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

Thank you. Welcome to this afternoon. I'm Eli Gross. I'm the global head of Morgan Stanley's transportation and infrastructure, investment banking practice. And today, we're pleased to host Paul Jacobson, Jill Greer and others from the Delta Air Lines management team for a fireside chat. I'm thrilled to have them and thank them very much for making time. I'd like to thank everybody who's dialed in or Zoom-ed in to this webcast for attending the virtual Laguna event. Huge success so far, great turnout, and we look forward to the discussion this afternoon. I was told I need to read a disclaimer at the beginning of the chat. So I will. Bear with me for one second. And it says, please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Thank you. Maybe we'll start first, Paul, and say a couple of things. First, would be congratulations on the SkyMiles financing, which really was earthshattering, and we'll spend some time talking about that today. And the second, on a personal note, I wanted to say that I recently took my oldest daughter back to college, and I flew on Delta there and back. It was a great experience, the clubs, checking in, the crew and the equipment, extremely safe and felt very well taken care of. So thank you, and I look forward to getting back on to hopefully more Delta flights when this has passed.

So with that, Paul, we had a few questions. And I thought it would be topical and obviously, whatever you think is most topical. But one of the great expressions, I think, is from our CEO, James Gorman, is that you never want to let a good crisis go to waste. And so reflecting on the past 6 months or so, for Delta Air Lines, what are the things -- in addition to cost, obviously, but what are the things that you would say Delta has learned through the crisis, that will also benefit the company once we return back to normal, some of the lasting kind of behaviors or things that you've learned?

Yes. Well, first of all, let me start by thanking you, Eli, for having us and for also flying on Delta. We appreciate that. And my family has flown probably half a dozen times together. It really is a good comforting experience as well. So we appreciate you saying so. Second, I'll add that this is, I think, my first time to the Laguna conference there, at least in several years. We usually have a conflicting engagement this week, but it's not lost on me that the one time I get to go to the Laguna conference is when it's virtual, and I don't actually get to see the beach. So we're here in Atlanta, dealing with the remnants of tropical storm or Hurricane Sally. And she's brought a lot of rain to Atlanta, but we'll just pretend it's the beach for now. But thank you for having us. Look, one of the things that I've said is that I think the word unprecedented gets way overused this year, 2020, and you use the figure of speech earthshattering, which I don't actually think we can use in 2020 because it might actually literally happen. But I think this crisis has taught us a lot. And I -- personally, reflecting a lot on what this means. First and foremost, I think it's a showcase for the Delta culture and Delta people to show how much they care about customers and how much they care about this company, whether it's 45,000 people that rushed to sign up for a voluntary short-term unpaid leave or over 17,000 people that opted to retire early under one of our voluntary programs. I can assure you that no one planned their retirement to look like this. But many of them that I've had a chance to talk to really considered a bit of a badge of honor that they could give up their job to help preserve a job for someone else. And it's that type of culture that makes Delta really special and unique. I think also the way that the company rallied to the cause. when we first said in March that we were going to set out to reduce operating expenses by 50%. Like many things at Delta, that gets established as a stretch goal. There's no real path to get there. But with those goals within the walls of Delta, people rally. And within 6 weeks of this crisis, we had raised over $3 billion of cash, and we had gotten our run rate expenses down by 50%, which we carried through in the June quarter. We're going to do it again in the September quarter, and we're continuing to focus on cost reduction and hope that we'll get close, if not there, in the December quarter as well. And we've done that in spite of more capacity being flown in September than we saw in June. So I think when you think about don't let a good crisis go to waste, this is really the path before us. I think with this bond deal, with the stabilization that we've had in cash burn, albeit we're still burning roughly $750 million a month, that is way down from where it was, and it's been pretty stable. And we see some shoots of demand coming back, although it's quite small. And much like we said in July, we don't want to be over-exuberant about it. We can turn our attention, now that the bond deal was done, to really focusing on 2021. And that's going to be the most challenging planning year ever. We're used to planning within a precision of maybe 0.5 point of capacity. And now we're looking at a plan that's anywhere from down 25% to down 40% versus 2019. It's a massive variability than we've got to get our arms around. But if we can take the momentum we have around cost, and apply that to the rebuild of the network as demand comes back, I think we're going to be positioned to do quite well once things return to normal. And while that might be a long journey of a couple of years, I feel confident in our ability to be able to get there.

You guys done obviously a tremendous job on the cost side, on the liquidity side. And then one of the questions that, I think, that's coming in from the audience, and one was a question that I was going to ask as well, is clearly, we're seeing, and you guys have said, some of the leisure traffic coming back and told that you've been traveling with your family. I've been traveling with mine. I know plenty of friends who are scheduling vacations throughout the fall and into the colder months in the Northeast. But when you think about the business travel, one of the questions getting here is, how do you see the business traveler following the leisure traffic? If guys like me are comfortable traveling, and I'm a business traveler, surely, I imagine I'll be following. But is that kind of what you expect? Or how do you see that playing out?

