balance in an effort to make sure that we have time to make the adjustments to the business that are going to be required to thrive in whatever environment that we see going forward. And then third, and what we're spending most of our time on right now, Hunter, is really kind of defining our past -- path through this crisis, trying to understand what the demand environment might look like and really making those changes to rightsize and position the business well for a recovery that, as we've said, may take as long as 3 years before we start to see some semblance of normalized demand. So our principal goal, as we've outlined since the earnings call now, is to reduce our daily cash burn to 0 by the end of the year. This is by far the most valuable action that we can take to preserve liquidity because every dollar that we save in the enterprise is a dollar that we don't have to borrow tomorrow. And that's important for what the recovery is and the long-term restoration of the health of the balance sheet. We've already taken actions, as we outlined, to reduce our cost base by over 50% in the June quarter year-over-year. This is total operating expenses. And a step-down in our cost structure has reduced that daily cash burn from $100 million a day at the end of March to where we currently stand at about $50 million per day. And we now expect this daily cash burn to improve to $40 million per day as we exit June, about $10 million better than our original expectation back in April, really due to better cost performance and some modest improvement in net sales versus refunds. Net sales have improved modestly versus our conservative forecast. And recently, we've seen some days of positive net sales where sales volume is above the refunds of any given day. And we think this is really driven by an uptick in leisure bookings for domestic travel in June and July. But we have to be careful that those actually translate into trips and don't just cancel as we've seen people booking travel on the expectation and the hope that the environment gets better. But until we see some clarity on what can people do when they get to their destination, where can they stay, we've got to be cautious about people actually getting out and moving. So we're continuing to evaluate our schedules. We will be adding 100 flights in June to provide a little bit more schedule utility to ensure that we have enough seats to respond in markets where demand is improving while also, importantly, adhering to our 60% load factor cap that we have put on the operation. So this exit rate of $40 million a day of cash burn in June, combined with the cost improvements that I'll detail in just a minute, really puts us on the right path, we think, to achieve a cash flow breakeven by the end of the year. It will take some demand recovery, but hopefully, we're seeing the green shoots that will do that. We've also moved very quickly and decisively to raise capital. We raised over $10 billion in the last 90 days, really harnessing the power of the fortress balance sheet that we created over the last 10 years. And that's really bought us a nice bit of time to really focus on the longer and intermediate term in an effort to really help shape how we think about the airline coming out of this. Encouraged by how receptive the capital markets have been to Delta, we continue to have access throughout this crisis. We were able to upsize our most recent debt deal due to strong demand. And while prices have been higher than where they were pre-crisis, I put everything in the category of no-regrets financing. Our philosophy has really been to take risk off the table while we repair and restore the cash performance of the company by raising cash early and being very deliberate and doing things in that no-regrets way to position Delta well to come out of it. If at the end of the day, we end up raising more cash than we need, we always have a sizable slug of maturities next year that we have a lot of flexibility to be able to pay down that debt with cash. So with this slightly better cash burn and with the upsized debt deal, we're now projecting to have more than $12 billion in cash on hand at the end of June. And we continue to have access to more capital. We still expect to have $6 billion to $7 billion of unencumbered assets on the balance sheet at the end of the quarter to help some -- access the markets even more. We also have the ability of the CARES Act loan which we have applied for to hold our place in line. We have until September to make a decision about that. As well as other financing sources should we need them. With our near-term position more certain, as I mentioned earlier, we're now turning our attention to really how do we develop a plan to position Delta for the next 2 to 3 years to really thrive. Our finance teams work very closely with Glen and the commercial organization to really synchronize with their vision of what the demand environment, our network, our fleet, our capacity plans are going to look like while we really go in and plug in the right cost structure to support the network and to ensure that we can adhere to cash generation even if it's in a lower-load-factor environment. And while we don't have all the answers yet, we know at the end of the day, Delta is going to be smaller than where we were for the next few years, back to 2019 levels. Against that smaller footprint, we are working on accelerating some of the fleet simplification opportunities that we discussed back at Investor Day. This is a really unique time for us to really put our foot on the gas on some of those fleet decisions that don't require nearly as much capital in this environment to activate. So we've announced we'll begin retiring the MD-88s, the MD-90s and the 777 fleet this year. That will give us an opportunity to take a leap forward in our fleet simplification process and try to pull some of the complexity out of the business. Because with 13 fleet families, 25 aircraft types, we have an old fleet, but we also have the most flexible fleet in the U.S. And the simplification journey that we were on predates the COVID crisis, but COVID gives us a unique opportunity to accelerate that. The decision to exit any fleet, especially one like the 777, is not an easy one. It's had a special role in Delta's history. But it is important to structurally change our costs and our performance going forward so that we can emerge with a much simpler, more streamlined fleet and help drive cash generation in the new world. We also need to proactively manage our headcount through this time. We're incredibly fortunate to have an amazing culture and team at Delta. As of right now, we've had over 40,000 employees sign up for a significant personal sacrifice by taking an unpaid voluntary leave from 30 days out to as long as 12 months. We will be launching a voluntary separation and early retirement package that we have been foreshadowing since the April call. And in addition to continuing the unpaid leaves, we hope that most of the headcount changes that we're going to need are going to be achieved through these voluntary programs, and we can do that quickly. I'll wrap up here and open it up for questions just by simply saying thank you to the 90,000 people at Delta and to our customers for their patience. Our people are fighting on the front line with grace, professionalism, determination, and we're here to serve. And frequently around our halls, we're resurrecting the old ad phrase of Delta, is that we're ready when you are. And we can't wait to see everybody back in the skies. With that, let me turn it back to my good friend, Hunter, for some Q&A.

