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

Hey, everybody, are we good? Sorry. Hey, everybody, this is Hunter Keay, Wolfe Research. It is 8:30 a.m., 8:35 a.m. Eastern Time, May 25. I'm here with Delta Airlines. Our fireside chat is a 30-minute chat, starts 8:35, and it ends 30 minutes. So I'm here with Glen Hauenstein and Julie Stewart. Glen is the President of Delta, Julie runs Investor Relations. And I'm going to turn it over to Julie for some opening forward-looking statements, and then we're going to turn it over to Glen for some opening remarks.

Thanks, Hunter. Thanks for having us. Just a quick disclaimer. So today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from forward-looking statements. Some of the factors that may cause differences are detailed in our other SEC filings. Glen?

Well, first, I'd like to thank everybody for being here with us today, and I'd like to thank Hunter for doing this in person. This is really great to get back out on the road, and this is actually my first purpose of travel business since the pandemic. And as you see from what I'm about to talk about, it's happening right now as people are getting back to business and people are getting back to travel. So a very exciting time for us to be here, and so we really appreciate you doing this. Just a few comments before we go into questions. And really, first, I think about the pace of demand. We've been very, very pleased with the pace of demand recovery since we talked about it last in April. Bookings have been better than expected. Demand, increasing in business centers, which is good to see a lot of the larger U.S. cities that have been closed down in the pandemic, Boston, New York, San Francisco, Washington, it's good to see them all reopening. And it's good to see the traffic coming back to -- at a very rapid pace. And the other thing that customers are feeling more confident. We see that in their confidence of willing to fly further out in the booking curve. As a matter of fact, when you go further out in the booking curve, the better the restoration is right now. So if you look at July, it's better than June and August is better than July. September is better than August. So people booking further out. And that's caused a significant build in our air traffic liability, which is now growing substantially and mostly back to pre-pandemic levels. As we sit here today, we think that will actually go above pre-pandemic levels because of all the credits that are out there in the marketplace as they unwind over the next several years. May is coming in strong, and we think that June will be even stronger. And so we're thinking we'll be in the upper half of our revenue guide. We guided down 50% to 55%. So the closer we can get to 50%, the better, all working very hard on that. And of course, this quarter included the lifting of the middle seat block. And Delta, of course, was the only carrier that continued. That will end 2021, and we really had 2 parameters that we wanted to check. One is the confidence that the consumer had, and 2 is the rate of vaccinations and case decline. So we thought that May 1, we had postponed that several times and we were willing to postpone it again. But when we got to the March, we thought that May 1 would be a good time, and as it turned out, I think our timing is absolutely spot on, but that within a few weeks of when customers really started returning in earnest. So we're excited about that. And then as we went into May, May is a transition month. We had a significant amount of capacity. As a matter of fact, the capacity between April and June, it's a 64% difference in sellable capacity. So May is about filling the seats up. We set a stretch goal of beating a 75% load factor in the transition from April through to June, and we will exceed that expectation from a 75% domestic load factor on our way to the mid-80s in June. So a lot of progress there. One thing that I'd like to talk about, and I think we'll hit on this segment in a couple of the questions is the strength of the premium products. As you know, Delta has worked on positioning itself as the premium domestic brand. And I think we have been working for many, many years on this. One of the things that we've really worked hard on are the premium products and making them available to not only business customers, but to leisure customers as well. And I think if you had told anybody that we were going to go through this pandemic and it would be a significant reduction in business travel, how would the premium products hold up in this environment, we might have thought there was a little pressure on them. But what has actually happened is that premium products through this have outpaced domestic main cabins. So I think a really interesting and a validation of our premise that as we continue to open the aperture of these products to a wider and wider audience and get -- continue to build allegiance to the products that we get a lot of repeat business. And that our product, our revenue versus the industry actually has peaked pandemic on all leisure, on mostly leisure. So a very interesting side note and one that I think has real implications for recovery as we move through it. Domestic leisure, 100% restored by June with forward bookings above 2019 levels and it has essentially recovered. And we are very, very hopeful that this is the kickoff of in-person meetings for us, but -- and more and more in-person meetings happen. I think it goes without saying that we're all a bit tired of Zoom. And seeing you in person is great, and we look forward to many more meetings as -- particularly as people head back to the office. We at Delta are heading back in the month of June. And so please feel free to come down and visit us. We're open for business, and we'd love to see you all. You have the opportunity to come visit with us. Long-haul international, we've had some really good progress on that. I think -- I don't know if we've talked about that but [indiscernible] now that we have most of Southern Europe open for the summer vacation season. And we're expecting that more countries will open here in the next few weeks. Unfortunately, they're all with slightly different protocols. So that puts a lot of burden on the airports and on our customers and making sure that our customers know what's going to be required them when they get there. It's also one of the key things we're going to have to work on through the rest of the summer and into the fall. And I'll just close with saying that I think that we are in a great position here. The investments we've made, they've continued, the improvement of the products and services we had to the end of this section of the pandemic are going to really pay off for us. We believe that our Net Promoter Scores have never been higher. Our affinity to the brand has never been higher. And that is something that we're going to continue to work on as we get to the end of the pandemic here. It is continuing to differentiate the Delta brand. And we're very, very pleased that we won the coveted J.D. Power award, which is on display now, and we're happy to show that to you when you come visit us in Atlanta. We're very, very proud of that, just another proof point that we are differentiating our products and services. So with that, I'll turn it over to you for some questions.

