Delta Air Lines, Inc. (NYSE:DAL) Morgan Stanley 10th Annual Laguna Conference Call September 14, 2022 10:35 AM ET
Company Participants
Glen Hauenstein – President
Dan Janki – Executive Vice President & Chief Financial Officer
Conference Call Participants
Ravi Shanker – Morgan Stanley
Ravi Shanker
Good morning, everyone. Thanks so much for being here. I’m Ravi Shanker, Morgan Stanley’s Transportation Airlines Analyst. And I can’t tell you how excited I am to welcome you all to the 10th Annual Laguna Conference in person, no more Zoom, we’re never doing that again, we’re never going back there and we’ll never leave…
Glen Hauenstein
[Technical Difficulty]
…measurement which is our corporate contracted sales, the largest companies in the country that we all have contracts with. And that travel had been about 65% restored during the summer months with revenues running around 10 points above that because yields, of course, are higher.
And now as we’re sitting here today, we’ve seen about a 10- to 12-point increase in that. So going from the mid-70s up into the mid- to high 80s in terms of total revenue recovery and on a great trajectory as we look to close September and head into the fourth quarter. We really have two things to think about as we finish out the year here. One is what’s going on with business travel; and the second is how do holidays look. And so we are expecting a very, very robust demand for the holiday periods for Thanksgiving and Christmas and it looks to us now is the business is going to have a very strong fall which is always great for October.
Ravi Shanker
Got it. That’s a great update. Just to unpack that a little bit, is it safe to assume that, that 10 to 12-point bump that you’ve seen was largely driven by volume and not yield? So the…
Glen Hauenstein
No, that was the volume number, the volume number with revenues tracking about 10 points ahead of that.
Ravi Shanker
Ahead of that even. Okay. Got it. And when you look at your — again, I love how you share your corporate travel surveys and kind of what they tell you. In terms of the forward look, kind of have you seen any movement there kind of any clear indication? Obviously, with what’s going on in the macro, that put some pressure on that as well.
Glen Hauenstein
Right. We haven’t really seen that yet. I think everybody is looking for cracks. And what I’d say is we haven’t seen any cracks in our demand set yet. There was step-up in business post Labor Day which we were hopeful for but didn’t know if it would actually materialize. And now we can see it actually has materialized. And we continue to see, of course, on the leisure side, very, very strong demand through even what’s traditionally more of an off-peak period in the fall and into the early winter.
Ravi Shanker
Got it. Just last one on corporate, maybe taking a longer-term look. Maybe it feels like a long time ago, maybe it seems like yesterday that people are saying that corporate is never coming back. And if it ever does, it’s going to be like 50% shy of whatever it was, et cetera. How would you address that statement right now? I mean do you feel like it’s definitely good across 2019? Or kind of what do you think the long-term future of corporate travel is?
Glen Hauenstein
I think what we’re seeing is a lot of different travel post pandemic. And it may never go back to what it was in ’19 but it will be bigger in different ways. And business travel, we know that one of the things that we always look at the negatives of conferencing, mobile conferencing but the plus is your office is with you everywhere and you can be anywhere and participate in meetings.
And so we have that. We have the migration of people out of some of the bigger cities in the U.S. to more rural areas or lower tax areas that have to get back to the office many times a year. And those aren’t in our more traditional corporate contracted categories. But I think you could clearly say where we’re sitting here today and corporate revenues restored to 85%. The 50% prediction was wrong. It was just wrong. And people need to connect, they want to connect. And the more people haven’t connected, the more the desire is to connect again in the future. I think as you just mentioned today, you’re never going back and it’s great to be here.
Thank you all for being with us today. We really appreciate it. Hopefully, some of you flew here.
Unidentified Analyst
On Delta?
Dan Janki
Well, on Delta.
Glen Hauenstein
But it’s a very different environment but it’s — I think it’s got a lot more potential than even the prepandemic in its totality. It’s going to be differently fragmented. But in its totality, it’s going to be a great ‘23, I think.
Dan Janki
I mean different and that the underlying set of our corporations are actually bigger than they were in 2019, too.
Glen Hauenstein
Absolutely.
Ravi Shanker
Is that largely a function of GDP as a function or — got, it, got it.
Glen Hauenstein
Economic growth.
Ravi Shanker
So the other area of real strength that you saw during the pandemic was premium cabin. I think it’s been consistently running like 10 points ahead of Main Cabin. Yes, as we’ve gone deeper in the recovery, kind of do you have more visibility, more certainty on the stickiness of that number? Kind of how is that number trending as you’ve gone back to normalized levels?
