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

Good morning, everyone. Welcome to the Morgan Stanley Life After COVID Conference and this track, which is called working and consuming outside the home. For those who don't know me, I'm Ravi Shanker, Morgan Stanley's transportation and airlines analyst. And we're very excited to kick off this session with Delta Airlines and Bill Lentsch, a Chief Customer Experience Officer. Bill, welcome to the conference.

Good to be with you, Ravi, and with all of you else.

Thanks so much. So before we kick off the fireside chat, a couple of standard things for me to check off. First, I need to point out that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This 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/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And also to the audience, if you have any questions for Bill, please submit your questions via the webcast, and I can pass them on.

And with that, Bill, obviously, very, very interesting times, especially with kind of big news developments in the last 24 to 48 years. Maybe kind of before we kick off some of the thematic discussion, may be you can just start with a little bit of a news update. Obviously, the headline yesterday on the COVID vaccine that is potentially being out there, being pretty much more successful than people thought with the time to market. What are your views on that? Kind of how does this track relative to your expectations? And where do you think we go from there?

Thanks again for having me, Ravi. And the news yesterday certainly was welcome news. But I would not say that it was unexpected. We, of course, know and have been tracking very closely the status of all of the vaccine trials and recognize that by end of the year -- we would recognize that by end of the year, we would have a couple of successful vaccines, but there's a whole another problem that we have to solve yet, and that ultimately is the distribution of the vaccine because it's not good just to have the science completed. We need to ultimately distribute and make sure that the vaccine gets out to the general population. So it's good news for us. We view it as just one more layer of protection in the system that we have built over the last 9 months, which puts in multiple layers of protection. For our customers, whether they're in our airports or onboard our airplanes and minimizes even further the probability of transmission of the virus. So we're not going to be giving up on masks anytime soon. We anticipate that the cleaning activities that we have engaged in are going to go forever. That's our commitment. They are going to go forever. We've got social distancing practices in our facilities, on our jet bridges, on our airplanes that are going to stay in place for some time until it's safe to lift those. We're replacing air filtration filters on a very frequent basis, twice as often as the manufacturer recommends. So this whole system and all of these layers that we have put together are just fortified even further by a vaccine that we hope gets distributed and has been provided in mass to the U.S. population sometime by summer of next year.

Got it. Understood. So maybe kind of just following on from that discussion from the response of yours. I admit that we've gone from being an extreme frequent flyer to not having airplanes since early March, my bad, I'll go get on the plane soon, I promise. So maybe if you can just update me and maybe some of the audience that hasn't been in a plane for a few months. What does that experience like today? A, from a financial standpoint, kind of what is that costing you? What further changes do you expect to make and maybe how much of these changes are permanent versus temporary? I mean, you just kind of allude to the fact that some of these are permanent, but just maybe we can go in a little more detail there?

Sure. Well, I welcome you to come back any time that you want. We have built what we think is the cleanest public environment that you will find anywhere and the recent Harvard study indicates as much. But the experience -- I've been traveling throughout COVID. I live in Minneapolis, but I work in Atlanta, and I have been traveling weekly throughout COVID. And yes, there are fewer people traveling at the moment. There's more space on board the airplane, both seating space because we're leaving that middle seat blocked. And we're going to do that through the sixth of January. And as we get closer, we're going to evaluate. When you walk into the lobby, you'll see plexiglass in front of our agents. You'll see social distancing markers on the floor. We worked very closely with the TSA to make sure that they have social distance practices in place. We're sharing our cleaning protocols, both the supplies that we are using as well as the technology that we have deployed. So we partnered with the TSA. We partnered with CBP. You see social distancing going on in Sky Clubs, in our clubs, out of the gate area, down jet bridges, on board the airplane, again with the middle seat block. A limited catering offering. We've partnered with the Mayo Clinic through all of this and one of the things that they have guided us on very regularly is minimizing the amount of mask downtime on board an airplane. And that's generally driven by someone wanting to drink or eat and so we have minimized the amount of food and beverage that we are offering. We are -- that not only keeps the mask up, but it also minimizes the contact points between our flight attendants and our customers. So frankly, if you're comfortable wearing a mask and if you're not looking for a lot of food on board the airplane, I know I'm a bit biased here, but I would share with you that the experience is better than it used to be. And one of our commitments as we go through this is we're going to come out of this better. Wearing a mask has become very comfortable for me. I just plan what I -- where my hunger is and manage accordingly before I get on board the airplane. But the process through the TSA, the experience in our Sky Clubs, the experience at the gate and on the airplane, it is very clean. It's very comfortable. I feel confident being on board the airplane today, more so than I ever did because of all of the actions that we have taken to make it a very safe environment. So what stays and what doesn't stay? We'll eventually bring back catering at the right time when it is safe to do so. But things like the cleaning standard that we have developed -- I've created a new organization under me called Global Cleanliness. It's led by a 32-year veteran of the airline who understands operations and the cleaning processes. He's a vice president. He's building out a staff below him, in fact, is nearly complete building on the staff, and they have the primary function and focus of cleaning our facilities and our aircraft. And that group is not going to go away. They continue to innovate around cleaning solutions, cleaning technologies, cleaning processes. So what we have established as the standard of cleanliness, which we believe is the standard, it's the gold standard. What we have established is here to stay. The fleet changes that we have made. We are going to retire 200 aircraft this year, another 200 by 2025. Those fleet changes are permanent to drive a more modern, efficient, consistent experience for our customers. And then the other thing that I would share that is not going to change is -- and we couldn't if we want it, quite frankly, is the facilities work that we're doing. We have taken advantage of this opportunity to accelerate, bring forward the future when it comes to facilities in our fleet. And so the build-out we're doing in L.A., what we just opened as a new terminal in Salt Lake City, the work we're doing in LaGuardia. We've got facilities work going on in the lobby in the baggage claim area in Minneapolis, modernization work in Atlanta. All of that has been accelerated. Taking advantage of this customer downtime, I would call it, and doing what we can to pull forward by, in some cases, a couple of years, the completion of those projects. So that when the customers do come back in good numbers, they'll have an opportunity to experience the goodness of that work for a longer period of time. So we've got -- a good amount of this is a permanent change in our mind. But food and beverage, that's one area where we will eventually, at the right time, grow back the product.

