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

All right. Good morning, everyone. This is Dave Vernon with Bernstein covering airlines and transports. Welcome to Day 2 of our 37th Annual Strategic Decision Conference. We are delighted to be joined by Ed Bastian and Julie Stewart from Delta, CEO and IR, respectively. We are going to spend most of our time in Q&A. Ed's just going to kick us off with some prepared remarks. Julie is going to build a little intro before that. As we're going through the conversation, if you want to ask a question on your screen, you should see a button that says "Ask a Question". That will go into the system. We'll be able to see here, we'll be able to add those points into the conversation. With that, I will hand the mic and the podium over to Ed. And welcome, everyone, at the conference.

Thanks, Dave. I'll give a quick, quick disclaimer here. We filed an updated 8-K this morning with investor presentation and updated June quarter outlook. Today's discussion contains forward-looking statements that represent our expectations about future events. All forward-looking statements involve risks that could cause actual results to differ materially from forward-looking statements and those risks are described in Delta's SEC filings on ir.delta.com. Over to you, Ed.

Well thanks, Julie. And Dave, thanks for having us. Good to be with you. Hopefully, everyone is getting ready to enjoy summer. Certainly, that's what we're seeing in our business. The U.S. consumer is leading the return of our air travel business, and I could not be happier with what we're seeing happening as our business really is into a full-fledged recovery mode. Hopefully, this also will be the last virtual conference that we need to do. We started to do most of our conferences and investor meetings in person, and I think that's going to be a sign of the times, that we're getting back and reclaiming our lives. And when you think about all we've been through, it's only been 15 months. It seems a heck lot longer than 15 months, it's probably many more in human years than actual fiscal years. But getting people to return back to life, reclaim their experiences, is what we're doing here at Delta. I could not be happier, again, with what I'm seeing with the recovery. Our Memorial Day volumes were very strong. We ran a load factor domestically in the mid-80s and carried nearly 3 million customers over the 7-day Memorial Day period. So it was a great start to the summer, and our team ran a very, very solid operation. With better-than-expected results in demand in May and June, we've also updated our guidance, which Julie mentioned is in the 8-K. We now expect to be at the top end of our revenue guidance, down roughly 50% to 2019, representing about $6 billion -- a little over $6 billion in revenue generation. For us, that represents a double from revenue from just the first to the second quarter. First quarter revenues were in the $3 billion range, we're expecting a $6 billion range. So just massive volumes starting to show up. As I mentioned earlier, it's being led by the U.S. consumer. Domestic leisure is expected in June to be more than 100% recovered. And our digital booking volumes are also more than 100% recovered to 2019 levels, which indicates that demand for travel is going to continue to accelerate from this point. We're seeing nice improvement in yields, as you could appreciate, now that our load factors are up. Delta was the last airline to block the middle seats. We're blocking the middle seats right through the end of April. And we went from load factors that we were averaging in April to 50% up to the Memorial Day holiday, which was in excess of 80%. And when you have that level of volume, you can appreciate there's some choppiness in the pricing environment in the very short term. What we're already seeing in the month of June, some nice improvements in yield as well as a 25-point load factor increase if we took the March month compared to where we expect to be in the June month. The corporate travel is improving. Still not where it needs to be by any means. But domestically, we're at about a 30% recovery level. But every week, it gets stronger and stronger. And anecdotally, from the many CEOs and business leaders I talk to, people are just, they're ready to go and they are starting to move. The large part, this is going to be initiated by the reopening of businesses. I'd expect over the course of the next few months, certainly by Labor Day, no later than, we're going to see corporate America open for business. And as the businesses are reopening, travelers -- corporate travelers are getting back to doing what they do, which is driving their business, being out, making connections and continuing to lead their businesses forward. For Delta, for example, we are fully open now this month of June. And many, many companies here in the Southeast are already back to volumes, back to 2019 levels. On the cash front, cash is also quite strong. We're seeing, in the current month of May and June, revenues that are coming in, cash revenues that are coming in roughly 25% higher than where we had originally forecast at the start of the quarter. June month, daily cash sales system-wide are 60% recovered to the 2019 level. And we expect to be solidly cash-positive in the June quarter, even ahead of the $4 million per day that we saw in the month of March. So on the cash front, we're also doing well and our cash reserves are in good shape. On the cost front, there have been some noise and friction. Fuel, as everyone can appreciate, is starting to move, and that's moved up over the course of the quarter. So we've seen some pressure on fuel