Glen Hauenstein
It’s doing nothing but accelerating along the — despite the macro headlines, we know the consumer is still in a really good position and they’re traveling and they want experiences and they’re getting used to it. I think once you start flying in a different cabin or a different experience, it’s hard to go back. I know that personally. I worked very hard at the airline so I don’t have to sit in the back. I don’t need to. And so customers are getting very used to that and they’re appreciating it and we look at intent to repurchase. It’s never been higher.
We look at how it’s coming to us. And it’s why the distribution system is widening. And I think one of the really underappreciated things about the transformation of the industry from a commoditized seat to a decommoditized experience is that, that was a journey. It didn’t happen overnight. It happened over multiple years and it had multiple events that had to support it in transforming essentially the entire distribution network that was solely geared on price and seats to something that was geared on experiences and bringing all of your distributors along that journey with you. This has been a multiyear process.
We’re not at the end yet. We still have a few big dominos that need to fall but they’re all in process. Whether or not it’s the way Expedia looks at air flights, whether or not it’s the way Concur looks at the way they fulfill corporate commitments. These are all long, long, long journeys. And we’re in a very, very strong position as corporate travel continues to return, I think.
Ravi Shanker
Got it. Just a few more questions on the demand side, obviously, because that’s the most important thing here. Just kind of focusing or switching gears to domestic leisure. Obviously, it has been like carrying the recovery on its back for the last 2 years. We’ve had an incredibly strong summer. I don’t think it would be a shocker to see kind of some of that given back with normal seasonality and just with some of the frost, like the revenge travel, if you will, kind of coming off of it. How closely are you tracking that? What’s the booking curve telling you? Kind of when you see that normalization, is that normal seasonality? Is it better, is it worse? Just around that.
Glen Hauenstein
I think we’re seeing some return to a more normal seasonality. And the consumer and leisure demand remains very, very strong too, as I mentioned, the off-season, the September-October which has not necessarily been that strong of a leisure market. And it’s concentrated in the same places, the leisure destinations, the Floridas, the Phoenixes, the Denvers, places people want to go visit, outdoor space is Bozeman. And so it’s been a very interesting rebuild of the airline because it came back but it came back very, very strong but very differently. And our ability to adapt to that new normal is going to be, I think, our ability to generate acceleration in the margins into ‘23.
Ravi Shanker
Got it. The last piece of the volume jigsaw obviously is international which has been the slowest to come back but probably has the most dry powder when it does which show pretty short term. Where do you think we are? I mean obviously, you and your peers have been fighting really hard to get governments to open up their borders and drop the travel restrictions. And you’ve seen a lot of those travel restrictions has been dropped. I think Japan just came out a couple of days ago and said they now want to drop all restrictions. So do you see what you like? Do you have everything you need and now it’s just a case of getting bodies on the planes? Or do you still think there’s some room to — wood to chop there?
Glen Hauenstein
Well, where we sit in this leg of the recovery is that international now is surpassing domestic in terms of unit revenue strength. And so we see that continuing into the fall. And again, that extension of the leisure period, usually, we pull our transatlantic schedules down starting in September right after Labor Day. We’ve run a more fulsome schedule into October and into November. And actually, I hate to use 2019 as a reference point because it’s getting so old but versus 2019, we will actually have a larger footprint in the transatlantic in the month of October than we did in October of ’19 with unit revenues that are leading the entities in an upward momentum.
So I think you’ve got a lot of things going on in the transatlantic. First of all, you’ve got dollar strength. And that could be bad if you’re European based but our revenues are generally about 80% U.S. dollar denominated. So that’s been a very strong thing. And as most of you know, October is actually — and in early November, it’s actually a wonderful time to be in Europe and never a better time to travel than this year with the dollar trending right at parity. And so we’re seeing really strong strength into the shoulder season here for transatlantic travel, it’s open. As a matter of fact, I just got back from Greece on Sunday and it’s full. It’s open and it’s full. And — so then you have to just get through the dead of the winter, the holidays, the dead of the winter and then you’re kind of back by March of next year into the U.S. point of origin leisure travel segment.
So, I think really good fall and winter for transatlantic based on U.S. consumer strength. And then in Asia which is our least rebuild, of course, we still don’t have really any resolution to China. We’ll see what happens after October with the Congress over there and if they attempt to reopen after that event.
Japan, as you said, is intending on reopening. We don’t have the exact specifics yet but that looks like it will come back online. What I could say is if it’s open, demand is really, really strong. So places that are open like Korea, we will have our schedules fully rebuilt by October. Australia, we’re already rebuild. We’ll actually be larger this winter going into the peak holiday season. So if it’s open, the demand is quite strong.
