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

Good morning. Welcome to the second track and second day of Barclays 41st Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst. And next up we have Delta Airlines and joining us, Glen Hauenstein, President. So really appreciate you guys coming down. But before we get into the Q&A, I just want to queue up the audience response questions here really quick.

Question #1, please. Do you currently own Delta? Yes, overweight; 2. market weight; 3, underweight; and 4, no ownership to market. [Voting]

All right. Question #2, please. What is your general bias towards Delta right now, positive, negative or neutral? [Voting]

And Glen, we've been hearing a lot of buzz about airlines at the conference the last 2 days. So -- all right. And then question #3. In your opinion, through cycle EPS growth for Delta will be above peers, in line with peers or below peers. [Voting]

I think that's pretty bullish outlook there, Glen. Okay. All right. Little technical difficulties here but we'll get this back on track. So Glen, thank you for coming down, being at Miami. Really appreciate it.

Horrible to be here in Miami in the third week of February, it's just really terrible duty.

And the fight is for fall too.

It's good to see.

Before we -- I do want to ask maybe about near-term bookings but I want to keep us really focused on the long term. And maybe let's just start it off because you guys provided, at the time, I think this was '21 or 2022, a 3-year outlook, I think getting north of $6 to $7 in EPS this year. And at the time, a lot of investors just figured, well, there's really no way to predict where revenue for the industry is going to be and how can Delta recover that level of profitability? And 3 years later, you guys are pretty close to that higher range.

I think we outperformed in the first 2 years.

That's correct. So can you give us some context on how you guys are looking at the business postpandemic and long-term planning?

Yes. I think we're really excited about our relative positioning in the industry, emerging from the pandemic. I think for most of you who followed the industry for a long time, as you come out of a crisis and unfortunately there have been crisis like 9/11 and of course, the Great Recession, the profitability of the industry generally been led by the LCCs and the ULCCs. And this time, it's quite different. The profitability of the industry is being led by the legacy carriers, Delta, I think last year accounted for about 40% of the industry's profits. And so clearly, there is something different. And I think that's a testament to the people at Delta to -- who work hard to change how we view the airline business as not a commodity, right? And there were a lot of doubters in the beginning and said, "Oh, well, that's all that matters, is the price between point A and point B and do you fly there. But when you looked at the data, it really showed that there was much more and consumers weren't being satisfied by just a price. And I think we were probably the first to see that. And so we had the first mover advantage on that. And I think that's worked out quite nicely for us to say, "Hey, look, well, 35% of the -- 65% of the people were choosing on price and schedule only, there were 35% of the people who were choosing on something else. And that was product and that was brand." And those 35% who were choosing on something else, actually represented more than 50% of the airline industry's revenues. Yet, they were kind of being ignored. And so as you saw we this 10 years ago and said there's an opportunity to occupy a more premium space, to come up with products and services that would be geared towards a more premium customer who wanted amenities, who wanted clubs, who wanted food, who wanted priority boarding, who wanted to make sure they could get their overheads on the airplane. And really, that was a long journey. And it sounds simple now that you look back on it but it was very, very complicated to take an industry that really wasn't geared to sell those products and services and reengineer it to be able to go ahead and use that as a leverage point. And I think we've seen that strength in going into the pandemic and really accelerate coming out of pandemic that's really differentiating Delta.

But it is pretty amazing when we look back at the last few years and how it's played out. I guess near term though, can you remind us what the revenue outlook is for the first quarter? And folks here do want to understand, are things turning better domestically? And what's the outlook in 2Q because industry capacity does step up quite a bit from the first quarter to second quarter.

