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

Thanks very much, and good morning, everybody, and welcome to the 13th Annual Global Transportation Conference here at Cowen that's being held in conjunction with the first annual mobility conference. I'm Helane Becker, Managing Director at Cowen and senior airline analyst. This morning, we're kicking our conference off with -- as we almost always do, with Delta Airlines. It's my pleasure to introduce Paul Jacobson, Chief Financial Officer of Delta. Good morning, Paul. I'm very excited to introduce you this morning to, once again, kick off the conference. Did you want to say a few words before we head into Q&A? Or did you have any thoughts about that?

Yes.

I don't know who's in the room with you. I do know -- I saw Jill earlier, so if you want to introduce her.

I've got Jill and Wesley here with me. Yes. I've got Jill Greer and Wesley Matern here from our Investor Relations group. They are off camera and muted so that we don't bombard everybody with endless streams of echoes. But thank you, Helane, for having us and thanks for that introduction. For everybody listening, appreciate you joining us. Helane and I were just remarking that we were hoping this was going to be the first of the in-person conferences, but alas, no. We are still in the throes of distancing and people starting to get acclimated. And I think bigger picture, there are encouraging signs on the horizon as we see vaccine development and we have seen slight increases in the amount of travel, particularly in the leisure set. But as we said back in July, we expect this to be choppy. And we expect that we're going to see ebbs and flows off the lows, but we're still well, well behind where we should be. And as we kind of said from the beginning, I think we'll be here for a little while and we have to focus on controlling what we can control, which is the expense side of the equation. And the team has done an extraordinary job quickly getting expenses out beginning in the second quarter, where we reduced expenses by more than 50%. And we're on a really, really good trajectory for the third quarter -- to meet or exceed that goal for the third quarter as well. So that's important because that's what really controls the cash burn. And from the beginning of this, we've reduced the cash burn by more than 70% from the $100 million a day that we were experiencing in the first weeks of the crisis. The good news is that the refund stream has slowed down quite a bit off of those highs, which makes sense. As we get further along the booking curve and the booking curve shortens, there are fewer and fewer people that have travel that needs to be canceled. So we're hovering around $27 million a day. And as we said, we were expecting this to be somewhat flat until we see meaningful recovery in demand. We have not seen that yet. But with that, I think we're in good shape. And then for what we can't control, which is the demand side and the return of demand, make sure that we brace ourselves with enough liquidity to be able to get through this. We had over 16 -- almost $16 billion at the end of June and we continue to make liquidity a priority for us going forward. And we think that recipe will help give us time to rebuild the airline. We have to be flexible and we have to be nimble in order to respond to changing demand and where it comes from. And I think so far, we're executing that well in a really difficult situation. Proud of the team.

And that's really amazing actually, how fast you're able to accomplish the goals, given everything that's occurred and the fits and starts we've had around the country with this virus.

And just since we're talking liquidity and financials, to kind of kick it off, the 364-day term loan, I guess it's current now.

It is.

Because I don't think you've repaid it. So I was wondering if you could talk about the loan in the context of the balance sheet and your capital allocation thoughts and how you're approaching that.

Yes. No, it's a great question, Helane. And that was the first transaction that we did in the throes of the pandemic and it was one that is attractively priced. It's got a good loan-to-value. And we want to be very conscious about how we think about that. It's low-cost financing to keep out there. If you -- as we talked about in our disclosures in the June quarter, we did a lot to both issue unsecured debt to take care of our unsecured maturities, one in December for $450 million and one in, I believe, it's April for about $600 million. We were able to refinance those opportunistically. We're still holding the cash. Obviously, they're not prepayable, but we've got the cash to do that. We were able to extend out our revolver. And that bridge facility now is really the only maturity of significance that we have in 2021. So we're keeping that out there. We're looking opportunistically at what we have to refinance it. But also, with 16 -- almost $16 billion in cash, a scenario where we start to see a recovery between now and then, we might have the ability to just pay that off. We are carrying more cash than we need in a normal state and that will probably be here for a while. But we have plenty right now and we'll just kind of see where that ends up. But we don't want to continue to sort of rush into needing to refinance that, but that's out there. And we're in constant communication with the lenders in that group, too.

Got you. When I was looking at the balance sheet at the end of the June quarter, and you have -- it's a $73 billion balance sheet, which is okay on a company doing $45 billion in revenue. But -- and I know this is like a unique year where revenues are going to be more like $15 billion or $18 billion. So how do you think about that long-term debt of $19 billion, short-term debt of $5 billion, which at this point includes the term loan? I know you can't comment on revenue per se, I get that. I was like wondering how you think about the balance sheet relative to revenue and maybe potential growth. And also -- and we'll shift to the network. So as you're answering that question, you can kind of think about the network, which would be my next question. You flew to a lot of cities and relied on partners. And then as you think about coming out of this, will reliance on partners diminish? So kind of a lot of questions in that, so you can take your pick for how you want to answer them.

