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

Well, good morning, everybody, and thank you very much for tuning in this morning. We're here -- so I'm Helane Becker, I'm Cowen's senior airline analyst, I guess, for a lack of a better title. This is our 14th Annual Global Transportation and Sustainable Mobility Conference. And this morning, we're going to kick off the conference with Ed Bastian, CEO of Delta Air Lines; and Dan Janki, CFO of Delta Air Lines. And before we have Ed's opening remarks, I'm just going to turn it over to somebody everybody knows really well, Julie Stewart.

Thanks, Helane. Thanks for having us. 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 the forward-looking statements. Some of factors that may cause such differences are described in Delta's SEC filings. Please note, we filed an 8-K today with an investor update that is available on ir.delta.com. Over to you, Ed.

Well, thank you, Julie. And Helane, thank you. Always good to be with you and your team and all investors that are logged in, welcome and thank you for joining us as well. I'll be brief in my opening comments, and I'll kick it to you, Helane, for -- I guess a Zoom chat, but they call it fireside chat for some strange reason, but a Zoom chat, I guess, with Dan, our new CFO. Happy to have him on the team, and this will be his first investor conference in the airline space. So it will be great to hear from him as well. The story for the quarter, while everyone at the moment is myopically focused on the variant, the story for the quarter really has been about the amazing surge in demand that we've witnessed this quarter from people wanting to travel. People want to get out. And once it's safe, once people are comfortable -- they're coming in, by the way, through the recent weeks with the variants at a pretty high level, people are still can traveling. So it's not that people have turned away from travel. It's been a remarkable return to travel. And that's been our single-minded focus here at Delta, is restoring our business, getting the quality of service, the customer expectations met, our people in place with the right tools, staff accordingly and running by far the most reliable airline in the industry. Everyone's been well aware of the challenges the industry has had this summer: staffing issues, cancellation issues or liability issues. I'm glad to say that's not at Delta. Delta has run by far, the most reliable -- and put the most reliable product and service out there in the industry. We're staffing. We've hired 6,000 people this year. Reservations being one of the places that we really needed to bulk up with all the questions people were coming to us with, and the team is doing that. The airports are full, and our team is ready to handling them, and they are handling them. The variant has caused a bit of a pause on some segments of our business, particularly our business travel. We were anticipating as we got into the post Labor Day period, seeing another step-up in business travel, particularly domestic, as businesses were scheduled to return to office. Many of those have pushed those back into the latter part of the year or early start of next year. So it's probably about a 90-day plus in return to travel for that next leg up that we were expecting to see, but it's coming. We haven't seen any pullback in business travel. We're still in that 40% range that we were in the early part of July. It's been holding pretty steady. It's up and down a little bit, but it's holding pretty steady. And the other thing that we were anticipating seeing was more international borders opening. And of course, with a variant, the U.S. has not opened its borders to international travel. And that's another thing that we've been wrestling with, trying to get international borders open again. But that all said, I'm pleased to say that we're still going to come within the revenue guide that we provided the Street at the beginning of the quarter. We'll be in the lower half of that guide, but we will be within the guide. And I'd estimate when I look at it, we're probably 1 to 2 points away from the revenue target we had internally that we set for ourselves at the start of the quarter. So team's done a really good job in managing a choppy, choppy environment. And as we're starting to see the revenue -- excuse me, the variant starting to recede, particularly here in the south, you're going to see the return coming back again and people getting back out on the road once they feel it's safe and not having to do these Zoom conferences. And Helane was sharing with us her frustration in not being able to do this live, and we share that frustration, but we will be doing this live soon. So with that, Helane, I'm going to turn it to you to take us through your questions. But great to be with you, and thank you for hosting us.

Well, thanks very much, Ed. I'm really sad that we're not in person, but I will look forward to seeing you in December at your Investor Day in person. So that will be something -- that will be hope. I think I have a bunch of questions, but you and I had talked early on. The one thing that you talked about was hope. That's what travel is, right? It gives you hope for the future versus this whole idea of being caught up in your various paradise prisons as I refer to my house. Like I love being home, but not that much. So pulling back a bit, and thanks, by the way, for that update. But let's talk longer-term and just ignore the pandemic and kind of go back to maybe thinking ahead. What do you see as the key differentiators for Delta on how you've managed through this whole pandemic?

