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

All right. Good morning, everybody. My name is Jamie Baker. I cover the North American airlines and aircraft leasing companies on the equity side at JPMorgan. I'm joined by my good friend and colleague, Mark Streeter, who does the same thing on the credit side. And it's our pleasure to welcome you to the 2025 Industrials Conference. I keep hoping for a conference that nobody attends because all is right with the world and Delta is trading at 20x earnings and we have to grab research interns to bring the dinner to fill the table but it doesn't appear that 2025 will be that year. Obviously, starting off on a somewhat somber tone, I'm sure people are caught up with the headlines. For anybody that isn't on my distribution list or maybe hasn't gotten to read everything, I would point out that both American and United equity recently triggered our proprietary down 30 and 30 trading rule. The old adage is you never want to try to catch a falling knife but that's exactly what [ D-30-30 ] is intended to help you do. And the statement of fact is that in each and every 29 prior instances that the market has come to such a severe conclusion so quickly on airline equities, the market has been proven wrong. So we're certainly hoping lightning will strike a 30th consecutive time. Let me turn it over to Mark and then we'll bring the Delta team up here and get going on the day. Thanks for joining.

Jamie once did a CNBC spot where he spoke about the 30 and 30 rule and I think [ Mitchell Lee ], after he made the pitch said, only in airlines do we have a 30 and 30 rule, where it's happened 29 times or back then, it was 27x.

I don't know these days [indiscernible] I know my colleagues, our colleagues might be [indiscernible].

That was before the Mag 7 and everything. But just today, just reminds me of the line from Hamilton, the room where it happens. So this is the room where it happens today, folks, if you haven't been paying attention to all the 8-Ks that are out this morning. It's going to be a very, very busy day. And this conference now, we're in our 24th year going back to when I started pre-Bear Stearns, a little credit conference back in 2002, Jamie joined me the year thereafter. So it's year 23 for Jamie, year 24 for me. Year 25, next year will be somewhere nearby. It won't be in the new building because of some space constraints, believe it or not, we'll be taking this conference on the road somewhere in New York. So look for information on that. But very pleased that everyone can join us here. And with that, let's kick off what's going to be a very, very eventful day.

Absolutely. So if the Delta team would like to join us. For anybody on the webcast that can't see, we're going to have 4 executives up here, Ed Bastian, CEO, is headed up right now. And then also at the table, we have Julie Stewart, Glen Hauenstein and Dan Janki. As is the tradition, I'm honored to turn over to the opening slot.

I'll give a quick disclaimer here. Thank you, Jamie and Mark for having us. As a reminder, today's presentation contains forward-looking statements that represent our expectations about future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that may cause those differences are outlined in our SEC filings. Over to you, Ed.