Right. Well, first, last year was really the year of international. International demand was incredibly high. It was the first year that people could travel without any restrictions. And so we saw really demand exceed supply. We saw historically high revenues internationally. And there was -- through the second half of last year that international played out and domestic being a little bit lighter than I think many people expected and I think we bottomed out in June and then had that gradual recovery and what we've told our investors and I think we're on track for this, is that we will inflect a positive in this quarter. And so that's a very nice sequential improvement quarter-over-quarter. And then the question, I think, in a lot of people's minds, well, you had such a great year internationally, how are you going to do this summer, internationally. And I'd like to say, I'll go on record in saying, I think there's going to be a bigger summer internationally than last summer, posting multiple news records. I think we'll have record transatlantic unit revenues. I think we'll have record transatlantic revenues. And the one I'm really excited about for this year is the Pacific which is really looking like second quarter and beyond are going to be incredibly strong for us and that's, I think that's the entity that's going to lead this years in terms of year-on-year improvements.

Can we dig a little bit deeper into that commentary? So how much of a visibility do you have on bookings? And is international different from domestic with greater visibility?

Certainly, international books further out. So looking at second quarter, we had roughly 50% of our bookings for transatlantic and transpacific, as we sit today. So that's better visible than what we have for domestic, which tends to book much closer in.

Okay. And in the transatlantic, I think you commented that capacity should be roughly flat or is that incorrect?

I think our capacity is up mid-single digits year-over-year in terms of seats.

And that's where you want it to be from a network perspective this year?

Yes, I think we see incredible demand and may be I'll just take a step back and say during the pandemic -- we have this slide in our investor presentation that shows that there is about $300 billion of airline revenues that we're missing during the pandemic. And if you look, airline revenues as a percentage of GDP, it's pretty constant at around 1.4% of GDP. And then every time that it goes under, depending on what the event is and every time coming out of it, it goes over that 1.4%. And so last year, we were probably seeing just under the 1.4% and I expect that the next few years will probably be over that as some of that gets caught up, I mean, somebody who's in their early 60s, you're looking and you say, how many more times am I going to go to Europe. And when you miss 3 years in a row, you got to hurry up and get over there because the one thing that everybody in this room hasn't come and we all have a clock.

That sounds pretty bullish. And the commentary on Asia, is that incrementally better than maybe where it was in last year?

Absolutely. And I think, again, underappreciated in the industry. We told our shareholders for many, many years to be patient with us. We had to rearchitect and reengineer our Pacific operations. If you recall, postmerger with Northwest, every one of our flights stopped in Tokyo, Narita Airport. Our airline does -- no longer flies to Tokyo and Narita. So that's a big change, right, as you went from everybody stopping in Tokyo, in Narita, to not even serving the airport. We are the largest carrier to Haneda, of course, which is close in airport in Tokyo and where all the business and high yield wants to arrive. So Japan is looking very, very strong. And with the yen, where it sits today, it's become a huge vacation spot and considered safe, considered, of course, people love Japan. It's a wonderful place to go visit. So see a lot of not only increased corporate spend but we also see very high leisure for Japan. China is going to be what it's going to be for us. It's less than 2 flights a day. And yesterday we learned there will be another 2 flights for all U.S. carriers. So we probably see more capacity. It's doing quite well with what capacity is there. The unit revenues are down because the capacity was so constrained in the previous year but still incredibly profitable for us. And then really the one that we're so excited that and continuing to build out is our position in Incheon Airport. And for those of you who have not transited Incheon, we do believe it's the best place to transit in Asia for secondary Asia and our partner there, Korean -- and with the Korean, Asiana merger, almost complete, we see a really, really bright future for that. So really kind of hitting on all cylinders in Asia this year.

And how about your JV structure, you hinted at Korean and Air France, Virgin and the Atlantic. So how is the JV structure working this year? And what are your partners doing from a capacity perspective?

I think the JV structure is integral to Delta's success in international. And if you think about it, we can be relevant in New York, we can be relevant in Atlanta, we can be relevant in the United States. But when you think about our relevance in a country like Chile or Brazil is -- we fly there a couple of times a day and without those partners, we don't have distribution networks, we don't have hubs to disseminate regional travel. And so adding those to our portfolio and having the tightest relationship with our JV partners is really integral to our success. And the most recent one, of course, is our association with LATAM, which we're really in the -- end of the first year of approval of the joint venture. And I think the results are nothing short of incredible. We have about a 30% capacity increase into South America this year and unit revenues are up. So I think there's no -- that's just an incredible testament to how that's doing in its first years. And as we continue to mature that we'll see a lot of runway.