Got it. I mean, definitely now this is something I need to experience for myself, which hopefully happens before the end of the year. Maybe kind of switching gears a little bit. I mean, Delta, obviously takes customer loyalty very seriously, probably more so than any other airline. How do you cultivate that, kind of what dividends do you expect that to play for you in an environment like this? And kind of where do you go from here? And kind of how much more is there left to unlock from your SkyMiles members?

Well, I would -- let me take a step back and just share with you that our very, very clear focus through all of this work that we've done in the past 9 months. And quite frankly, it's always been there, and it will always be there, but it has been particularly on display now is that people come before profits. And when I say people, I'm talking customers and employees. And one of the things that we have been very keen about over the last 9 months is making sure that we are listening to what it is the customer wants. Yes, they want clean airplanes, clean and sanitized airplanes. Yes, they want the space, they want the social distancing. They want all of the appropriate protocols for safety and they're well-being put in place. But there are also other parts of the experience that they share with us. We've spent an ordinate amount of time, the right amount of time, I should say, over the last 9 months, engaging with our corporate customers with their travel managers, with their C-suite leaders, understanding what it is that they are looking for from us. The experience in a lobby in our clubs, at the gates, on board the airplane, and we are making adjustments. So the voice of the customer has never been so important as it is now. It's always important, but particularly now because expectations have changed. So this, I believe, builds a whole lot of loyalty is just spending the time with the customer whether it's through survey, focus groups, getting out and meeting with them at the airports. We've had over 400 corporate customer visits to our airports and we've walked their key people, their decision-makers through all of the protocols that we have laid out. In fact, many cases, we've allowed them to use the electrostatic spraying devices that we use before every departure, right? So for them, there's nothing cooler than walking on board the airplane and having an opportunity to do what our cleaning staff does and see how all of this works. So just engaging them -- I mean, the loyalty program, that in and of itself, will always be important. We want to be able to offer the choices that our customers want. We want to be able to build a network that is convenient for them. All of that really important. But just engaging them in the process, helping them design what it is that we are going to build our network and our product around is keenly important to them and really engages them. And I would share with you that through all of this. And we're seeing a different mix of customer today than we've seen in the past. It's more leisure than it is business. Of course, it's nearly all domestic versus international, given the restrictions that we have. But what we have done to engage and deal with the customer needs has driven Net Promoter Scores to a level that we've never seen before. And last year at this time, we were running -- on the domestic side, we're running Net Promoter scores in the 50% range. We just finished the month of October with our fourth straight month in the mid-70s. And we're off to a similar start in the month of November. So I think they're sharing with us through that feedback that they like our focus on them, that we're listening to them and that we're delivering what's important to them right now. It will be different down the road when this virus becomes much less of a threat or becomes a nonthreat. Right now, they have unique needs and we're listening, and that's really engaging them and holding them close to the Delta brand.

Got it. Let's talk about the corporate versus leisure topic a little bit more. You may have seen that we published our latest corporate travel manager survey late last week. The bad news is that corporate travel managers expect their corporate travel budgets to be down another 8% year-over-year next year. The good news is that only 3% of them said that their travel plans for next year are actually firmed up. And 80% of them said that they're most likely to revise their plans once we get a broad availability of a vaccine. So clearly, a lot still up in the air. You kind of spoke about how you are convincing corporate travel managers that Delta as a safe airline. It's a good experience. But what are they telling you on the demand side, there's been a lot of talk about permanent loss of business customers and business travel? What are your views on this? How much do you think could be a permanent loss versus not? And if there is a permanent loss of business travel, what differences does Delta need to make in terms of how you operate the airline and the consumer -- the customer experience, if you are going to be more of a leisure-focused airline than you have in the past?