That's great. I appreciate that. That's very thorough, very clear. You just mentioned that your demand for your premium products outpaced demand for main cabin. Can you give us some more color on that? Are you talking about sort of post-purchase upsells? Are you talking about just point-of-sale Comfort+, the lie flats? So give me some color on what you mean by the premiums.

So it's the premium cabins, and so the premium cabins are everything above main cabin. What we see is a recovery in those that it's running 10 points ahead of main cabin recovery. So if our main cabin unit revenues are 75% restored, our premium products will be 85% restored. So that, to us, is a real proof point that our hypothesis that there is demand for premium products from a broader perspective and just traditional business of customers, it's valid.

So do we know that, that's not just a timing issue with the unblocking of the middle seats? Is this sustainable? Is it possible someone came to Delta, assuming there was going to be middle seats box, saw there weren't and they just bought up to Comfort+ or something like that?

Oh, no, this has been through the entire pandemic even with the middle seats blocked. So I think that this is not a 1-month phenomenon, not a 1-week phenomenon, but a lengthy trend that's continued through the entire pandemic and even forward-looking into the summer. So I think when you think about the industry, if you think about everybody focused or a lot of the industry focused on providing the lowest price, we're really focused on providing the best value. And when you look at even the categories in J.D. Power is that value, as perceived, is actually higher for us than it is for many of the ULCCs despite the fact that our average fares are significantly above theirs. So that's the piece that we feel has been underappreciated by a lot of our competition and our investors is that this is really about providing the best value to customers. And we compete very well with United and American. But really, what we're competing for is a higher share of our own customers' wallet. And that's where our game is being focused in on.

You defined value a few years ago. You said value doesn't mean getting the lowest price. You said it was -- what was -- how did you define it again? It was -- I forgot what you said.

Getting the product you wanted at the price you want to pay.

That's right. So that hasn't really changed. This COVID just sort of amplified.

I think when you think about adding back business as we get to the fall, not to get too far into the weeds here, but I will. The business customer has the hardest time buying our products and services because a lot of the distribution -- redistributors of our product, particularly the OBTs, have not made those investments to be able to display products, multiple products. So they're still getting the lowest fare. Maybe they exclude basic economy, they kind of program that in. But -- and so we've been encouraging our redistributors to provide that entire value spectrum to the end user. And I think our Sabre deal was -- a part of that is to try and get -- to get the value chain aligned, right? And that's something we've worked on with customers when we were the first carrier way back when to go to a dollar-based frequent flyer accrual. And because it was misaligned, right, is what did you want to do? I wanted to pay the lowest fare and get the most miles. And so aligning that went well. Now aligning the redistribution of our product, and we have a lot of agreements coming up in the next couple of years. And I imagine that, that will be one of our big focuses, is to make sure that the consumer, whether you're business or leisure, are getting to see the full array of products and services and what gets you best.

So before I get to that Sabre deal, which I think I want to spend some time on that, back to this concept of there's better appetite for premium products amongst leisure travelers and how you got paid for blocking those seats during COVID, how do those 2 things together inform future decisions on [indiscernible] on aircraft layout going forward? Are we going to see seats a little bit more spaced out? Are we going to see a greater mix of Comfort+ products in the cabins? Are we going to see any interior reconfiguration programs?