Well, when the pandemic started, I guess this is 18 months now officially. I sat down with Frank Blake, who's our Chairman and we're beginning to strategize what this was going to mean. And obviously, none of us had any idea in early March of 2020, what was about to unfold. But the piece of advice he gave me, which I've carried through every decision I've taken since is that this crisis will reveal the character of Delta Air Lines, its people, its management team, its values. People, in times of crisis, think that's what builds character, going through a crisis. If you don't have character, you're not going to make it through a crisis. The crisis will reveal the character of our airline. And as a result of that, the focus we've had around protecting our people, our customers, our liquidity, our financial position. And also, just as importantly, our future was paramount right in the early days, and we set out that summary that, that was going to be our philosophy, how we manage through this difficult time. And we've done that. We've seen our brand strength during this period of time. We won the J.D. Power award, it's the Best Airline in North America in the face of a pandemic. The decision to block those middle seats for a year was not easy, but we did it because we cared about protecting our people, our customers and it spoke to who we are as a brand. We've invested smartly. We've invested in new technologies. We're going to the cloud. We didn't use the pandemic to back away from our future. We actually accelerated our path into the future. So new technology platform being built with AWS. We've got airports that we're opening. We opened a brand new Salt Lake City Airport last fall. We've got LaGuardia and LAX scheduled for big openings next year. And cut by the way, several years off the timetable for those projects in billions of dollars of savings as a result to get them done sooner. And we've simplified our company. We got rid of a lot of our older planes, subscale fleets. We've given a lot of our people opportunities to step up into new leadership positions. A lot of our people retired. We had almost 20% of our entire staff early retire, and that's given us opportunities for new people to step forward. So it's a new company coming through. So we're going to be stronger. Our brand is going to be stronger. Our Net Promoter Scores throughout the entire pandemic were at record levels. And while the huge surge in demand that we saw this summer, obviously pulls some of those NPS scores down a bit as everyone's back into crowded airports and lines and full airplanes, we already are on it. We saw it bottom out at highest level we've ever been at, and we're already on the climb back up again. So the team has done a great job, and our brand's never been in a better position. And by the way, our financial position also was in really good shape going in, and it enabled us to get through this crisis without having to tap our owners for any equity. We've been able to manage this ourselves, which is an important factor and also will not have to furlough a single employee. Whether it was going to be CARES Act or not, we told our people we weren't going to furlough. So those are things people will remember for a generation about how we handled this crisis.

They'll be writing cases about this crisis and how well I think Delta came through it actually in business school and business school cases to do that study. So thank you. That was very, very detailed. And thank you very much. Dan, so you're 2 months into the CFO role at Delta. What are your what are your initial observations that you could share with us?

Yes. Certainly. Well, thanks for having us, and great to be with you. First of all, the one that really stands out and Ed alluded to it is the people and culture. Coming in from the outside, you had a sense of it as a customer, as a long-time resident of Atlanta and being around the Delta community. But certainly, once you get inside, the [ collegiate ] nature of the team, the inclusiveness, just real depth of industry expertise, just really talented individuals, especially when you get also out on the front line and interact with the teams, just the passion for what they do every day. It is just awesome feeling. So that certainly is something that I've been impressed by and has really, really stood out. I think the other one that you really feel is the North Star, the customer and our people. And whether you're in a business review, whether you're in Starbucks cafe on campus, whether you're in a town hall, you're in a hallway discussion, it's really clear in everything that we do that the customers, people are at the center of that decisioning and actions that you take every day. And if I had to pick 2 things, I'd say those have been the 2 most impressive things that have stood out in the first 60 days here.

Okay. And you're also new to the industry. So there you go for that. A heck of a time to join, right? You joined at quite an interesting time. How are you thinking about your priorities near term and then longer term as Delta's CFO? So there's maybe, what, 2 questions in there, near term and longer term?

Yes, a couple of things. Near term, being around industrial companies, being around financial service companies that certainly tangentially seeing the airline industry have been a customer of it. But the first and most important priority in the near term is just the immersion and learning of the business, the operations, the customers, front to back, really getting in and seeing and feeling those operations, seeing it through the eyes of our employees and really paying attention to the details of those operations. So whether it's every day, every week, every month, there's a significant amount of calendar time just dedicated to that. And that -- so that's #1 priority here. Number two, the team that I'm responsible for and that directly -- whether it's the core finance team, whether it's the fleet team that fuel supply chain and procurement strategy, it's getting to know those teams understanding the operating rhythms of them, but most importantly, ensure that we're aligned to the business priorities and that we're clear on our allocation of resourcing and we're executing on behalf of the business, that we're delivering on that weekly, monthly set of deliverables and executing well. And I think really to maybe the second part of your question, longer term, it's working with Ed and the leadership team and all of the operators here to ensure that we stay true to the focus of the company, that we're focused around those priorities, that we're allocating the right amount of human capital and physical capital to those priorities, that we're executing against them, but ultimately, that we're delivering for our people, for customers and for our stakeholders in creating value and generating the returns that we expect on those investments.