Thank you, Paul. I appreciate that. Nice transition, by the way, very Delta. So -- okay, so you mentioned it in your prepared remarks, I'd like to elaborate on what you said. You're seeing a little bit strength, adding 100 flights. Where are you seeing that strength? I know it's off a very low base. I'm not like getting ahead of myself here, but obviously, something is happening to drive that. Where are you seeing that?

Yes. It's primarily some leisure destinations, some beach traffic, some activity out west. But like I said, we want to be cautious not to overanalyze and over-conclude on this data because while we have seen TSA data bounce off the lows, we're still a fraction of where we should be at this time of the year. So we're cautious. I'd like to be optimistic. But I think, especially in the financed seats, we need to make sure that we're managing the organization for risk mitigation as well because we really can't afford to have false starts, and I think that's going to be the challenge for the industry is how we think about restarting in the phase of demand information. That probably is going to bounce around a little bit before it starts to settle out on positive trends.

When you think about the recovery in business travel, is there a scenario, even if there's a willingness for business travelers to travel, that their company might not let them? And how do you -- from an insurance perspective, maybe their health care provider has certain rules in place where they can't travel until the CDC dictates some sort of standard has been passed or something like that. So what are you hearing from your corporate salespeople who are in touch with these corporate buyers around when, from an organizational perspective, they will loosen up and start letting their people travel, even if they want to right now?

Yes. Well, I certainly think your characterization of the individual travelers want to get out, and I think many of the people that we all interact with in our communities all want to be out there, right? They want life to return to normal, but we've got to be cautious about that. So I think corporations are going to take -- be very cautious not only about sending people on airplanes but also how do they resume the workforce, all right? So I think this is the sequential series of steps that people have to get comfortable going to their local restaurants and eating in instead of taking out, then they have to get comfortable working in an office environment and so on. I think to our operational team's credit, and I give a lot of credit to Bill Lentsch and to Gil West for what they've done, what we're trying to do is remove as much uncertainty and anxiety from the actual flight as we can. And when you look at the cleaning procedures, the mask policies, the things that we're doing in the airport, the things that we're doing onboard with fogging, et cetera, all of this is to really raise the level of confidence about travel and the safety of it. And hygiene is going to become a very, very important piece, not one that we necessarily think we should compete on because we think this is an industry issue that we've got to focus on, so we're collaborating with others in the industry as well as others outside the industry. But it's going to be as much about how do the hotels open and what do we see about theme parks and convention bureaus and so on. A lot of that definition, and there's a lot of great minds thinking about what that might look like, and I think that all of that surrounding environment and data really contributes to how corporations are thinking about when they're going to put their people on the road, let alone when corporations are going to want to see outside visitors. That's another piece of it as well.