Yes. I think we've said from the beginning that leisure was going to lead the way mainly because businesses are still really trying to get to figure out what it's going to look like when things "normalize". I think many companies are saying, we're going to go to a work-from-home model. We're going to go to a hoteling model or we're going to reopen the offices early next year. I think as they do that, we'll see a little bit more demand come back. I think what the leisure patterns have shown us is that people are comfortable traveling in short burst on short notice. In fact, the leisure booking curve has shrunk to probably 7 to 10 days. Nobody is making plans out there because they don't know what the outbreaks are going to be and they don't know what's open and so on. But for somebody to say, "Yes. Next weekend, I might want to go to Disney World or Disneyland and it looks good. I'll make plans, 10 days in advance." So I think that's going to be the precursor for business travel to start to loosen up. We've seen some of that. We've got a large majority of our corporate accounts that have approved some travel, but it's fractions of what it should be. But that's how it starts, right? You telling the story about how safety felt means something to people and word-of-mouth is a powerful force. I was almost going to say it's viral, but that's the wrong metaphor to use in 2020, but it is powerful. And as companies start to come back online, they'll be more receptive to guests, consultants, bankers, salespeople coming in to visit them. And I think that will open up. I was in a conversation earlier this week and somebody said, the first time that I lose a sale -- this was the person talking about it -- because I was doing meetings virtually and my competitors took them out to dinner or did an in-person meeting and an in-person demo. That's the last time I'm going to try to sell virtually, right? So that's what's going to happen as things open up. But I think that we still really kind of have to wait for the vaccine for things to, I think, really serve as a catalyst to bring that back over time. And then, of course, domestic leading the way for international. And I think international is probably a vaccine away from really normalizing how we think about crossing international borders again.

That makes sense. And I think about my early days in the airline business, and people told me that it was a GDP-driven sector and that drives demand. And I think that it's going to be the case. The economy is going to grow and travel -- or tends to fall very closely. So I know we're traveling. And we're getting back to the office at Morgan Stanley, and it's -- as you said, it sometimes moves in step functions. So the [ variable ] on demand. On the liquidity side, we talked about SkyMiles at the beginning. I think looking at what you guys have done since COVID, it's hard to say that you've not been hyper-disciplined about the way that you decide to go-to-market and to raise capital, the types of securities and when you tap the markets. But just maybe give us a sense of, okay, why you kind of -- how you thought about the balance sheet and the construct of it? Maybe touch on how SkyMiles went because obviously, it was unprecedented in terms of size and a lot of other dimensions. And then maybe just how you think about the balance sheet going forward because of all the work you guys did in creating arguably -- yes, not arguably, factually investment-grade balance sheet and really a lot of financial firepower. So how do you think about what you've done in the crisis and how do you go forward from here?

Yes. Well, I think I want to, first of all, thank the team for the work that we did over the last 10 years. And I think you're really seeing that play out. And while we were wrong about the next downturn being free cash flow positive. Nobody was imagining the 100-year shock that we're having to absorb. But I think what we've demonstrated through our access to the capital markets is the resiliency and the credibility of the balance sheet that we created and the commitments that we made over the last 10 years. So it's quite an endorsement when you go to the market and you could sell a little bit on credibility because we did all the things that we said we were going to for a decade. So when we talk about -- when we get through this, the first priority of business is going to be to repair the balance sheet and restore it to where it was. And while we've issued a lot of debt, we're carrying a lot of cash. And the hope is that we can control the burn rate. What we say here inside the company is every dollar we save is a dollar we don't have to borrow because we've got to get that burn rate back to positive and get to a daily cash generation. Once we do that, then I feel very, very good about the liquidity that we have. And then we can focus on rebuilding the airline. And then once we do that, then focus on using some of this surplus cash to pay debt down. So we've got about $4 billion of maturities coming up between now and April, including the $3 billion bridge loan that we did immediately in the early days of COVID. That will free up some additional unencumbered assets, which will give us a little bit more of a cushion, but that's going to show you how we think about it going forward. And I may very well end up -- we may buy back debt at a premium over time. We did a lot of that in 2009 and '10 -- or '10 and '11 and that's okay. That really is -- what we did is we stored cash on the balance sheet in an effort to really, really take away some of the dilution risk because we never wanted to be in a position. We were forced into the convertible or the equity markets as a source of financing. So the team has been incredibly opportunistic going on really good days, whether it is the frequent flyer deal that we just did or we did the unsecured deal a couple of months ago. We did the LaGuardia financing, which takes care of all the LaGuardia construction costs really through 2023. I feel very good about the liquidity position we're in, and it allows the company to enter into the next phase of planning the recovery and thinking about life after that. So I feel like we're in good shape.