Ravi Shanker
Got it. And I loved how you slipped in that travel pitch there, very, very smooth. So just kind of lastly to tie on the revenue line. Obviously, the other big focus area has been pricing, running incredibly strong. You mentioned that in your remarks so far. 2Q was running 20%, 25% above 2019 levels. I think that’s probably not sustainable in the long term. But what do you think is sustainable off that amount? I saw a survey that said I think 80% of respondents would pay 15% more than prior levels to travel which is a pretty strong number if you’re going to institutionalize that and build that into the revenue base. So how sticky do you think the current yield gains are?
Glen Hauenstein
We don’t comment on forward pricing environment. So I’ll just talk about what has already happened. And what you’ve seen is really — and this is my personal belief, is air travel is more inelastic than people give it credit for. And when you think about how much you’re going to spend on the total trip, the airfare becomes — is really a very small percentage of the total spend. And so to the extent that people are used to paying, let’s say, USD 100 to go from New York to Florida, if it’s $115 or $120, probably not enough to make a decision different that you’re not going to go to Florida. And I think what our history would tell us is that there’s very little demand destruction that occurs with — when yields are higher. So just looking in the rearview mirror, I think there’s always the ability for us to continue to look for value.
And I think that’s what’s different about us than past recessions or past advances. We have a much more diversified revenue stream and it’s much more based on the experience rather than just the seed. And so I think that’s what we’re going to continue to work on. It’s really the connection, the connection of the products, the connection of the services, the connection of the demand and then what you’re able to get out of your own ecosystem more and more.
Ravi Shanker
Got it. Maybe switching gears and talking about kind of some of the challenges of the last 6 months, obviously, not just for you but the entire industry around operations. It seems like the entire industry now has somewhat of a handle on that. Kind of in our most recent weekly, we pointed out that cancellation data for the last couple of weeks was the kind of the lowest it has been in a while across the industry. Where does Delta stand from an operational standpoint? Like do you have the resources you need? Do you have the line of sight to get the resources you need? How are we looking for the next 6 months?
Dan Janki
Yes. Progress still. We’re really happy with the progress that the Delta team has been making. We talked about it back in July that we took a number of proactive actions in June to reset our second half schedule to set how we do crew scheduling, the set of operational buffers, our airport procedures. And as we progressed here through the summer, July was better than June operationally. August was better than July. And September month-to-date, it’s off to a really, really good start to a point where we’re running the mainline 99.96% completion factor, continue to lead the industry across those metrics year-to-date, month-to-date, quarter-to-date.
So we’re really proud of the progress that the team has made on that front and that we’re making. You’re seeing it from our customers. Our NPS is very strong. It’s above what we targeted. And even our operational metrics is actually better. We didn’t get tired of talking about 2019 in a lot of ways. But in September, we’re ahead of September of 2019 as it relates to operational performance. So really happy and pleased with where we are.
Ravi Shanker
Got it. Obviously, one of the big factors there has been labor, kind of the pilot pipeline. Kind of what is that situation like? Kind of are you getting more people who want to work for an airline? Obviously, a very, very strong brand and franchise like yourselves. Is that pipeline easing? Is it — what does that cost inflation number look like? Are you getting any relief there as well?
Dan Janki
We have had — you said it with the brand. We’ve had great application rates. We’ve been bringing on 200 a month. Our activity is really about training. We’re training at an all-time high level. At any point in time, we have 1,700, 1,800 people in active training or training the new pilots or pilots that are moving up through the ranks of Delta. And that compares to 600 in a more traditional period. So about 1,200 more consumed in that process. So we’re getting very close to the level of pilots that we had in 2019. We’re in the high 90s but we’re consuming a lot of them through the training activity.
Ravi Shanker
Got it. So just maybe you can wrap a bow on that and kind of looking at the CASM ex fuel line. Understandably, kind of you said on the last call that it will likely be a drag if you’re operating a full airline or operating a full schedule for a certain period of time. What’s the trajectory of that gap closing? And kind of when do you think you can get that CASM ex number back to something more normalized?
Dan Janki
Well, we’ve said that we were going to put operational reliability first. We’re going to make sure that we have the resources in place to be able to scale the airline with the standards that our customers hold us to and we hold ourselves to. And you see that we’re the least restored at this point in time. But that pace of restoration will progress based on demand and we’ll continue to adjust that. You’ll see it here as we progress through the fourth quarter.