Thank you. Let's go back to Ed for a revenue question, and you might have actually answered part of this in your prepared remarks. I think business traffic has started to come back a little, and I know I've started traveling again for business. And I'm not going to stop, just FYI, just in case you thought I might. I'm not. And -- but then companies started postponing return to office. And I think you said that maybe it stalled down a little bit. So maybe you could speak to what you're seeing. And then did your -- did your -- does the variant change your view on the recovery of business travel over the next few years? So like do you think the longer this goes, there will be a permanent change in business travel habits? Because I don't. I think people will always travel for business. Maybe not as often, but I do think you need to travel to see each other and do the handshake or whatever we're doing these days if we're not doing handshakes, if we're doing fist bumps or elbow touches or whatever ridiculous thing we're supposed to do that's politically correct. But anyway, what are you thinking in that regard?

So I don't think the variant has changed -- changes anything other than delays the return to office that we talked about already. And that delay is in the 90-, 120-day time frame. I don't think it's a substantial delay. All of our companies -- all of our big companies and especially the smaller companies are all out traveling. They're just not traveling in the volumes necessary yet to get our business back to where we need it to be as they're waiting for the variant to subside, as they're waiting for offices, for their customers to open, for them to go do and see -- to go to conferences like we were going to go up to Boston for, et cetera. So I don't think the variant changes much of anything. If anything, Helane, it's kind of interesting. The variant is forcing us all to realize this is a serious disease virus that we have to deal with. And we're dealing with it probably on an even faster pace in terms of getting people vaccinated, the mandates that are coming out. We issued our own requirements of getting our people vaccinated. People are -- I think you're starting to see a big tick up now across this country, and those that aren't decided, they're not going to be vaccinated, unfortunately, are getting the natural antibodies and immunity. So I think we're going to be in a position in the next 30 days where we're going to be very much back to where we were several months ago before the variant appeared on the landscape. And yes, there's going to be more variants that the media is going to love to talk about, the new variants that are going to be coming out there. But there's also going to be booster shots and we're all going to continue to manage our ability to stay level and stay safe through this period. You're question about how business travel is going to fare in the future, I completely agree with you. I think business travel, if anything, is -- people are going to appreciate business travel and the opportunity to be with people more than ever because we took it all for granted, jumping on a plane and doing day trips wherever you wanted to go. It will change. No one can go through a period like we've all been through and not have behavioral changes of some sort. So I think there will be some forms of travel that maybe reduced, so those red eyes, those overnight, 1-night stay in Europe and back again, maybe some of those will be limited. And there will be substitutions on video technology and calls and even substitutions that really complements for the way people do business. But at the same time, the thing I've been struck with is people think for some reason, video technology enables everyone to stay home and stay in their office and do their job. Actually, video technology enables mobility because you can take your office with you. Your office now is wherever you are. I'm in Utah today, right? And I'm with you, and I haven't skipped a beat. I was able to travel out here and I'm spending the week working here from here. And you can -- you no longer have to fear that you're going to miss that important meeting or a need to get that calendar on the road all filled up that sometimes inhibits business travel, waiting for schedules to get completed. You can actually be more present wherever you are. And so I think there's probably as many positives as negatives. The other thing that I've talked to a lot of people on this question, particularly a lot of business people in running businesses, business development people, consultancies. Because of the technology, people have been able to meet more people and new people than ever before at a faster clip. But they don't have the human relationships, all they know are people on screens now. And they're going to want to advance their business and get out and see these people and cement those relationships. You're not seeing many transactions being conducted over Zoom, unless it's absolutely -- there's no other option. People want to be together, look each other in the eye, get their teams to know each other and start moving their businesses forward. I think this period of time, I think you're going to see a lot of people getting out and seeing new people and developing new opportunities faster than ever because of what we've all been through here.

That's really insightful and very, very helpful. So Dan, there's been a couple of -- maybe more than a couple of A321neo option exercises and some opportunistic aircraft announcements this year. Can you talk a little bit about the broader fleet strategy and how those aircraft are going to fit into it and maybe include orders that are growth versus replacement?