I think we have a very long-term strategy in our fleet, which is really based on 2 things. One is simplicity. And post the Northwest merger, we inherited one of the most complex fleets in the industry with one of everything ever built, and getting to streamline that and all the hidden costs that come out, including lead times, training [ letters ]. So that's one of them. And the other is the continued upgauge of the airline. And the upgauge provides really that opportunity to continue to provide more premium products into the marketplace. And that's one that I think we got ahead, and we're going to stay ahead. We see a lot of our competitors talking about the upgauged strategies they have now. But I'd say we're 5 to 7 years ahead of them on average. And we're continuing to -- if you look at where our fleets will be, we're continuing to widen the lead in terms of having generally larger airplanes with improved cost structure and more premium products in general. That's the direction we're heading.

Okay. So on the Sabre agreement, it is a full content agreement. So the travel agency community still has -- they have full access to your higher suite of inventory if they want it. But the point is that Sabre, you or Sabre and Sabre's TMCs to consent these TMCs to sell more premium products. I know this is all in a specific contract, but what are the mechanics of that? Well, how do I, as a travel agency, actually have...

Generally, there are low-margin products. Those would be the basic economy and some of the main cabin products and then the higher-margin with Comfort+, [ domestic first ] and Delta One. And prior to this, everything was treated the same, although the value to the airline and the margins was not the same. And so trying to align that to incentivize people to sell off into the more premium cabins where margins are larger was really driving force behind that agreement. I think we applaud Sabre and we applaud a lot of the people who have worked in the distribution system to try and get those products redistributed this fall. But if you go back to the commoditization of the airline, which was epitomized by the old screens of Orbitz or Travelocity, where it would align all the carriers and the only feature you would see was price. That is -- we knew if that was the direction we were heading, we were ultimately going to lose. So we had to come up with a strategy that said, show people different products and let them select into what they want to buy. And it sounds really simple, and it is a really simple concept. Unfortunately, the entire airline aviation distribution infrastructure was not geared to do that. So it's been a journey we've been on, and it's a journey that continues. But every renewing contract of a distributor, this is kind of the direction we need to hit. We're willing to pay you if you have a good margin on the products and services you're selling. For the lower-margin products, they need to [ return ] back to the lowest cost of distribution.

So it's Delta is going to pay a little more on the commission side. And the GDS might also change their payment structure to the TMC in addition to that. So therefore, it's all going to come back to TMC. I guess the question is, I always thought this should've happened 5, 10 years ago. It took a pandemic, obviously. But the TMCs are very -- they don't like change. They like things that the way that they are.

I think they -- I actually think it's different. I think they like change, and they are putting a lot of pressure on their online booking tool providers to change so that they can see what products and services are different. I think that the average agent does not like putting their customer in a product that they know they can do better than. But that's all they see, right? So I think there's actually a lot of pressure from the agencies. There's a lot of project -- pressure from the airlines. It's that middle person, the systems, particularly the online booking tools, that preference airlines based on their agreements.

When will we know if this works? When is this going to be rolled out?

Well, I think it's working, right?

But has the infrastructure already been changed...

No, but I think it's working in other ways, other places we have that structure placed already. So we've seen that these are reinforcements of a long-term goal and a long-term strategy. This is the first big GDS we've done, and I'm sure we'll migrate all of them in time.

Okay. Here's a question from the audience. It's related. Are premium products in demand because of the pandemic. Consumers also seem to be flush with cash right now, question mark.

Yes. I think we have several proof points on that. Let's say, going back to the middle seat was open. People were buying out of that gap, right? So it was more than just. I think when you think about the value distribution -- and one thing I don't know if anybody has talked about is the change of no change fees, right? And one reason, if we look at why people maybe didn't want to fly Delta, who chose somebody else because they thought the change fees were onerous. Taking that away, taking those and getting more in tune with what customers really want is key to our success in the future. So what we know is customers really want to buy domestic first-class in a wider aperture than currently it does today because a lot of them still don't see it. And they don't see the value. Certainly, if it's $20,000 to sit in first class, they see no value. But if they're paying $500 per coach and $700 for first class, I think they can justify, in their mind, that differential. And I think that's where we have to get inside the mind of the consumer and produce products and prices -- price points that get customers to buy it. We're like a giant fisherman, right? And we're fishing in these fields of revenue pools. And we fish against our competitors, which were those other ships that were out there. But what we really needed to do is get inside the minds of the fish and figure out where they were going, where they wanted to swim. Bad analogy, but really, our customer base is -- that's who we're competing against. And we really want to be able to provide them more and more value because the more value we can provide to them, the more they become loyal to Delta, the more they stay in our system.