as well as RINs for our refinery at Monroe. And we expect to be also at the upper end of the guidance range on our nonfuel cost, primarily due to a decision we made last month to reward our employees for the great job they did as we won the J.D. Power award for Best Airline in North America. We awarded all of our employees 2 positive space travel tickets, anywhere they want to fly. And that, unfortunately, accounts as a cost in our bookkeeping. And that's about 1 point to 1.5 points of pressure in the quarter that we were not -- we're happy to receive, but we weren't anticipating. So absent that, we're right in the midpoint of guidance on the quarter. So I feel good where we are in cost. And that all adds up to our June quarter coming in at expected pretax loss in the $1 billion range. But we do expect to be solidly profitable at the pretax level in the month of June. And we also expect to be profitable in the back half of this year. So inflecting to profitability just 15 months through the worst crisis in this industry's history, I think, is a pretty impressive statement about the resiliency of the business that we have created and the great work of our people. And we look forward to continuing to grow from here. Very, very quickly, and I'm not going to go through the charts. But when you look at the strategies and the key areas that underpin our positioning in the recovery, it's probably best captured on Slide #5. Very focused on leveraging our brand loyalty. The health of our brand has come through this crisis stronger than ever due to the great work of our people and how we took care of our customers during the crisis. We're seeing that recognized in the highest-ever Net Promoter Scores, customer satisfaction scores, as well as the recent award of the J.D. Power Best Airline award in North America. Interestingly, during the quarter when the crisis began, people were concerned as to what that might mean to our premium strategy. Delta, we are a premium airline. We get paid for delivering premium product and premium service. And in a consumer-led, leisure-led recovery, it was unclear in many people's eyes how our strategy was going to hold up. And fortunately, that's held up quite well, and we anticipated it was going to hold up well. People are paying for quality and they're paying for premium, and our premium products have outperformed our main cabin in both yield and load factor improvements by 10 points. So it's good to see the product segmentation strategy and our ability to maintain the revenue premium to the industry continuing to click in and confirmed during the crisis, which we think, again, will only be stronger as we go with corporates starting to return back to the business. And we're also monetizing that strength through our great partnership and loyalty program with American Express. Our American Express co-brand, which is the most powerful card on the American Express platform, the spend level is already back and starting to exceed levels in 2019 already. So customers are opting to use the Delta card. They believe travel is going to be an important part of their future experience. And while they may not be traveling at the present time as much, they're putting all their points into future travel, and that's great to see as well. On the balance sheet, we are actively working on the restoration of our balance sheet. Since the end of the June quarter, we've reduced our financial obligations by nearly $11 billion through a combination of paying down debt as well as accelerating pension funding earlier this quarter. And we're in the process now of evaluating additional opportunities for debt reduction and committed to getting back to investment-grade metrics over the short to medium term. Importantly, on our pension plan, we have fully funded the pension plan with a last contribution that we're making this month of roughly $500 million, so $1.5 billion that we contributed within the quarter. And with that contribution, we are basically done, and we don't expect to make any additional contributions, period, to the pension plan into perpetuity. So when you think about coming through the pandemic with the pension plan having been fully funded and retired is another great sign of the good work our people did and the strength of the balance sheet coming through the crisis in maybe unexpected ways. On the cost front, we're also continuing to focus very well on the efficiency of our business, streamlining our product offering, streamlining our fleet. We've had a significant reduction in personnel as many people opted to take early retirement. Delayer the organization. We anticipate, by the end of this year, getting our nonfuel unit cost below 2019 levels, despite the fact that we'll probably be at about 15% less capacity than we were for the comparable quarter. So with -- that, for me, is a pretty good testament to what we've done and the sustained power as we go forward to keep that cost efficiency in place. So Dave, I'm going to turn it over to you for questions. Our moats, our competitive advantages have held up well throughout the crisis. Strength of our people, our culture is always #1. The operational efficiency of the airline. We're running the best airline in the skies, bar none. Our loyalty programs is strong. The balance sheet is starting to recover. And our structure is in place with good international partners still by our side. And with everything that we're seeing today, importantly, that we expect at the present time that we should be able to generate 2019 level of revenues no later than 2023 on a more efficient cost base, which positions us to generate potentially higher margins in 2023 as compared to 2019.