Well, thank you, Julie. Does this video work here? Because if you see the size, maybe not. You just have to turn around to see it. But anyway, that's fine. Don't worry about, Jamie, I got it. Thank you all for joining us today. Jamie, I'm thankful you let us in the building after the news last night. So I was a little worried that our badges would have been pulled as we tried to check in but we got here. But it is an eventful time for our industry. There's a period of time where there's some disruption. And it's disruption candidly, we're kind of used to in this industry and it's something we're built for in terms of being able to take advantage of and be opportunistic in and moving forward. So our presentation is going to kind of go right to the crux of the matter, what the conversation is around the weakness that we have seen and collectively across the industry, I haven't seen how the other airlines are doing but my guess is everyone's experiencing some flavor of this. It's a period of time where first quarter is always the most volatile quarter of the year. It's the weakest demand set of the year. And I think I was teasing Jamie last night, I think it's like, why he likes having this conference in March of each year because there's always something going on, not always great, that attracts attention. When we looked at the quarter, though, as the year ended, the end of December, the strength that we had is we are closing '24 and looking into the new year, we had a lot of optimism. We had a very significant growth plan. We're expecting to grow revenues 8% over the course of the first quarter and it was consistent with what we had been seeing all along as the -- as last year ended. Well, as it turns out, it looks like we're going to be closer to 4% than 8% but it's still growth, nonetheless. But not nearly growing with the kind of strength that we anticipated. And there's a series of factors why it's not just a single comment that one can easily sum up. So if you allow me, I'm going to just walk a little bit through what we saw over the course of the quarter, take -- give you a good lens on the air travel experience and environment allow you to draw your own assessment and we'll certainly save plenty of time for questions. As I said, I'm sure all the questions will go to Glen during the Q&A. So he'll be ready for that. When the year started, we were in a good spot. And then January 10 happened. And we had the worst snow and ice event in Atlanta, actually right through the Southeast in over a decade. The reports and I saw pictures, I know it was real 10 inches of snow in certain parts of the beach in the Panhandle. And we had a pretty significant event that fed into another significant snow event a couple of weeks later. So we had about $100 million of damage in January. That said, January actually looked pretty good. The revenue environment was pretty strong. The booking trends were healthy. So we were -- we're confident we're going to be able to make that number up. Then we had the tragic American aircraft incident that happened at the end of January. And that's what set a spiral of events that I think what may not have been the triggering event, it certainly was a causal effect in terms of the trend line that we're looking at. When that happened and that was -- as we all sadly know, the deadliest aircraft incident in almost 25 years, caused a lot of shock amongst our consumers. There's a whole generation of people traveling these days that didn't realize these things could happen. They can. That's why safety is our first and foremost priority at all times. And we saw a pretty immediate stall in both corporate travel and bookings, not that they stop but the growth rates that we have been on stalled considerably and consumer confidence, certainly in air travel, started to wane a little bit as questions of safety came. And unfortunately, as we all know, some aspects of the crash were politicized which did not help matters in terms of restoring confidence in consumers' minds. We, at that point in time, we were growing our corporate revenues at a healthy 10% clip on a year-over-year basis. And that's why, again, we thought first quarter was going to be a pretty strong quarter. That dropped into the low single digits quickly. And as we started into February and we wanted to see that recover and people getting through the incident and start to find a more stable ground, it never really happened. It kind of -- that close-in booking, that corporate confidence, that consumer sentiment continued to stay a bit lagged as we are looking at it and we thought it was a little bit odd that it was taking time for it to recover. Then unfortunately, we had our own incident. Fortunately, no one was seriously hurt but we had our own incident on February 17 and that fed into another round of delay. And it became pretty quickly obvious to us, there was more than just the consumer sentiment coming out of the incident. So there was something going on with economic sentiment, something going on with consumer confidence. And we are seeing that very much in the close-in bookings. We were able to hold our advanced bookings at a decent clip but it was the close in that we are having a very difficult time closing. And to make matters worse, we were positioned for close-in bookings. Again, if you've got a supply base and a supply balance that we've all felt has been quite favorable. We see a lot of demand in the market. Of course, you're going to be holding out for better pricing, for better yield management, for better inventory and we were in that positioning, waiting for close in that never materialized. And so it took us a few weeks to sort through all of that to get to a point where we started to recalibrate our inventory strategies and get ahead rather than behind the booking curve. And we're now in a place and Glen can talk about this during the Q&A. In April, we feel like we're in a pretty good spot. But honestly, in February and then we saw the same thing happen in March, we were behind and behind is a pretty tough place to be when close in was having a hard time with the incidents that I mentioned. So put that all together for the quarter, we're going to be short about $500 million of revenue from what we had anticipated at the start of the quarter. It's about 4% less than what we were anticipating. And I put it into 2 buckets. About $250 million of that $500 million, we really believe is transitory. Those are costs that we saw during the quarter that were moving through the quarter and we don't anticipate continuing to repeat going forward. $100 million of that was the ice and snow event and as well as the L.A. wildfires. We have a very large business in L.A. and that also happened in January. There was sentiment related to the