Yes. Well, first, I would say all of our customers are important to us, both the leisure and the business traveler. But of course, we've built our brand, our product, our airline with a focus on the business traveler. And do we expect that there is some long-term behavioral change there? Likely. Don't know how much there is. Certainly, there's a good amount of near-term behavioral change, and you just mentioned some of the statistics there, Ravi. But in our conversations that we're having with our corporate customers, and I've been on -- we've done these tours at airports where we walk them through and show them the product and how we service our facilities and our aircraft. Additionally, we have regular calls with our key corporate accounts, and I participate in many of those. And what I hear from them is, first of all, roughly 90% of them are booking and have booked over the last 4 to 6 weeks. However, they're not booking in the numbers that they have in the past. It's been real essential travel. But the sense that I get and what they share with me without a whole lot of specificity is, at the turn of the year, if we start seeing office openings and if we start seeing businesses, welcoming visitors, that they do anticipate to follow-on and start generating some additional travel out of their respective organizations. I've heard from them that they are not concerned in any way about the safety on board the airplane, the safety in the airport. I think we have done an awful lot of communication. We've had independent studies that support that. I don't think that's their issue at all. Their issue really is, is there something to travel to other than just the really essential stuff. And if there is and if I feel comfortable going, and of course, all of these safety protocols, including the vaccine, will stimulate some of that. I think they are ready to shift. They've indicated that there is -- and I don't know if they're just trying to -- if they're just trying to appease me or what it is, but they have indicated that there is some pent-up demand to get out in front of the customer. Their spirit, the human spirit is all about engaging personally rather than the way we're doing it here. And they want to do more of that. So we are hopeful. We're cautiously optimistic that with progress along the vaccine route as well as just continuing education about all the things that we are doing to keep them safe, that we can start to spring some further demand, stimulate some further business travel demand in the first quarter, maybe early second quarter next year.

Got it. I wanted to shift gear a little bit and maybe move away from specifically COVID as a topic and maybe talk about the broader customer experience and how that's likely to change in the coming years. So kind of maybe you can indulge me with a little bit of analogy kind of when I look back on the history of AirTran, right, you look at the golden days, like all the black and white video, it -- over the last several decades, it's been this real luxury experience, like going to the met gallery or something. It's been champagne and caviar and all that stuff. The good news is that over the last several decades, it has become more of a mass-market experience and that it has become more accessible to general public. But at the same time, maybe some of that experience has also kind of gone away from that ultra-luxury to be more of a mass-market experience. And I'd say the last 5 years, in particular, and kind of is my own example as a frequent flyer, I feel like the experience on the front of the plane has become very, very, very good. The experience in the back of the plan maybe not so good. So, a, would you agree with that characterization broadly And b, kind of where do you think that customer experience looks like 5 years from now both in the front of the plane and the back of the plane?

Yes. It's interesting that you bring up the glory days of travel with all the luxury. Just over the weekend, I had a good friend send me a photo via text messaging of Northwest Airlines' stratocruiser that had an organ on it, and it showed -- it was a picture of a woman playing an organ in front of the customers. Those days are gone, of course. I mean, I told them that's difficult on fuel burn and seat density. So that's just not a very good proposition.

I don't think the FAA would love having an organ.

No. No, that's just not going to work anymore. But I would tell -- I'm not sure that I necessarily agree with the position that everything has been focused on the front of the airplane and not the back. We have made investments in the Main Cabin experience. I'll give you some examples. We have provided free WiFi messaging, provided free entertainment to the Main Cabin. We've offered upgraded snacks. And in fact, one of the most significant product changes that we've made in the last 30 years, happened in the Main Cabin on our international product. It was the international Main Cabin redesign, the food and beverage service in the back. So offering a welcome drink, offering a warm towel and then providing bistro-style service, food service to the customers in Main Cabin. It was very well received. It was not only by our customers, by the way, but by our flight attendants. They really felt like that gave them an opportunity to engage in a much more genuine and warm way with the customers. They weren't doing the mad scramble around the cabin. They were able to be out and offering that service. Now understand some of these services, to some degree, have had to be -- had to be discontinued during this period of time. But that was a product that we tested on over 1,500 flights between Portland -- West Coast, Portland and Seattle over to Asia before we finally rolled it out. It was the most tested, most -- we provided -- or engaged in the most consumer research that we had ever done on a significant service offering and again, very well received. So we continue to invest in the Main Cabin product, just as we do in the forward cabin. And we have not given up, and in fact, we continue to stay very focused even today on our commitment to get WiFi to free. And that's not going to be cabin specific. That's going to be on board the airplane. So we're evaluating the technology, the equipage on the airplane. And when we get to free WiFi and we get the level of stability that we need with the technology, it's going to unleash a whole new level of opportunity for us. Basically, we call it -- we refer to it as the connected cabin, where you'll be able to get your Netflix account on board. You'll be able to communicate with the flight attendants for your personal electronic device. There is a whole host of connectivity that we are evaluating, but it depends on getting this baseline technology shored up, and that's what we're doing today even during COVID.

Again, what's the timeline on that?