That's a great intro, Ed. Could you maybe help us understand? As you have been managing through this obviously unprecedented crisis, what are the 2 or 3 things that have surprised you the most about the recovery in fare levels and consumer behavior as we've been coming out of this?

Well, the strength of the premium product is certainly a surprise given that people were anticipating it was going to be a leisure-led recovery with a lot of excess supply in the marketplace. The fact that we blocked the middle seats right through the end of April and generated a considerable price premium to the market was one we anticipated, but the strength of that I did not anticipate. In the fourth quarter, which is the most recent quarter we have the government statistics from, Delta generated a 35% price premium over the competition. And that is without our main travelers flying, our big corporate travelers as well as our international travelers. So even in a pandemic, when pricing was very choppy and consumers were a very different demographic than we typically carry, people flocked to the Delta brand and paid a premium to be on Delta.

And what does that tell you about sort of the normal assumption that most people have, that the price of the seat is the most important thing when you're selecting an airline to fly? Is this a sign that maybe consumer behavior is changing a little bit in the market?

No question about it. The health of our brand has never been stronger. About 10 years ago, we set out on a path to decommoditize our product from the industry. We realized that if we just stayed on the commodity path, where pricing was the most important decision point in the consumer's eyes, we'd never make it. We could never generate the type of returns that we needed for our investors. And so we focused on delivering a highly reliable product with the very best reliability, and we've done that over the last 5 years. And we're back this year fully to generating, by far, the best operational integrity and reliability in the sky, which is what customers deserve. And we've added the products and the services that customers want alongside that operational reliability. And the scale that we're bringing back to the skies as we start to reopen international, I think, is going -- we're going to exit this crisis in an even healthier standpoint on the commoditization or the decommoditization of our business than where we were in 2019 alone. In 2019, we were generating a 20% premium domestically to the competition. So one of the things that consumers throughout our country are seeing is that their health and wellness have been something they've taken a bit for granted. As people return back to public life, as people return back to travel, those brands that have -- are seen as being protective of and create the greatest wellness and ability to serve in the face of the crisis are the brands that are going to get the consumer power. And I think that's going to be even stronger when corporates come back.

So as you think about this notion of decommoditization, what are the 2 or 3 things that Delta is doing uniquely to be able to kind of extract that premium? Is it the segmentation of the cabin? Is it -- I mean, obviously, the quality of the service, the onboard experience is going to be a part of that. But can you talk a little bit about some of the things that make Delta able to uniquely execute on this opportunity?

Well, it's -- the segmentation of the cabin is certainly a big part of that. We have more premium product in the sky than any airline. We're continuing to put more and more of that on our fleet as we simplify our fleet or modernize and upgrade our fleet with all of our new airplanes coming in. We did not stop taking planes during the crisis. We actually put more metal in the sky, and we got rid of a lot of old metal. I think we shaved almost 2 years off our fleet age through this crisis. So we're coming out as a much -- in a much more modern position, simplified position. We are the #1 airline to corporate America. We've won Business Travel News award for the last 10 years running. Corporate America appreciates the service, the reliability, the quality of the experience we're providing. And when you think about the decommoditization, a big part of that for us was going hard into the corporate space and showing the corporate travelers that we have their back. And we are the preferred airline without a doubt in corporate America, and candidly, it's not even close. And the third part of that is the expansion of our international partnerships. The investments that we've made internationally are driving premium experiences back here in the U.S. as we take international customers into the country and expect to return here over the course of the next year. And the partnerships that we've had, while they've been stressed during the pandemic, they're actually in an even stronger place than they were [ pre '19 ] as we've been through this crisis together with them.

So I want to switch to business travel in one second, but one last question for you on sort of the domestic leisure traveler. What do you think has changed about the way -- other than maybe being willing to pay up more for a premium experience, what has changed about their sort of expectations for airlines around, whether it's advanced purchase days or where they're going? What are you -- are you seeing any sort of changes in the way consumers are interacting with Delta, are engaging with the airline? And do you think any of those changes will be permanent as we come out of the crisis?