aircraft incidents that was clearly something that's moving forward and we can see in our advances, people are traveling. It's not they're not traveling but there was a price to travel and getting people back confident in air travel is moving forward. And the third thing was the inventory strategies as we are recalibrating and pushing out to try to get ahead of the curve, there was a period of time that we were a little bit out of market, if you will, on pricing. And that -- those 3 elements was about $250 million to us in the quarter. So the real impact going forward as we see at Delta, everybody's got their own view but my sense, is about half of that, about $250 million that we feel is going to be something that we've got to address as we move forward into the second quarter and beyond in the year. Now second quarter, we're still feeling quite good about it. Obviously, there's -- the noise is still out there and the sentiment is still not as strong as we'd like but we've got tools to manage it. We've got our inventory and pricing strategies in place. Our brand is healthy. The operational reliability is very strong. The commitments that we have to continue to get customers where they need to be on time with their bags is holding up better than ever, leading the industry. We see a corresponding offset in fuel prices going forward that will also help buffet the storm. We -- from the peak in the quarter to where we are today, we're down about $10 in the price a barrel, Brent. At Delta, every dollar is $100 million on an annualized basis. So that $10 fall for us on a go-forward basis is about $1 billion. And for the same reasons why you see some of the weakness in the economic indicators and consumer sentiment around travel, you're going to see that weighing also on oil prices and that's partly what's also going to help buffet us as we go forward, looking at the year. And as I look at the slide, because I can't see it very clearly, the other thing that -- what has not changed is the constructive industry structure is still in place. If anything, this little bit of turbulence at the start of the year, I believe, should help reinforce that structure and continue to manage supply in balance with demand. And so we're hopeful that will also continue to hold. We feel good about other parts of the business. So there are green shoots we should talk about. Our international business has held up through all of this and continues as we look into the second and third quarters, continue to see nice, advanced bookings for both transatlantic and transpacific specifically. Our loyalty business, what we see going on with the co-brand spending for both the months of January and February is up double digits. And so there's not this overarching loss of spending prowess that we saw. You may have -- you may have expected to see with some of the weakness that we feel. We're not seeing that in our focus and the -- I'm trying to read upside down here. And the last thing is the operational and cost execution that we have in place is doing quite well. Not only will we get -- fuel price is down, we're going to have the lowest nonfuel CASM growth in the industry. We said for the year, we're going to come in, in the low single digits in nonfuel unit cost and that's what we expect as well as what we expect for the full year. And that said, feeding into our value creation framework, you can see here the 3- to 5-year targets that we put out in November aren't changing. We're not changing our full year guidance at this point. Obviously, we'll continue to watch. And if we need to make adjustments as we go, we will. But we feel good about all these things. There's nothing that we've been through these last couple of months to indicate there's any cracks in any of this. We anticipate margins continuing to expand and we think margins will expand this year even with the slower start to the year. First quarter, even though we just went through a little bit of a parade of horribles, we'll still be just as profitable as it was in the prior year. We're expecting between $300 million and $400 million of pretax profit in the first quarter and $1.5 billion in free cash flow in the first quarter, $1.5 billion of free cash in the first quarter alone, even with what we encountered. So the business at the core is healthy. We just need to continue to be able to better reset around demand and what we're seeing in the environment to take proper advantage of it going forward. We anticipate over the next 3 to 5 years to grow our EPS by 10% and free cash flow in that $3 billion to $5 billion range. And we're very committed to our balance sheet goal. Many of you have asked questions over the last few months, every time the answer is yes, we continue to stay very, very committed. Our goal is to get down to 1x gross leverage. And my anticipation over the next 24 months is we'll be pretty darn close to that number. The priority, as you can imagine, is developing a better return on invested capital. Today, Delta is at 13%. We expect to get to 15% over the course of the next year and that is the goal, showing that durability that Delta is known for, both on its balance sheet as well as its operating performance. And this comes through with respect to how we have a better allocation of capital as we look at ourselves relative to many of our peers. $10 billion of annualized operating cash flow is our expectation per year over the next 3 to 5 years with roughly half of that going back into the business, roughly $5 billion a year in terms of capital to be spent on the business and the other half to go into shareholder returns, prioritized by, first of all, continue to get our leverage paid down, our debt. We are reminded once again with some of the volatility we've seen in the last 2 months, how important it is to mitigate what you can, to control what you can and getting your debt paid down is probably the most important thing you can do. And once we get there, we can explore other means of shareholder return but we're going to stay very focused on that goal. So with that, that's a update from Delta, Jamie. Sorry, for having to present upside down here a little bit, looking back at my slides. Now you know the screen is working. It's a good thing you're getting out of this building. And we are very, very enthusiastic and excited as we look forward to the balance of the year. This is our centennial year. Delta is the first airline in the United States to turn 100. And this is the month actually. We just last week, we celebrated that 100th anniversary and we are committed, as we said in November, to making this the best year in Delta's history and I'm convinced that we're going to be able to continue to do just that. So with that, we'll turn it back over to you and the Q&A.