Right. Is one of the things that you can do to make people feel socially distanced onboard is fly wide-body aircraft around the domestic market? I mean you could -- the gate area is bigger. There's not as much tight congregation pre-boarding. You can board people one by one. And then once they get in the plane, they've got 15 feet between each other. Obviously, fuel costs are very low. The seat economics would be attractive. Is there a scenario where that makes sense? Given you're going to have a lower load factor anyway, who cares if it's 40% versus 10%? I mean does that make any sense at all?

Well, I think we've got to be careful about drawing conclusions about what works today versus what is scalable going forward. So the idea of using wide-bodies for social distancing is not something that is really scalable in any real sense going forward, and it's not going to provide the stability that we need. So I think the steps that we're taking and the flights that we added in June, I mentioned part of the reason we did that is to accommodate a little step-up in demand while also adhering to the 60% imposed load factor cap. That's important because credibility matters and trust to the consumer matters right now, and we've got to keep those promises, and we've got to make sure that we're doing that. Yes, they cost a little bit more to fly in those lower load factors, but this is about how we build up the network to get back to normal. And that path has to be a combination of risk reduction and scalability so that we can sequentially move things higher and higher as demand returns.

Okay. The bookings that you're seeing, how much of that is people redeeming points relative to your normal mix versus people actually paying for tickets with cash?

I don't think I would draw any big conclusions. Like I said in my opening remarks, we have seen a slight uptick in the sales-to-refunds ratio over what we were expecting in April. And -- but again, including some days that have even been positive. But I caution that we don't jump to any conclusions. But I don't think we've seen any measurable change in consumer behavior other than the obvious cancellation, no-shows, things like that, that are impacting the operation every single day.

Okay. How do you keep your premium co-brand cardholders engaged? I mean we obviously know that consumer spending is down significantly, and my credit card bill is down 75% or something like that. We're just not doing anything. I also happen to be a Delta Reserve cardholder. And I value that for when I travel, again, the lounges and things like that. But how do you keep me engaged in the event that I decide to take less business travel over the next couple of years? Might make more compelling sense for me to have, say, a cash-back card. How do you make sure that, that card stays relevant to me, a guy that's basically climbed -- uses the card to get platinum status every year, but my spend is down or maybe potentially shifting? Can you work with American Express to change some of the value and some of the perks attached to that card to keep people from canceling it?

Well, first of all, Hunter, if your spend is down because you're not going out as much, you always have more budget to shower your wife with gifts. So I highly recommend that you can go ahead to spend going forward.

I'm checking my spend, not her spend, by the way. But yes, go ahead.

That's not the type of gift I'm talking about. That's going to get you into trouble, my friend.

I know.

I think at the end of the day, the brand proposition for miles versus cash-back cards is really unchanged, right? Yes, there's a little bit of a hiatus where people aren't going to travel. And as we've said, I think international travel comes back more slowly than domestic does. But it also does give somebody to -- something to look forward to. A lot of us like the prospect and the feeling of saving up to get something, and here is where the miles come in. So we haven't seen any proportional shift or bigger shift of demand for sales on the Delta-related cards versus the American Express cards. Everything's still pretty much in line to where it was pre-COVID levels. So yes, spend is down, but that should recover alongside the regular consumer trends that we see. So we're watching that very, very closely with our partners. And we'll continue to adjust to make sure that, that program holds its value.

Okay. Let's talk about these airport improvement projects. Is there a scenario where you have to relinquish control of these projects and hand it back over to the municipality or the regulator if you just can't afford to spend the money to do it? It's really more of a LaGuardia question than anything. That's part one. And then part 2, is it too late to change the design? Or is there a willingness to change the design of some of these projects? You look at Fort Myers Airport, one of the first airports in the country built after 9/11, so they were able to really design security to accommodate the post-9/11 world. So some of these designs are locked. Some of the cement's already been poured. But really 2-part question, how committed are you to continuing to spend on these projects? And how much can you ought to hold them the event that this virus alters the way people actually flow through airports?