Sure. I'll try to remember all of them. We all set aspirational goals for ourselves. And if you had told me a year or 2 ago that I could be CFO over a $75 billion balance sheet, I would have been delighted because maybe we would have had a comparable market cap. But unfortunately, I think I've learned enough to know that you'd rather have that in equity than debt. But look, I think there's 2 observations about that. One is I think it really shows the magnitude of the crisis that we're in. And we toss around in 2020 the word unprecedented way too much because it starts to become a little bit numbing. But the reality is we've never seen anything like this. Even in past pandemics, economies and countries have never really shut down before the way they have in this one. And I think that's something that everybody has to be aware of going forward. Reactions are just faster in the information age, and news travels faster, et cetera. So I think we have to be prepared for that. And that probably means more liquidity for people going forward than what they had before. I don't think the right answer is 4x what we carried in the past, but we are going to have to be thoughtful about that. And then the second observation is I think it really demonstrates the power of what we've been saying for the last 10 years, which is we've got to have an investment-grade balance sheet because we don't know what it's going to be, but it's going to be something. We never imagined it was going to be of the magnitude of this, but we knew something was going to be out there. And I said many times that we thought we could be free cash flow positive through a downturn. Obviously, a shock to the system like this was not something that anybody really contemplated, but that's the reality we have to deal with. But thank God we did all that work over the last 10 years: to make the voluntary contributions to the pension plan, to aggressively delever and to instill a level of capital discipline in the company that we haven't seen really ever and through any cycles beforehand. So I think if you look back at the lessons of the last 10 years and you look at what we were able to do even on a much smaller company footprint, coming out of the credit crisis and through the merger synergies, et cetera, we really didn't experience our high level of growth in premium travel for probably about 5 years. It was kind of 2013 and beyond. But we still paid down a lot of debt in that 2009 to 2013 period by being disciplined with capital and by focusing and driving the business on free cash flow. I think that's the lesson here. And we need to focus on restoring that balance sheet. I don't know if that's a 2-year exercise, a 4-year exercise, a 7-year exercise, but we'll figure that out because I think if there's one thing that we've proven pretty good at as a company is capital allocation. And debt reduction is a priority and will probably be the highest priority for us coming back out of this on the other side. And then in response to the question about the network and how we get there, I think we just have to be agile. Another word that gets overused a little bit this year. But the reality is -- when I'm asked how big are we going to be outside the pandemic, what's our revenue base, customers are ultimately going to determine that. And we have to adjust our operation, our scale, our network to where customers want to go and who those customers are. So if business travel doesn't fully recover to the level because of Zoom technology, et cetera, or people combining trips, we need to adjust our business model to be able to do that. If the leisure booking curve is suddenly shorter because people have learned the value of spontaneous trips, then great. We need to be there to be able to do that. But what we first have to do -- and I think we're in a pretty good position to stabilize the patient, right? We've reduced the cash burn to a manageable level. It's still $1 billion a month we have to be thoughtful about. But we need to focus on continuing to reduce that cash burn, and we've got liquidity to be able to think forward rather than think day to day. And I think you're starting to see the industry do a little bit more of that with things -- customer-oriented message like eliminating change fees. It's going to be a simpler experience for the customer going forward. And I think when you combine that with our load factor caps and our commitment to the safety and health of our people and our customers, I think you can see Delta emerging back out of this with a lead and momentum to be able to expand that more.

One of the things I noticed in BTS data is that at the beginning of the year, you had about 91,000 employees. And midyear, it was closer to 51,000 and that includes part timers and full-time equivalents. So was that -- were you -- and that was the most aggressive of all the airlines in terms of people reduction. Were you able to do that because of voluntary time-off or time-out? Or how are you able to adjust the workforce so rapidly? And then as things recover -- I mean we think we'll be at 1 million passengers by the end of the year, and obviously, we were almost there last weekend. I don't know what percentage of that is your -- is sort of Delta. Maybe you can help us out there. As we look at TSA -- so I'm asking like 5 questions. So I'll slow down because I don't always remember them either.

Okay. 2 or 3 of which I can answer, so keep going.

Okay. So we'll start with TSA data. Can I look at that like 900,000 and say Delta is 18% of that? Or is it difficult to calculate because you might -- you're in New York, and I don't know, people in New York aren't traveling as much as they may be traveling from Atlanta or California, L.A. or something like that? But -- I mean maybe not even in California given the fires.

Right.

So let's start there. Is there a way to figure that part out?

I don't think you can really get -- parse through the data to find that. I think we -- obviously, we'll spend a little bit more time talking about the quarter on our earnings call, but I don't want to -- not at liberty to kind of give out some of that data right now.

Okay. That's fair enough. And then the second part of the question is unemployment, how you were able to reduce your employee head count so rapidly.