We won’t be — we’re running much more of a flat schedule coming out of the summer. So the relative restoration will take place in the fourth quarter. And we’re keeping an eye to we want to have the ability to be fully restored in the summer of ‘23. And we’re going to continue to watch that based on the demand and set that capacity appropriately.
Ravi Shanker
Got it. One of the kind of transitions or the changes in the industry you’ve seen in the last couple of years has been the dynamics between kind of the network airlines and the regionals, both in terms of scheduling and in terms of resources and capacity. So I think Delta has had a little bit of a strategy transition over the last decade and we’ve seen, obviously, competitors have to raise wages significantly on the regional side in the last couple of quarters. Can you give us an update on kind of the future of regional versus network and kind of how that’s going to play out in the long term?
Glen Hauenstein
Let me just give you a little bit about where Delta sit first. And I don’t want to prognosticate about where the regional space is heading in the long run. But if you go back to 2009, I’m going to ask you what percentage of departures do you think were on planes 50 seats or less? Just guess.
Ravi Shanker
[Indiscernible].
Glen Hauenstein
43%. 43% of our departures. And when you think about what’s different and what’s transpired over the last decade, the transition away from being so dependent on regionals and really moving more to the mainline. So 43% of our capacity, by the end of ’23, that number will be zero. So a huge transformation in a fleet that’s biasing away. And we’re sitting in a very unique position with being the launch customer of the A220 and having that coming into our fleet and really our ability to continue to upgauge over the medium and long term.
And does that mean we’ll be out of the regional business? No. Does that mean we’ll become less and less reliant on it over time? Yes. We already have become significantly less reliant on it than we were historically or than maybe our peer site is today. So — but we’re continuing on that march. We were on that march before the wage inflation that’s occurring right now at the regionals. And clearly, that will on the margin accelerator.
Ravi Shanker
Got it. Just kind of maybe on a related note, Dan, how are the conversations of Boeing and Airbus going? Kind of what’s your — are you happy with your current fleet strategy? Kind of what’s that cost renewal looking like and the visibility on that for the next 12 months?
Dan Janki
We’re very pleased with our fleet strategy. I think the team has been clear about that year in and year out in where we’re going. And you saw that with the MAX order fitting right into all the elements that we talk about. We want to continue to upgauge. We want to make sure that we have size within the fleets that we’re operating. We want to ensure that they’re sustainable and that we’re driving the efficiency and the new aircrafts that we’re taking. There’s certainly some delays.
Things are moving around a month here, a month there. But overall, the deliveries are coming in. We’re very happy with the performance of the neo and we’re looking forward to more deliveries on that front. Same with the 220 and the performance of that. And we continue to induct those lightly used aircraft that we bought in the 73s, 900s and looking forward to the MAXs over time. So very pleased with our strategy and how we’re positioned with our order book.
Ravi Shanker
Got it. You said the S word there. So that’s a pretty nice layup into my next question which is ESG. I think it’s obviously a topic that’s very, very close to your heart. You guys are doing a lot with sourcing sustainable fuels and kind of, for now, being carbon-neutral but then kind of moving away from offsets over time. So again, can you just give us a little bit of a — and for those who are new to the story, kind of a wrap on where Delta stands, kind of what your staff commitments are and your path to getting to net zero?
Dan Janki
Yes. No doubt about it. No doubt that fleet is a big part of that efficiency as we go to next-generation aircraft and the efficiency of that. Sustainable aviation fuel is part of that. We have a commitment to be 10% of our fuel consumption in 2030 to be sustainable. It’s a big goal. We’re making progress with that. We’re going to have about 50% of that defined in offtake agreements with a diverse set of providers. There’s a lot of different feedstocks and technologies out there and we’re on that path. But — that is a — for the industry to be at, let’s say, 10% in that time period, you’re talking about 3 billion gallons.
Today, you’re under 10 million gallons a year. So the industry has a lot of development that needs to happen. And it’s just not an airline or an OEM or it will take a village, a real broad ecosystem here and a set of partners and government incentives that enable it through this period of time. No different than you saw in electrical vehicle market, solar market, the wind market over time but all that will have to take place here over the next decade.
Ravi Shanker
Got it. Any questions from the audience? Any questions from here actually [ph]?
Unidentified Analyst
Can you discuss some of your various labor contracts, when the next ones might be coming up? And then secondly, do you measure competitive capacity by route? And how you compare versus American and United? Are you a little bit more less competitive markets, shall we say?