Yes, certainly. A couple of points on that. I think if you know our fleet strategy, the fleet team really is focused around 4 pillars. As we think about our fleet: first, simplification; second, scale with simplification within those fleet types we have scale; that we're utilizing size competitively as we talked about, especially the neos and large narrow-bodies; and then lastly, efficiency, sustainability, did the aircraft that we're putting in place have higher efficiency than what we replaced by a significant amount. So those are our 4 pillars. There's no doubt the actions that we've taken both on the neo and the actions that you've seen us take in the gently-used market related to the 350s. The 737s have right aligned to those -- that strategy of simplification, scale, size and efficiency as it relates to that. So right aligned with that strategy and the elements of it. Second piece of that, really about growth and replacement as you know, took a lot of action to accelerate our fleet strategy last year with the retirement of 227 aircraft. So a lot -- most of this as we focus here is replacement and restoring of the airline as we move forward. We obviously maintain the flexibility to flex that fleet as we've talked about with our 717s, our 767s. We also have a number of options out there for additional neos in 220s that give us flexibility for growth as we move forward. But it will be a few years until we get back to the fleet count that we had in 2019. We'll continue to stay disciplined. We're going to invest in the business, but we also want to restore the balance sheet.

Got you. And then as you think about modernizing the fleet in these aircraft orders and so on, how should we think about fleet financing and CapEx going forward?

Yes. A couple of things on that. We've predominantly been an owner of aircraft, about 75% are owned, 25% are leased. That certainly has served Delta well. As Ed talked about, we came in with a strong balance sheet. Those unencumbered assets allowed us a lot of flexibility as we navigated the last couple of years. We're certainly in a unique position now with the sheer amount of cash that we have. So we're paying cash for the airplanes. But we'll be opportunistic. You saw it on the A350s. As you looked at them, those leases were highly economic. They fit to fleet strategy. They had good returns. So we'll be smart about how we utilize that. See our CapEx for the year is $3.2 billion. We're going to balance that. Again, it's about investing in a business, making it stronger but ensuring that we pay down that incremental debt that we took on, and we restore to strong investment-grade credit parameters. And we'll talk more about that in December when we get together for the Capital Markets Day and the pace of that over the years to come.

Helane, if I could add on to some of Dan's comments there. Crises create opportunity also. We talked about all the negative things that crises present us with, they create opportunities. And they've created us with a great opportunity to accelerate our fleet development, not just retire a lot of old inefficient planes but acquire a lot of new -- not just the 321neos and the like, but going out into used markets, which we're not afraid of tapping into with some amazing bargains that will be around as a capital-friendly decision for years to come. But in the next couple of years, so you're going to continue to see us do some things where there's opportunity. Because I think this -- opportunities are going to stay out there. I don't think this is going to disappear anytime soon. But in -- when we presented at Capital Markets Day in December, we're going to give you a 3-year look at what we see on the fleet, on the capital allocation structure, the balance sheet. It's key to us to get back our investment-grade rating. And certainly, the first thing you have to do is get your investment-grade metrics in place. And then hopefully, your investment-grade rating will follow. But we'll take the -- our investor community through that. We're spending a lot of time on that now. So rather than focusing on any 1 point in time in this current year, which is kind of an unusual year for us, looking over a 3-year horizon, we'll give you a pretty good sense of how we're thinking about that.

I think that will be very helpful, too. I think it helps. The problem with thinking 1 year at a time is the years go by so fast that you don't really get a chance to implement everything because you also have to react to things as they're happening as well. So I think 3- to 4-year time horizons maybe work better. And actually, Ed, to follow up that, nobody expected a 90% decline or maybe more. I think at the worst was actually the day you guys reported earnings, April -- I want to say April 14 or April 16 of 2020, that was probably the absolute bottom in terms of number of people who traveled. And you actually said on the earnings call, this is probably as bad as it's going to get, and then it gradually started to climb from there. But you had to -- you took the airline down quickly and then you had to rebuild the airline. And I feel like -- we called it a jailbreak. We expected a jailbreak over the summer that people would want to travel because they were tired of being home and so on. So how did you do that? How did you rebuild the airline without the problems that some of your peer group had and then continue to balance your priorities?