Yes. This is actually one of the positives out of this, I think. And while it seems a little bit counterintuitive, we're actually looking for ways to accelerate spend on LaGuardia. So while we have got all of the project expenditures through the end of this year financed through the previous municipal offering, we are looking at different financing vehicles to finish it off. No, we don't think that we'll have to turn anything back to the airport authorities. We've got strong plans. But with the drop in demand, we actually see an opportunity to accelerate some of the construction to lower the overall project cost but also deliver it much, much sooner than we could. So for example, at LaGuardia, where we've got a massive project on a postage-stamp size of land, we've got to bring in equipment to tear down, we've got to bring in foundation equipment, take that out, bring in structure equipment, et cetera. So if we have an opportunity to bring down multiple concourses at the same time, we can actually save on that iterative construction process. So we're working with various financing sources to think about that. We may have to get creative, depending on the pace of the recovery and how the markets hold up. But we still feel good about that project. As for structural changes, not really anything that we can do with the footprint at this point. There might be some things that we can do around the interior and think about flow. But a lot of that design is really locked in. But with the additional space that we've got, we feel good about that project really for the next several decades. And that's why we're going to continue on these projects. Same is true in L.A. Same is true in Salt Lake City. And we're really looking forward to figure out how do we take this opportunity to accelerate those generational-type projects.

Okay. What is the -- over a business cycle up until pre-coronavirus, what was the return on invested capital on a wide-body aircraft versus a narrowbody aircraft? And the second part of the question is, what are the odds that Delta doesn't fly any wide-body aircrafts 5 years from now?

I would say that the return on invested capital is a little bit lower for the wide-bodies, and that trends consistently with the domestic being the most profitable and then the international regions sort of sequencing down from there. 5 years from now, I expect things to be relatively returned to normal. Of course, we can't see that far into the future. We don't know what a COVID resurgence looks like. But I do have a lot of faith in economic systems where there are a lot of really, really smart people with a lot of capital working to solve this crisis for everybody. And usually, when that happens, when there's an abundance of both things, problems get solved. So I think we're holding out hope for a vaccine. Maybe that could be sooner rather than later. But I think we've all got to get comfortable understanding the data and understanding what we can do to keep each other safe. But I think 5 years from now, we'll be looking much more like we did in 2019 than we look like in 2020. So yes, I do think wide-bodies will be here.

Okay. By the way, I forgot to ask you this question I've asked every airline. I'm glad I remembered, I had 2 to 3 minutes left. U.S. domestic load factor last year was 85%, okay? If at an industry level -- this is not a Delta question, this is your opinion as an airline expert. Do you expect domestic load factors for the industry to be over or under 75% in 2021?

I would expect that, boy, 75% is a really good number. I would probably say slightly under right now. But I think that has the perspective of the here and now. So I think we tend to believe that there's a little bit of a slower recovery going forward. I don't think that when we turn the page into 2021, yet absent a vaccine or something, there's going to be much of an appetite to get on an 85%, 90% load factor airplane. So we'll see how long these things hold. But as of today, on May 19, I would take the under on that.

Okay. And then let's see. Here's a question from the audience, and we have 2 minutes left. With load factor cap at 60%, what does yield have to be to get to breakeven on a free cash flow basis after interest expense, CapEx, committed financing?

It's really a question -- we get this question all the time, and it's a good question and it's a fair question. I think it really comes down to 60% at what scale, right? So 60% where we're operating 15% of our capacity from last year is obviously a nonstarter when it comes to breakeven. But I think part of our journey here and what we're working with over the next couple of months is to really understand the economic model. But I don't think we should necessarily put a lot of stock into high-yielding traffic or yields being significantly better for the foreseeable future. Again, that would be in the category of kind of preparing for the worst and hoping for better. But I think the demand environment is probably going to be fairly tough for the next couple of years as we're trying to rebuild. So we've got to be cautious on that standpoint. And that means the cost structure has to be flexible not only to be able to drive that positive cash flow at lower load factors but also be scalable in the event that we see demand return faster than we think. So a lot of unknowns right there -- right now, and I think that's what you're seeing the market trying to digest. We see a lot of volatility in the equities, and I think that, that's really driven by nobody really knows what it's going to look like in 6 months either from an operational perspective, from a size and scale perspective and ultimately from a demand perspective. But we're trying to navigate the best path that we can through this that minimizes risk and achieves our goal of getting to breakeven cash flow by the end of 2020.

Okay. Well, we're out of time. That went really fast. Paul, thank you so much for coming. I know you guys would have had your Analyst Day next week, didn't happen. So I appreciate you freeing up your time to do this. This is tough after what happened.

This is like our Analyst Day, Hunter.

Yes, it's even better. Really appreciate you doing this. Thank you, Julie and Jill. Good luck, guys. We'll talk to you soon.

All right. Thank you. Thanks, everybody.

Bye.