But just maybe to put a bull on that topic here, I think I'd be remiss to not ask about what you said publicly just for this audience about government support and applying or not applying. I think you've been pretty clear as to how you've been thinking about it. And there's lots of different approaches across the industry. But I think I'd be remiss not to at least ask you just to walk this audience through kind of how you thought about that and go to the government. You're taking the money, you're taking your share or kind of -- or not, which obviously you said you're not going to do. But maybe chime in on that, Paul.

Yes. So we've been pretty open from the very beginning of that program that it was our desire to try to find public market solutions to our financing needs. And as long as the markets were open to us, we didn't feel like we needed the government loan or we wanted to do it. As we were negotiating with them, and I think they're trying to protect the taxpayers and they've done a very, very good job with that, we, for us, found a more efficient use of that collateral in the private markets. And as a result of that, I think once we get this closed, we'll be able to say that we're not going to take the government loan. And I think so far, based on those disclosures and the disclosures of others, I think it's pretty telling that the strongest balance sheets going into this crisis are going to be the 2 that didn't take the government loan. I don't say that as a knock on anyone because I certainly understand it. But I think it goes to show you what we have said is the right business model for an airline going forward is to make sure that you control the balance sheet because you've got to have that dry powder available. And while the next shock is unlikely to be as bad as this one, and granted I said that after the credit crisis as well, so God help us all if it's worse than this. But...

[indiscernible] last one.

Yes. We were on an internal call today. And they said, "Well, this is a 100-year event". And I said, "Honestly, I don't care if it's a 50-year event." If that's a 10-year event, it's a little bit different, but -- well, I think that's a pretty important statement in, I think, how we focus on cash generation and capital allocation going forward is informed about the progress we've made over the last 10 years.

Well, on that point, because there were a bunch of questions coming in here, and I think it ties to your comment on a dollar saved is a dollar not borrowed. So obviously -- and you're talking about capital allocation and where you spend your money. And it's pretty hard to argue that over the past decade, Delta has -- in the midst of deleveraging and building the brand, you've also spent a ton kind of refleeting, getting the clubs where you want them to be and the technology and the user experience where you want it to be. So that kind of brand and image that you've created and product that you created, how do you think about that going forward and the plans that you might have had and you can kind of -- whether it's the fleet or other things that you can keep investing because there's a lot of questions here on kind of CapEx and what you plan to do.

Yes. Well, I think there's 2 broad buckets. Those things that were priorities pre-COVID that have had to shift into a back burner, if you will. And then there's parts of the capital allocation and spending that we wanted to accelerate. So fleet simplification is a great example of that where the progress that we had outlined and the strategy we had outlined at previous investor days, I was talking about reducing the number of aircraft types from 13 to 8 in an effort to reduce complexity across the business. And the problem with that, in a world where we were perpetually growing, was that it was a $30 billion CapEx bill. So we had to spread that out over 10 years to think about what's that trajectory when you balance it against all the capital allocation. But you started by saying, what are the opportunities that COVID presents? That's probably the biggest one because we've been able to sit down multiple aircraft types, the MD-88s, the MD-90s, the 777s, some of the 767s that we had already announced and all in the name of simplifying it. So we reduced the training footprint. We reduced spare parts, tooling, inventory levels, just general complexity in the system. And we don't have to spend the dollars to replace that lift right now. We can spread that out over the recovery, and it actually makes it much more palatable. But I think when all is said and done, we may be able to accelerate that by 50%. We might be able to get all of those savings done within the next 5 years. When you think about big opportunities like that, we're really aimed at what can we do to improve the efficiency of the operation. The customers, I think, were in a great, great position. But we got to put the hold on any new stuff until we understand what the customer wants when he or she comes back because it's going to be different, right? The best example of that is cleanliness, right? The one area of the company where we're spending more money year-over-year is on hygiene, right, and cleaning. So that's going to be important for customers. At the end of the day, even in a vaccinated world, people are going to look at crumbs on the tray table or stickiness on the tray table as a sign that maybe this is not as clean as I thought it was or as clean as it should be. It's a different standard now, but it's one that we've been able to employ these new processes and procedures, and we feel very good about it. And the customers have really responded. Our Net Promoter Score in August was 75. We used to think that 50 was aspirational. So it's pretty evident what customers want right now, but those are going to shift over time. And we need to make sure that we're agile enough to respond to them.