I think they will. One of the things that we've seen is the engagement with our digital tools. Our delta.com bookings, as I mentioned, we're already back and beyond 2019 booking volumes on delta.com. Throughout the pandemic, we saw over 50% of the transactions were being made directly by consumers with Delta as compared to going through the OTAs and all the intermediaries who try to disintermediate us along the way, which allows us to create an even closer connection to our customers to be able to better serve them. And once those connections are made, we don't lose them. They just continue to develop and mature in a relationship moving forward. Built a lot of new customers through this period. SkyMiles. One of the things that customers love about Delta is the rewards we provide through the SkyMile program in our American Express partnership. We are already back to 2019 levels on acquisitions of new SkyMile members through the card program with Amex as well as just through natural means by people signing up to the program. So we actually created a whole new level of customer through the experience. People that did not have the previous opportunity to try Delta had that opportunity and loved the experience and paid a premium to be -- it's going to also allow us to get probably into another segment that we haven't focused as much on, which is the small and midsized traveler. We've been very heavily focused on the large corporate customers. We are the airline of choice of Corporate America, we also want to be the airline of choice in the midsized market for business as well. And we've had a lot of opportunity to get closer to that marketplace during the pandemic. That segment of business travel is actually a bit larger than the traditional and the classical large corporate travel segment, and it's also held up the best through the pandemic.

So it feels like, at fare levels where they are, we've kind of killed the lazy bear case of too many seats in the sky, never going to be able to get back to profitability. But one of the issues that still is out there in talking to investors is this fear of a business travel recovery maybe never coming back to 2019 levels, business travel changing forever kind of thing. How is your perspective on that debate changed as we've moved through the crisis? I think, when we started out, everybody was just thinking, "Oh, no, it's going to be down 30% to 40%." And now maybe it's down 10% to 15%. But from your -- from where you sit and talking to your corporate customers, how has your perspective on the nature of the business travel recovery changed over the last sort of 10, 12 months?

Well, it certainly has improved. As we've gotten closer to the recovery. I can appreciate, at the beginning of the crisis, people were very nervous about where the future travel was going broadly, not just corporately. And as the vaccines have gotten people confident that they can carry on life as normal, as people understood and probably placed a much higher value on travel, not just business travel, travel in general, when it was taken away from them over the last year, people are getting back to realizing how powerful travel and experience is a part of our life. And whether it's in business or personal reason, there's just so many reasons why people need to get out and connect. Again, specifically to your question, I've said all along that I expect the traditional corporate travel that we've carried, the business travel, to be reduced by 20% to 30%, and I hold true to that. But it's not -- doesn't mean the overall volume is going to be 20% to 30% lower. I think the lines actually will hold in just fine with where we were in 2019. I think the mix is going to change. The nature of the travel is going to change. These tools are going to be a complement to business travel going forward, they're not going to be a substitute for business travel. I was with the CEO of a large ad agency a couple of weeks ago, came down to see me in Atlanta. And he said one of the big obstacles to the traditional business traveler...

[ Just froze. ]

in the past has been, when you get on the road, [ you've got a lot of times, ] a bit challenged. Now that everyone's used to video technology, you literally take your office with you when you get out on the road. And you start to return -- and so you don't have any dead time. You can be as productive when you're on the road as you are in your office because people have found a way to be mobile. Video technology makes you mobile, it doesn't make you immobile. It actually gives you freedom to move. So that's just one of many ways we're going to see that technology is -- complements what we do. Internationally, I think there will be some business trips that were, overnights to Europe, that won't return. And they shouldn't return. Those are inefficient uses of people's times. When people travel internationally, I think people are going to spend more time getting back and actually investing in relationships. The world needs to get reconnected. And we've never felt as disconnected as a society as we are today, and one of the reasons is because people haven't been able to be with each other. And my view, and I'll go out on a limb here, Dave. I think, starting July 1 forward, if you look at, at least on the domestic business travel side, I think the volumes of domestic travel July 1, 12 months forward, are actually going to be even higher than the domestic volume -- travel volume per business that we saw in 2019 alone. Because there's such a demand, there's such a push to travel, and people are going to be out there. Our plane -- it's amazing to me. We saw the jump from April to May in load factors, I talked to you, from 50% to 80% virtually overnight once people felt safe. And as business -- those people all have jobs that are traveling. And those companies, once they finally reopen, which they're already in the process of accelerating the openings for many companies, they're going to be out and encouraging people to get back out on the road to be with customers. So I think everyone's going to be leaning in the same direction, to go and to reconnect and get their businesses going. I think there's going to be a lot of peer pressure. No one's going to be waiting for the government to say it's -- now is the right time to travel. Businesses are going to be making that decision and pushing their people out on the road. And I think there's going to be a renaissance of business travel in our country, not just for the airlines, I think for the hotels and for the hospitality sector in general.