Sure. Well, thank you, Helane. A few things in there. You're right. We had never done this before. We've never put our airline to bed. And we never woke it up all at once and with everyone starting to fly. One of the unique aspects to how we've done this is, remember, we blocked those middle seats through end of April. So we timed the resale of those seats in May, probably as much luck as being smart at that point in terms of timing. But we had 1/3 of our seats already available for customers as that jailbreak was occurring, as people were coming back. So we were already flying the seats. So it's just -- so it was actually operationally much less stressful for us to get people into those seats than it was for other airlines that had to actually start up new planes and get new staff and a large number of other complications. The second thing is that we were determined right at the onset that we're going to be pretty disciplined about not trying to get too far ahead of ourselves in anticipating the revenue environment. I know a number of other airlines went for market share and decided to go all in to take whatever they could. And you've seen the consequences of that. It's been -- there was not much buffer for error in those -- in some of those businesses as a result. We were much more cautious and disciplined. We're still 30% down in the current quarter on capacity relative to '19. So we're building our airline back, hiring the people. We are not waiting for our contractors, our service contractors to find people. We're going out and putting Delta people in jobs, pushing wheelchairs, cleaning planes, working the catering kitchens, doing whatever it takes. And those are jobs that are probably going to stay with Delta for a long time to come because we've created a whole new generation of new employees just this year alone, building the new airline that we're creating. So there's a lot of pride in that, that's being done by Delta. And the teams, the operation teams, the commercial teams have stayed in really, really close coordination. A couple of things on that. Obviously, there's some cost pressures that we've experienced and that are going to be in this quarter. We're going to be probably a couple of points higher than we thought at the start of the quarter because of that, because we wanted to put our people in a position to take care of all that demand that was coming quickly. And we're going to get to, by the end of the year, we're going to stay with this philosophy. The priority is to get this airline fully stood up, exceeding customer expectations by the end of the year. There's some costs attached to that. I know we have put out an early goal to try to bring our fourth quarter of this current year cost below the fourth quarter of '19. We're probably going to miss that by a little bit, not by a lot, but by a little bit. But it's for all the right reasons because we've got our people, we've got our costs, we've got our brand to worry about. We've got a lot of revenue to serve. And next year, we'll fill out that schedule as we bring scale back to the airline. And I think our cost structure is going to look really, really good next year.

That's good. Actually good to hear. And I think we only have about a minute left. So -- and I still have like a gazillion questions. But could you just broadly talk about your hiring plans over the next, say, 3 to 5 years, especially in context of seeing a lot of pilots retire and maybe some senior flight attendants retiring?

Yes. So we are hiring flight attendants. We're hiring pilots. We're hiring mechanics. We're hiring reservation agents. We're hiring airport workers, mechanics, you name it. We're going to hire this year. And we've already hired close to 6,000 people this year already. And so we're already ready for the return. We're not waiting for people to -- we're not having some of hiring pressures that you may be seeing in other businesses. Our brand is incredibly strong. We announced a few weeks ago that we needed to hire I think it was 2,000 flight attendants, and we got 35,000 applications in 1 week, and we had turned off applications [ to-date ]. It was just too much. So the brand is strong. It's a great hiring brand. People want to work for the air line. Pilots, again, we're not having any problem hiring pilots. It's the airline that pilots want to work for. We'll hire about 1,000 pilots probably a year over the next several years. So you could see several thousand pilots hired over the next 2 to 3 years as we get back by 2023, which is our goal, to the revenue production that we had in 2019. We're going to need pilots and flight attendants and mechanics. But we're getting out in front of this stuff. We're not waiting and trying to time the return of revenue to bus. We want, as customers come back to travel, to say, "Delta, I missed you and you're actually better than you ever were." And that's our goal. And there's a cost to that, but it's the right cost to pay because the revenue that we generate from that, the brand strength that we retain is massive.

Right. Exactly so. Well, unfortunately, gentlemen, we're out of time. I could sit here and talk to you all day if I could. But Ed, I have to let you get back to maybe taking a nap...

Thank you. The 1 thing I did not mention, Helane, it's important. My team will kill me if I didn't. We're going to be profitable this quarter, this third quarter. Despite the challenges that we've seen with the variant and some of the revenue reductions, we set it as a goal for ourselves that we'd be profitable in the third quarter. And I just want to affirm that we will be profitable this quarter.

Even better news. It's even better. Okay. Well, I have to -- I sadly have to let you go, but I look forward to talking to you on October earnings call and then seeing you guys in December. And again, thank you very much for supporting our conference and for being here with us today.

Thanks, Helane. Great to be with you.

Thank you very much. Pleasure.