Well, Glen, when I think, back in January when you guys had your fourth quarter call mid-January, maybe it was a little bit more cautious on Latin America expansion, I think you called out some beach market headwinds.

Yes. I think Latin America is a big entity because it's got several -- some components from leisure-oriented, visiting friends and relatives to business markets and what I'd say is, South America is the standout for us. There is a little bit of excess industry capacity in leisure beach, that tends to go in waves. And so probably next year, it will be in balance but then last year, in 2023, it was fantastic. In 2024, everybody thought it would be great to have a lot more capacity. And it will be good, it won't just be record-breaking and then next year will probably resolve itself.

Appreciate all this. And prepandemic, we could have inversed a lot of these conversations, right? I think Asia Pacific was lagging in terms of profitability. And to your point, you're building out the network moving from Narita into Incheon. But how sustainable are these international results? I think because investors are a bit skeptical, if you look at airline P/Es, they're probably the worst of all the attending companies here.

Right, right. I think we have -- we've learned so much with our partners and how to integrate with our partners. And I think I don't know the exact statistic but more than half of our capacity internationally goes to partner hubs. So that's pretty insulated and pretty advantage to us. Our highest margins domestically are going to be flying between our hubs domestically. Our highest margins internationally are going to be flying between us and our partner hubs and we're continuing to focus on that because it's competitively advantaged. The other thing that we've come to grips with is that we don't have the right configurations on our long haul equipment. And so starting this fall we'll reconfigure our A350s to be a much more premium configured airplane. Margins tend to be dramatically different domestically but it's even more pronounced internationally, of where you make your money and where you don't. And as we retool our airline to be a more premium airline we see huge opportunity in the international long haul to continue to lean into premium products and services where the margins are much healthier than they are in coach and the commoditized piece of the airplane.

That's pretty bullish conversation, by the way. If there's any audience questions, you guys can raise your hand, we'll get you a mic. Glen, can you talk about that transition into premium because I think premium revenue has been outperforming for Delta for quite sometime now. What's the go-forward strategy from a fleet perspective than a capital perspective?

Well, I think I mentioned international configurations, which we're working on now. We also have -- we're in the phase of really renewing our long haul international fleet right now. So that's a priority for us. Domestically, we're looking at opportunities within the existing fleet and we're finding opportunities when we take a [indiscernible] for example, to increase Comfort+ by 30% without decreasing seat pitch on certain fleet types. So I think we're very bullish on continuing to find opportunities with the configurations themselves. And then on top of that, I think we're thinking further about how do we -- what is the next leg in terms of segmentation for us? And what we've done, I think pretty effectively is, segment the coach, cabin of the airplane. But that same segmentation probably exists in terms of trying to meet customers needs and wants in all of our cabins. So if we can create from the main cabin all the way up to the highest end products in Delta One, different experiences for different customers, really controlling our experience and then controlling the pricing behind that and so say we want to kind of to think about having a good, better and best product in each one of our cabins. And moving forward into that, that's a whole another layer of opportunity we see in terms of being able to satisfy customer needs and taking control of our ability to price.

And coming back, sustainability or resiliency. I think folks are just worried, will this trend play out through the next economic cycle? So if GDP contracts we go into a recession. Will these trends hold or does everyone revert back to paying the cheapest the fare?