As you think about that recovery, one of the things that we had been looking at prior to the crisis was eliminating some of the constraints through the GDS systems in the channel that would allow you to maybe extract an even better yield premium going forward through the business channel. You recently announced a partnership with Sabre, I think, to expand some of your distribution. Could you talk to investors about kind of what that's going to do for you from either an upsell or a more premium product available kind of into the business channel?

Well, one of the things the traditional GDS relationships were based on was volume. And we've been after them for a long time that we're not focused on volume. We have no problem getting volume. We're focused on premium and we're focused on value back to our consumers and the value of the experience. And what we did with Sabre, and I give Sean and the team there a lot of credit for stepping up with us and doing this, it allows them to create a real retail storefront with Delta where they can put on their site the Delta product, market it and merchandise just as you would in retail. That's our goal. Very similar to what we're doing on delta.com. And so there's alignment, and consumers are understanding the value they receive in the products and the services that they receive when they shop Sabre on Delta and as well for our corporate travelers as well. So there's been a lot of change in our industry over time, and the quality of the experience, the products that we're putting out, the opportunity to upsell, the opportunity to segment and differentiate in the marketplace has never been better. And we need our travel partners to be able to generate and bring the technology with a retail mindset and be able to price accordingly, similar to how we handle that on the delta.com site.

So you mentioned earlier that your expectation would be some of this pull-forward of the direct relationships for leisure is a permanent pull-forward. And with the change to Sabre, like if you were to think about just the business part of your distribution challenge, how much of the market have you enhanced with the ability to kind of offer the full suite of products from Delta? Like I'm trying to get a sense for how much more they may need to go over the next couple of years as you think about rolling out similar enhancements with other channel partners.

Well, I think it's significant. And for us, it's aligning our objectives. I'm not going to put a number on that for you. It's -- internally, we have a number, and it's a significant number. But it's about aligning our objectives and getting us all moving in the same direction. Paying Sabre for bringing the customer that we want, as compared to just volumes, the premium customer, and providing the incentive for them to invest in their channels to differentiate Delta and give us that retail experience that we're looking for.

Okay. If we talk about loyalty for a little bit, I think prior to the crisis, at your Investor Day down in the Delta Museum, you guys had laid out a pretty ambitious plan to get the contribution from the card programs up to, I think, it was $7 billion over a couple of years. How has the crisis changed that expectation? Has it pushed the number out? Or have we maybe found that loyalty is actually even more valuable, there's more potential in there? Like how do we think about that expectation for the contribution from the loyalty programs, kind of coming from where we are today, over the next several years?

I see no change to that, Dave. I think that $7 billion target is what we shared together with the American Express as well. We're working towards that. Obviously, we didn't know that we'd hit a major speed bump in the form of the pandemic when we gave that forecast. But at the same time, we have seen the pandemic has created the opportunity for differentiation in the eyes of the consumer like never before. And so loyalty is something that people have great -- placed greater value on. People are, again, picking winners and losers through this crisis. And those that want to ensure that they're staying with brand that is -- aligns up with the value of the experience that they're looking for, there's no question that, that brand is Delta, and then the card that they're using is American Express. I find it remarkable, honestly, that we are already beyond 2019 co-brand volume levels on the most important card in the entire Amex stack, period, not just Delta, but period, for American Express. We are their largest commercial partner, they are our largest commercial partner. And that's with travel, which typically is a big part of the spend that goes on the card, still down 30% to 40% travel volumes and revenues. So people are putting -- we hear a lot about all the discretionary income of the consumer in our country and the bank accounts that are growing in the consumer space. As people are spending, they're putting their home improvements on the Delta card. They're putting their furniture purchases on the Delta card. They're putting their small business expenses on the Delta card because they want to go on Delta as they get through. And they used it really as a source of optimism to get them through the pandemic, that they were looking forward to the experience they're going to have. I can't explain anything else, that this brand and the strength of this partnership is even stronger now than it was in 2019. And that's a pretty remarkable accomplishment and achievement just in and of itself on top of everything else we've accomplished during the pandemic.