To kick it off, we have a lot of people in the audience. So John, if somebody wants to shoot up their hand. So Ed, at a high level, if you could change 1 single perception that analysts and investors have about either the industry or specifically Delta, what would that be? So for example, if somebody asked me the question, like the adage that low costs always win, I never agreed with that, always bristled at that. That's the kind of answer that I'm potentially looking for.

Well, I think it's our responsibility. I know it's been quite a while. We've been on this journey. I know even in periods of disruption, we got a chance to prove that yet again that this is a safe place to invest. That this is not just the same old airlines. And yes, of course, when you see the stocks get hammered over the last couple of weeks, it's easy to reinforce that age old perception that it's going to be how we recover. And my view is going to help us reset at a higher level. We've got one more opportunity to continue to prove. This is an investable industry. And when you look at the cash that we're generating, when you see what we're doing with the cash, when we're continuing to generate very, very significant gains from a customer standpoint, our employees are on our side. This is a healthy business and it's a vital business and it's a business that will continue to pay dividends into the future for people, I'd say. But it's not necessarily going to -- there's -- it's not straight up at all times. But when you have these moments of dislocation, this is the chance to move forward, not back.

You think you'd ever win back the confidence of the Berkshire Hathaway, your former top shareholder?

We try. We try every day. We try every day.

Quick question for Glen, because I definitely want the audience to be able to ask questions. But for the last several days, including overnight, I keep getting the question, how much capacity do you think will be cut at the conference? And I know you can only speak to Delta, obviously but my understanding is that the internal bar to make a decision on summer capacity in mid-March is very high. Is that perception accurate? It just seems like you'd have to have a ton of conviction now to start...

We were talking about this last night at your dinner. Yes, it is. No, we had a bias to fly whatever we could as we headed into the summer. And I think on the margin, we've tempered that down to make it fly what needs to be flown. And so as we go through the year and as most people know here is that the schedules for the summer for us, at least, I can't talk to the industry, are overbuilt and you will see those coming down over the next couple of weeks. I think our spring schedule load is going to be out on March 22. So I expect that to be reduced from what's out selling today. And I think the bias has gotten a little bit -- the bar has gotten a little bit higher.

How much of your business would you say touches government, federal government? And what have you been seeing in bookings from that sector?

Well, less than 1% of our revenue comes from direct government and 4% of our revenue comes from Washington area. It's the one area of the country that we're the least exposed. So I guess that's a benefit at this point in time.

Just following on from the last question. If you take the $250 million that you talked about that's non-transitory, are you able to describe what type of customers that was typically -- if there is weakness, okay, government is not a huge part, okay but where are there pockets of weaknesses in terms of different types of consumers, different parts of the market corporate, et cetera? Any color on that would be very helpful.