We survey a lot of our customers. And if you fly Delta, we know we survey you to death. And what we see is a really high intent to repurchase. And I think this is kind of the human social, it's not unique to Delta in other words, it is -- when I get out of school, I may have a car that is very utilitarian. As I progress through my career, I might have nicer and nicer and nicer cars. You tend to not go backwards. And so I think what we see is that we have between 70% and 80% intent to repurchase. And then once you're in that cabin, you only go up. So our real goal here is to have best-in-class products and services across the whole spectrum of your life cycle. So as you're getting out of school maybe and you're starting your career and you don't have a whole lot of money, who is the best in main cabin and I think, we want it to be Delta. And I think we've demonstrated that it is the most reliable, it's got the best people, all those things that make Delta a special airline, are common throughout all of our cabins. But if you want, if price is the only thing that's important to you, we want to have that available to you. And then as you continue to grow in your needs, through your own life cycle, I think we have best-in-class products across that spectrum. And people tend to go back and that's the exciting part for us, I think.

And maybe on the lines, can you talk about loyalty in the SkyMiles program, the American Express partnership?

Absolutely. I think the other piece about sustainability and resiliency is about diversified revenue streams. And clearly we think diversification of those products and services are key and our goal is to have more than 50% coming from other products and services, other than the base fare itself. And so as we look to do that and one of the key driver is American Express, another key driver is the MRO. But American Express, last year we, the remuneration, I think we've disclosed is just under $7 billion. And we have a goal in the immediate term to get that to be over $10 billion. And, of course, that's less subject to changes because it's profitable across the spectrum. So more durability, more consumer and more stickiness with our consumer, which I think is great for the airline and great for the loyalty program.

When you didn't make some changes last year and may be rolled some of them back, what's been the experience with the updated SkyMiles program, has card adoption and with the exception on [indiscernible] still turning in the direction you want to see?

Acquisitions this month are incredibly strong. Of course, we did during the transition and we knew that we were going to upset a lot of people. Not our intent, our intent is to have the best products and services for everybody. But given how generous we were during COVID, we realized that we weren't able to sustain the number of people that were in each one of the ranks and we had to make some priority decisions of who would ultimately be in what category. And I think what we've come up with is, many ways to get there. And if you think about it, it's more simple. And that was one of the key drivers of -- we wanted it to be simple. We wanted it to be fair and we wanted it to be transparent and I think we've achieved all that. Initially, we took a lot of hits. We had some revisions, wherein some of the changes were very unpopular and Ed was very adamant that we needed to revise those, which we did. And now we're back into a period where I think that in the most recent -- some of the most recent articles that have been written about the relaunch of the corridor, wow, this is amazing. So I think we've given people a real opportunity to get value from Delta that -- even greater than they did before. It just took sometime I think for us to get it right and then for people to understand it.

And I know we're focused on the network, the cost inflation has been a challenge, I think, for every Delta airline, some related challenges and definitely wage inflation has been top of mind. Can you just remind us the strategy at Delta. I think you guys want to have the best paid employees. Is that correct?

Absolutely. Across all workers, we tend to have the base that's the best in the industry and then on top of that we have our profit sharing and of course, our profit sharing and just paid out last week. So it's fresh in everybody's mind. We paid $1.4 billion in profit sharing last year, which was, I think, our third or fourth best year in terms of profit sharing and our goal is, of course, to grow the profits of the industry --of the airline and grow the profit sharing of the airline. So it's best-in-class in your base. And then on top of that to have the best profit sharing programs in the industry and payout at the highest end.

Yes. I think some investor fear though, is that the industry has paid so much in the inflation. The base is so much higher now. Can pricing sustain profitability going forward in adequate returns?

Yes. What I like about where we sit today at Delta is the fact that we did lead the industry in terms of returning to profitability in the postpandemic era. And there are carriers in the spectrum of airlines that are either not as profitable as they need to be able to return capital in the long run or unprofitable today. And really the basic law of business are, there's 2 ways you can improve your profitability, you can shrink costs in an inflationary environment where labor is constrained and airplane manufacturers are constrained, that's pretty difficult to do, not possible but I don't think that's what's going to really change their fortune. Their fortune is going to be changed by changing their revenue profile. And where we sit today, as the industry revenues have to recapture in order to return cost of capital, revenues have to go up. The industry has proven over time, whether it's higher fuel or whether it's industry common inflation that it can pass through higher cost to consumers successfully. And I think that's why I'm so about where we sit today, as other people have to move. And whatever they move, we can sit on top of that.