Right. But one of the reasons why customers don't trust airlines is because pricing changes so much. When you sit next to somebody in the plane, don't ask the person actually what they paid for their ticket. So until that changes, would you admit that the trust is never really going to be there until people feel like the airline is trying to squeeze every last dollar out of them on every dynamically priced ticket?

So Hunter, that is such a great question and I think one that we've been really, really working hard on and one that I think has alluded the industry for many, many years. And again, I don't think it's a revolution. We've seen people try, including Delta, back with simpler fares to make a revolution of trying to lower the high-end ticket prices. They brought the bottom up and the top down. And whether or not you -- where we need to be, which I would say, we're probably not anywhere near yet. But on the margin, we have been actively managing, and it's a journey. It's a journey to see because what our -- the traditional revenue management systems will do is that we'll say, oh, I got somebody who bought me -- who bought that ticket for $900. Let's see if I can get them to pay $1,000, let's see. But those algorithms don't have in them trust. It's a transaction, and it's not a trust. So we have -- when we rethought the change fee, what we didn't want to do is we didn't want to have really onerous changes in the fare structure itself because you get rid of the change fee, and you replace it with what we call shop current, which is whatever the price is in the marketplace today. So you're a leisure customer who booked 21 days out, and all you're eligible to do now is to buy a business fare. And we're working it. It's a slow journey on the convergence of the high and the low. And the low has to probably come up a bit, not a lot. And the high has to come down substantially. But it's market by market, day-by-day and research that we're doing, because we know that is the place that we will fall down on trust if we do not provide ultimately a good value to customers. Okay, I want to stay an extra day. Well, good news is there's no change fee. The bad news is the fare differential is $1,000. So we are working on that, and we're working on how do we bring that all in. It takes courage. But I think if you freeze it as an evolution as opposed to a revolution, it takes less courage. Not that we're not courageous, but we need to learn that there were actually people who wanted to buy those tickets. And I think we've only seen the demand saying, okay, on the $1,100 fare, walk-up fare between Atlanta and LaGuardia, oh, how many walk-ups would we have if that fare was $800, $900? We're experimenting with that every day.

No, that's great. It brings some stability to pricing.

Absolutely.

Transfer some sort of -- when you call it -- you talked about reference pricing, which is I don't know what something should cost, but I know that, that seems fair. And just knowing this is what the [indiscernible] from San Diego to L.A., every Thursday, it should be about $96, something like that, plus or minus. Okay. [indiscernible] How many lounges did you guys operate before COVID? And how many you're going to operate in [ 2021 ]?

Yes. We operated 53 lounges pre-COVID. Next month, we will operate 53 lounges. And we are looking to continue to expand the lounge offering. We think that, in combination with the loyalty card, which is a big driver for that, it's lounge access. And looking at cities that Delta provides -- business cities that Delta provides a vast array of services that can cover the entire country very well. And we don't have a club, and there's a couple of handful of those that, over the next 5 to 10 years, we think we get to.

Okay. What -- your new CFO, Dan, was it Janki? What should we know about him?

Dan is a consummate professional. He's been at GE -- he's been there for years. He's worked on some of their most difficult transformations, and I think Dan is going to bring an amazing talent set to Delta. And I know our entire company is excited to welcome him. I know the finance team is very excited to welcome him, and we think he's going to be a great addition.

Okay. But I -- is there anything that we need to know about this Mexican space as it relates to partnership with Aeromexico bookings in your channel?

Well, bookings, we're not going to be able to put our code on Aeromexico but we should still -- we'll offer those connections. The first thing I want everybody to know is we believe Aeromexico is incredibly safe, and this is not about Aeromexico. This is about the Mexican version of the FAA and about having some of the right protocols in place. So for us, it's always safety first. We have no issues with the safety of Aeromexico itself. And so we will be forced to remove our codes on the Aeromexico flights. They can continue to code on Delta. And we will make sure that if you're flying on an Aeromexico flight that would have normally carried a code, you will be held harmless in terms of your mileage goal. So if you're flying at Aeromexico at the transborder, you will continue to be able to receive Skymiles. So really, it's very little impact to our customers' booking through -- between Delta, you can go to beyond Mexico City. So I think what it does do, it restricts Aeromexico's ability to grow into the United States. Hopefully, we can get this accomplished. I think last time this happened it was back about 10 years, and it lasted about 6 months.