I'd say it was -- it's domestic. Certainly, it was through partially corporate, maybe half of that is corporate related in terms of the growth rate coming down against growth. It's not that corporate has stopped traveling, it's that -- it hasn't increased its travel at a double-digit clip. And we have talked, as we could imagine, we talk to all of our corporate customers and everyone is ready to go. But in the face of the amount of macro uncertainty that's out there, I think people are cautious and they're pulling back a little bit on travel, not in an organized manner but just kind of waiting to see what's going to transpire, whether it's trade and tariff challenges or macroeconomic policy changes or just a little bit of the unsettledness of the market that we all see. And the other half is in the domestic more price-sensitive consumer and it was entirely -- almost, not entirely but largely in the close-in area. We just didn't see that walk-up traveler, whether it was a last-minute decision to travel corporate or consumer and a little bit of price sensitivity around that as well. That's why I think our pricing was out of whack with the market and we -- it took us a little bit of time, a couple of weeks to make the necessary corrections on the forward-look. Not -- you can't go back and recapture and change but you -- we tried really hard to make certain that our pricing structures were respected and stayed in place as we got back ahead of the booking curve in April. And we also -- I think it's fair to say, we'll find out but we have a sense that March will be the bottom in terms of what we're seeing, that we'll be in a better spot in April. Glen, you may want to talk to that?

Yes. I think what I haven't done a very good job explaining at dinner last night was the fact that when you have your close-in demand very, very strong, we were saving about 2% of our seats for this close-in demand that didn't materialize. Your choice is to try and fill those seats or to just power through it until you can get ahead of the curve. So essentially, those seats went unsold in February and March until probably the last week of March and into April. And as we adjusted the inventory, those seats are now sold at a lower, of course, average fare. But instead of having 0 revenue on them, you have revenue at 70% of what you would have had. So that's why we're confident that as we move into second quarter, the worst is behind us.

Dan, maybe a couple of questions for you. As we think about the balance sheet goal of 1x gross leverage, you have a lot of flexibility right now. You have your route slots and gates tied up and bonds and bank deals, you have loyalty, where the loan-to-value is very low. You obviously have some aircraft and so forth. How are you just thinking about the composition of the balance sheet going forward as you get down to that 1x gross leverage? Are you going to buy planes for cash? Are you going to issue unsecured debt to refinance the government debt coming due? How should we think about all this?

Yes. Thanks, Mark. A few things. One, we've been paying cash for all our aircraft delivery. We'll continue to do that. As you know, our or assets that aren't encumbered with debt continue to grow. They're over $30 billion now. We believe they'll grow to over $40 billion. We're in a position where when you look at the vast majority of our maturing debt, it's actually our higher cost debt. It's a couple of points above our weighted average cost of debt. So that's favorable. And you're going to continue to see us do our liability management that we've been doing as it relates to chipping away at that non-maturing high-cost debt. We did that with the term loan. We can accelerate the amortization of that and we'll continue to do that. And then I think when we get out an issue, we'll be -- you'll see us go back to where we were, which was more unsecured than secured as we had come through this the past 5 years and we'll take advantage of that in the market. And Ken and team are looking at that. And we'll -- part of that is just where are the markets at any point in time but we'll advantage -- be opportunistic and take advantage of that upon issuance.

Good. And then, Ed, just a question for you. We touched upon this when we met last but just sort of thinking about the delta value proposition, the flywheel, et cetera, the sort of stickiness of your customers and so forth. Where do you think you stand on that journey? Like how much more is there to go? And we were talking a little bit about the comparison to Apple and getting sucked into their ecosystem. It's clearly what you're trying to do at Delta with the credit card and the in-flight experience and the lounge network, et cetera. But where are you -- like what inning of the ball game are we in right now for Delta in that regard?