Okay. And speaking of capital, I think you guys -- what, you've guided a EPS of, I think, $6 to $7 a share, right?

Correct.

And it's a $3 billion to $4 billion...

$3 billion to $4 billion of free cash flow.

That's a pretty good yield on your stock price right now. Anticipated in that guidance, were you baking in the idea that Transatlantic, the Latin and the Asian network strength that you're seeing now.

Listen, I think it's early to make revisions to the year. We are only in the third week of February but we see a very healthy revenue environment as we move forward. We've got to continue to work on costs and fuel, of course, we don't control fuel and fuel has moved up, as of late, so we'll see how all that plays out. But I'm optimistic. And I think that this could be a great year. And I think the important thing for us, take that $3 billion to $4 billion of free cash flow that we're going to have this year and work to pay down the debt. We have more debt than we did prepandemic. We need to get that back down. We need to get the company to investment grade. I think we should be able to get there this year or close to it. And I think continuing to use the excess cash flow to pay down debt for the short to medium term is where we need to stay focused.

Maybe we can queue up question #4 here. And john, we'll get you a mic. Or go ahead, or let's do question 4 real quick. For the audience, please, in your opinion, what should Delta Airlines do with excess cash, bolt-on M&A, larger M&A, share repurchase, dividends, debt pay down or internal investment. [Voting]

I think larger M&A would be a challenge.

Yes, I think so.

And Question #5, please. In your opinion, what multiple of 2024 earnings should Delta trade? [Voting]

All right. And then question #6, please. What do you see as the most significant share price headwind facing Delta, core growth, margin performance, capital or execution and strategy? And thanks again everyone for participating. [Voting]

Thank you.

All right. Go ahead, John.

I have a question about the demand in domestic and demand for your main cabin and lower end of the segment, Delta has been focused on premium revenue growth and premium demand. But how does Delta see itself over the medium and long term towards the everyday flyer domestically and the lower end of this segment?

Yes. I think -- for the people who seek value across their whole life cycle, we want to be there for them because you don't -- we have this great saying internally is, Million Miler starts as a 0 miler. And today, we will about 2,000 people who start flying this month that in 22 years will be Million Milers. So it's a long journey. And first of all, the people who have spent million miles and multiple million miles with us are very cherished by us and they're very important to us and we want to make sure they're incredibly happy. But along that journey we need to continue to show them value. And that starts from where do they enter the system. And most people do not enter the system in first. If you did you're very lucky. I did this as a survey in our internal leadership meeting and too many people raised their hands. I thought we have a pretty entitled group here. But most people start flying in coach. I did when I was a kid, I still fly in coach a lot but I tend to fly less than I did back then. And I think that's what we want to make sure is that for people who value high quality that we are available in all spectrums.

And then also, you talk a lot about revenue diversification and with your MRO business across the industry, there have been maintenance headwind call-outs. Is Delta able to take advantage with your MRO business and servicing aircraft?

I think we're present in 3 platforms, 3 of the new generation platforms and those are all new platforms. We think that the shop visits will peak in the 2035 time period. So between now and '25 -- '35. It's about a $1 billion business, now a little bit less and there, we see that growing to about $5 billion business between now and the early 2030s. So we're preparing for that. We have capital for ours and we'll do ours and plus our partners. And so I think it's a very exciting business. And it's another one that I think is less cyclical than the airline, the core airline itself that we can have as a great addition.

Well, Glen, unfortunately, we're out of time. I have so many more questions but very bullish on the presentation. So really appreciate you coming down here.

Well, thank you for inviting us. We really appreciate it. And if anybody has any additional questions, I'll be out in the vestibule for a while. So thank you all.

Thank you.