Sure. So the Delta culture is incredibly special. We've talked about that before. And as a finance executive, it's hard to really go in and quantify the value of culture. But it's during extreme cases that culture really manifests itself. And I think when you look at 2020, the pace and the severity of what we saw in the post-COVID world, all the way to some of the social unrest that we're seeing right now and the Black Lives Matter movement, et cetera, you see the Delta people really rallying to the cause. And what we did early on is put a call to action out to -- for people to volunteer to take unpaid leaves. We would cover their benefits, but they would agree to forgo their pay and essentially drop off the employment roles for anywhere from 30 days up to 12 months. We had over 45,000 employees sign up voluntarily for one of those packages. And everybody had their own reasons to do so, but a lot of it, honestly, was we had just come off a record profit sharing payout just really 6 weeks before this crisis started and people wanted to find a way to give back to the company. And then when you look at that and say, okay, I understand how that works, but it's short term. It's flexible for the company, but we've obviously reached a point where we need a little bit more permanent structural change. We came out with the voluntary early retirement program, in which we had over 17,000 employees choose to leave permanently. And there were incentives to do so, medical coverage, et cetera, all of which structurally works for us because it defers some of that cash down the road but we get the savings now. So it's been an incredible response by Delta people. There have been some hard days. I commented that it was August 31 -- actually, it was July 31 because the first day of those retirements was August 1. And behind me is a pretty empty parking lot. It had more cars in it than I have seen since March, but it was people that were coming in that hadn't been to their desks since March. They were walking in with boxes, cleaning out their desks and walking out and it was pretty hard to watch. But at the same time, there's a special celebration for people. Nobody who retired pictured their retirement being under these circumstances. But it really was the last thing they could do to help the company, and that's just really emblematic of the Delta culture and one of the ways in which I think we're going to get through this, shining a light on what that is.

So let's move away from this and talk about Delta and your vision for the next, I don't know, say, 3 years. 5 years is maybe too much. But let's pick the -- sort of pick up the action with the pandemic largely behind us, maybe a vaccine in place. So let's say first quarter -- end of the first quarter, beginning of the second quarter of next year. Talk to me about some of the things we talked at Investor Day about culture and diversity. You talked just now a little bit about the Delta culture and how people do love the company. But talk to me about what your vision is for the airline, say, 3 years on, when this is hopefully just a memory.

Yes. Well, I think a couple of things, Helane. One is I think -- whether it's 2 years or 3 years, I think we need to brace ourselves for we're going to be in a rebuilding mode, right? So the questions about cost reduction and what can we do, there are limits to where we go much deeper than what we're doing. We're cutting really hard into bone, and that's going to be more difficult to rebuild the airline when it comes time to do that. But I was listening to a podcast the other day, and there was a stark reminder on there, which is vaccines don't end pandemics, vaccinations do. And I think what we have to remember is that there's going to be a tremendous supply chain and logistics effort to get people vaccinated. And in this environment, you already see polls with people saying, "Well, I'm not getting vaccinated" and others saying, "Well, everybody has to." It's going to take a while for those vaccinations to really get disseminated out globally. And so I think we should probably brace for that being a 6- to 12-month exercise, which means we'll start to see some improvements in demand. But I think as offices and corporate offices start to reopen, we should start to see some pent-up demand for corporate travel, maybe as early as next spring. But I think, as Ed has said, it's not going to be the same. It's probably not going to be for a while the way it was, and there might be some permanent demand destruction on the corporate travel side of it. So again, I'd just go back to we've got to be nimble, and we've got to be able to adjust. And the big dilemma facing every CFO right now in the business is how do I minimize my cost base but also make sure that the company can respond when the commercial side of the business says we're ready to go, demand is there. And when consumers are ready to come back, we can't just say, "Well, it's going to take us 6 months to ramp up." So everything is a trade-off between savings now and agility and flexibility later, which is why I think we're in a decent position. That's why I could see where a little bit more liquidity would be helpful to help bridge that gap however long it's going to be. But I think largely, the industry with the help of the CARES Act, and who knows if there's going to be a CARES Act 2, has proven and the capital markets have proven resilient enough to be able to fund that rebuilding effort. But that's kind of where we're going to be for the next couple of years. And like I said in the opening comments, the consumer is going to determine how big we are, where we fly and how we fly. We've just got to be able to respond to that, and that's where I think the Delta culture can be superior.

Yes. I think the whole of pent-up demand is, Ed talked about it on the last conference call, you have to have hope. It really brought home the fact that people who can't or aren't traveling, you kind of like -- that's why you work. It's part of the whole working process. It's "I work for a vacation and I want to go someplace amazing," and you have to put all that stuff on hold. I think we have -- yes, we have some more time. So the other thing is, how are you thinking about the loyalty program and the value of the program in the sense that some of your most loyal customers are leisure obviously and maybe some of them are still traveling but some are business and maybe they're not traveling? So does that make the loyalty program less valuable? Or is the revenue being made up on people using their credit cards? I mean how should we be thinking about loyalty in an era where the high-value customer may not be traveling?