I think we're still in the early innings. A lot to do. I don't think it's a race you ever end. One of the things that, as I look back over the arc of my -- I've been in this business now 26 years, 26 years. I remember growing up in New York and American Airlines was the airline of choice in New York without question for both business and Delta was the plane you took to Disneyland. And I'll say, it's just -- it's flipped, right? And Delta, not talking about American but Delta's role here in New York is certainly one of the great strength that's how the brand is seen around the world. And our opportunity is to continue to advance that with younger audiences, with younger generations. We spent a lot of time at our Investor Day last November talking about how the buying power of our younger generation is actually at the highest level that we've ever seen in terms of comparable generations over time. And there's no question that generation is choosing Delta. And that generation, whether it's through the free WiFi that works that we already implemented in or the partners that we're bringing into the ecosystem or the live TVs that are ubiquitous around Delta. All of that, the new airports, the lounge designs, every -- all of that is to be an aspirational brand that they want to be part of the loyalty membership and they want to continue to feel great about their choicing -- choice when they're on Delta. And that's where we're going. And I mentioned at dinner last night, one of the testaments to me that says what we're on the path is, over the last 2 years, Delta has been named the 11th most admired company in the world by Fortune Magazine. Not airline, company. And the only one closest to us is Singapore Airlines, they're #28. So it's just a survey but it's a worldwide survey. There's tens of thousands of people who participate. That's what people are saying about our brand. That's what we're continuing to invest in and go. And so while we hate the fact that we're going to come out of the blocks a little slow in the first quarter, we're undeterred. And the focus is really clear on this team. It's going to continue to go win the hearts and minds of the next generation of flyers.

And Glen, I don't want you to feel left out of my question in here. So we have a big industry announcement this morning with Southwest Airlines charging for bags. Have -- anything you can share insight into? I'm sure you've done your own analysis, like the other airlines have about what maybe -- was there a drag to Delta on the fact that they were -- had their prior bags fly free policy and what this might mean. The fact that they're now charging for bags in terms of what that does from a Delta perspective, from a competitive nature?

I think clearly, there are some customers who chose them because of that. And now those customers are up for grabs. We'll see how that plays out over the next period of time as they continue to implement multiple changes to their products. Some good for customers. I think the assigned seating, of course, probably like by many business travelers, the premium economy seats liked. And clearly -- so it's a mixed bag with their transitioning to more of a legacy carrier and they're in that transition.

One for Glen and then 1 for Ed. And Glen, I don't want to be labeled as a permeable by asking this question. But if the U.S. consumer is delaying their travel planning for summer and in the event that consumer confidence is restored by further changes in Washington, I mean, is there a scenario where summer yields are actually higher because of the delay that people are taking in booking summer? Or is that just too wildly optimistic?

Well, first, I think the question is a little bit weighted that we think people are delaying their summer travel. And I think what I was trying to explain in the earlier question is that we were saying no to many customers who are planning for spring and summer. And now we're saying, yes, earlier in the curve. So as we talked about last night, April is the first month that we will actually go in with a load factor cushion. Previous to that, in February and March, which are clearly February, one of the more difficult months for general demand. And to run -- we were very confident on that close in that we saw so strong into December and early part of January that trailed off after all of the confluence of events that happened in January. So those seats went unsold in February. They went unsold largely in the first part of March and we're catching back up to the curve in late March. And I think when we look at loads for summer, we think that loads will be at or above last year's levels.

And then Ed, do you -- and I don't know how you would analytically answer this question. So it may just be, do you have a gut feel? But at what point does the pain in the stock market begin to drive a change in premium consumer behavior? How much more pain before people start trading down? And again, I don't even know how I would answer the question with limited data that I have, you've got a lot more than that.

Yes, yes, sure. If you recall last November, we put up a chart that showed who our consumers are and the accumulated wealth effect and how that's grown over the last 5 years post-COVID And it's stunning when you see that growth. Our consumer is a household making $100,000 or more, which, by the way, represents 40% of the households in our country. So it's not necessarily an elitist definition. And they make up clearly well over 90% of the revenues coming to Delta. If you look at the wealth that, that cohort has accumulated over the 5 years post-COVID, it's in the tens of trillions of dollars and it's more than doubled, maybe close to triple, I believe, from the chart in terms of what their ability. And that's the market, that's real estate, that's cash. It's just an accumulation of opportunity. I don't think a modest pullback in the market is necessarily going to change. It doesn't seem to be -- obviously, it's changing, wanting to go to Europe this summer or wherever they may be. And honestly, with all the noise, it's all the more reason to get away.

Well, on that, thank you very much.

On that advertiser. Thank you, Jamie, Mark, it's always good to be with you.