Okay. Sort of back to the distribution side for a second. Do you know what percentage -- I think Delta usually had about 50% of your bookings [ from dot com ]. Do you know what percentage of those were business travelers that kind of went [ rogue ] and just booked direct on your website outside of their corporate booking tool?

Right. I couldn't give you that exactly. I think one of the things we need to continue to work on is options, options in distribution. And delta.com for business is something that we're continuing to work hard on to -- for small and medium-sized enterprises and really, for customers who might want to use that because they can't get in contact with their agency, they want to make sure they're adhering to protocol. So I think we've got a lot of work to do there. A lot of opportunity to continue to provide best-in-class tools at delta.com or use whatever your preferred distribution system is.

Okay. So one of the things I wonder about is are employers going to mandate their corporate travelers book through GDS channels going forward as it relates to not only duty of care, but also just CFOs just tracking ROI on business travel spend.

Well, they try -- I mean, that's been the case pre COVID. They tried. And I think they have very good compliance at the major corporations. Small and medium-sized enterprise, another underappreciated, is actually slightly bigger than contract and corporate. So...

Interesting, okay. All right.

And that's real area of opportunity.

I've got one other from the audience here. Will Delta shift capacity to Europe as things reopen or is it too late in the summer booking curve?

Well, we have. We've added things like Dubrovnik because it was open in Croatia. We've added the highest level of capacity to Greece that we've had in recent history with Atlanta, [ Doubleday lane ] JFK. And as Rome opened earlier in the process, we'll have a very robust service into Italy for summer. And what we think is that Europe will continue to open. And so that will push -- peak your travel, which is usually, June, July, August, more into the September, October shoulder season. So I think you'd see it continue to build up. October is usually actually one of the better months for travel to Europe. It's -- if you haven't been, it's a great time to go to Europe. So we'll get a little sell in there. And we think most of Europe will be open for fall travel. So who doesn't want to spend a nice October weekend in Paris or in London? So hopefully, that will continue to open. We will reallocate airplanes. Or take them out of the deserts and start putting them to Europe, that's if demand warrants. And we are expecting that probably September and October will be the best months for Europe this season.

We have 1 more minute, and I want ask you 2 more questions. How are you going to manage -- I don't believe you've made a decision on status for 2022 yet for you. You have a lot of [indiscernible] you might be using your status at the end of this year. I obviously don't want you to get ahead yourself or anything but when do you have to think about making a decision?

We have many, many programs in place right now to earn status on Delta. We have many bonus offers. We have extensions, and I think we are believing that the pieces we have in place will get us to a status level that's roughly the size we were pre pandemic. And if not, we will continue to adjust to make sure that we're taking care of our customers, and make sure that we're making it easy to maintain status since we're in, really, the most difficult time in our history to maintain status. I think we feel pretty comfortable where the offers we have in place today. If not, we can bring even more exciting offers into the market. But I think it's been very well received. We're getting record Net Promoter Score in the program. And we continue to be excited about the future of the program. You didn't ask me one question about American Express card.

I was -- actually, a really good question I wanted to ask you, and we're out of time. I was going to ask you about Wheels Up. I was going to ask, you bet, a bunch of stuff I wanted to talk about, but that time just flew by. But I do want to ask you one more question I'm going to ask every airline. On a scale of 1 to 10, how concerned are you guys about cost inflation as you think about the next couple of years? Just general cost inflation, on a scale of 1 to 10?

Yes. I think maybe a 5.

Yes. That answer can be oil, it can be tight job market, it can be...

It is a tight job market, but not for the direct airline employment. The direct airline itself, our wages are pretty high, and we're able to have a really steady stream of people who want to come and work at Delta. But for some of the service providers, I think we've already seen catering kitchens, wheelchair pushers, all those things that are subcontracted out, that labor market is quite tight already. And we've seen some inflation in there. So -- but it doesn't represent a huge chunk of our total cost spend. So I think that's why I wouldn't rate it higher than a 5 is that we already have some pretty high wage rates throughout the airline business.

All right. Well, we're out of time. Sorry about American Express, but I'll ask you in July.

I look forward to it. Thank you, everybody.

Thank you, guys. Appreciate it.