Glen Hauenstein
Let me — first of all, we only have — well, we have a dispatches union but really, we only have one major union group which is the pilots and that’s been open since 2019. And of course, during the pandemic, by mutual consent, we decided to defer any negotiations that picked up again earlier this year and we are currently in open negotiations with our pilots, as are United and American. So all 3 of us are currently in negotiations. We’ve got — there are 27 sections in the contract. We’ve closed a significant number of those contracts. I think — of those sections, I think 20 of the 27 are closed. The 7 that are remaining are always the big ones, right? There were pulls in the pay [ph], so we’re working very hard on that. And hopefully, we get that done by the end of the year. But we’ll see at the pace of negotiation.
Unidentified Analyst
Got it. And the American — the competitive…
Glen Hauenstein
And at a market level, do we track competitive capacity? I think yes. Of course, we do. But I think one of the things that we’re really excited about with our brand and where it sits right now is that we actually have our highest returns in some of our most competitive markets. And that isn’t where we sat when we had 43% of our departures with 50-seat regional jets. And so that continued upgauge and continued movement away from the smaller cities and towards the more major metropolitan areas, if you look back at our history, we expect to be number one in Boston this year. We have been number one in New York for a long time, number one in Los Angeles this year.
So these are major — between New York and L.A., that’s 20% of the total revenue of the airline. And so to not be big in big cities, you can’t be a big airline. So I think that’s been really our journey is to be a more preferred carrier in competitive markets and create the products and services that are resilient against your competitor set.
Ravi Shanker
Got it. And then I wanted to kind of shift here and I’m going to talk about the long term. I think it’s — investors in this space need to be short-term focused for understandable reasons. And I think the gap between where the stock prices are right now and fundamentals probably has never been wider. But — so just two questions for you. I know that you’re not going to fix this problem or give us world peace on stage in the next 4 minutes. But two things; one is, what are some of the long-term enduring structural trends in the industry that excite you for the next 5, 10 years? And second, how do we make this space investable for investors in the long term rather than straight to them [ph]?
Glen Hauenstein
Right. I think there’s a couple of things that you would think of. During the last recession, unfortunately, we posted a $4 billion net loss or close to that, I don’t know the exact number but it was all on our fuel hedge. So even in the worst recession, our lifetime, the airline actually created a profit over that period. I think there was a missed opportunity because I think everybody looks at the headlines of what the losses were as to what the underlying transformation has been. And so if you think about how we’ve transformed to be a much more resilient model, what I’m very excited about is that diversity of our revenue streams, it’s no longer dependent on just a fare on a seat in a market.
It’s about an ecosystem. It’s about owning your customer base and having your customers be loyal to you. And I don’t know how many of you in this room are Delta loyalists but I’m sure some of you are. And hopefully, you find that to be a great experience and you want to continue to give us your business. I think that’s a seat change away from where we were as an industry 10 or 15 years ago. And it’s been part of that loyalty ecosystem. It’s been part of products and services. It’s been part of the array of trying to diversify our revenue portfolio. We laid out a goal to be 50% premium products and services, 50% of our revenue being from premium products and services in 2024, correct?
Dan Janki
Yes.
Glen Hauenstein
And we will meet or exceed that goal. And I think that’s underappreciated. And I think understanding your customers, I mean airlines are good at fighting with each other. And I think transforming that, not winning the airline game against United or American or Southwest but winning it in the hearts and minds of your customer is a really big sea change, because getting your existing revenue base more and more excited and franchised in your brand and then offering them array of products and services that continue to improve and get better is really the name of the game.
And so I feel like less and less am I worried about does United have 12 or 11 trips a day between LaGuardia and Chicago? But am I serving the needs of the people who are flying between LaGuardia and Chicago? And that’s a great example because in LaGuardia, we’ve got that beautiful new terminal with the world’s largest Sky Club. I don’t know if any of you have visited it, it’s really truly amazing and transforms the LaGuardia experience.
Dan Janki
It’s incredible. Yes.
Glen Hauenstein
And in Chicago, where we’re now moving terminals and we’re going to go to the international terminal and we’re going to have a brand-new 21,000-foot Sky Club where we can board the LaGuardia flights directly from the club itself and create a unique experience in what’s otherwise a just commoditized marketplace that should bring more and more people to say, “Hey, have you tried that Delta experience?” And that’s really what we’re about now is creating an experience with stickiness. And it bears out we’ve had, through the pandemic, even though we’re not fully restored, we’ve had record acquisition in terms of our SkyMiles penetration on the airplanes, what percentage of the people are part of our SkyMiles program has never been higher, although it’s only in the low 50s. So there’s still a lot of opportunity there.
And our co-brand card has had record acquisitions through the pandemic and will really be — we’re well on track to achieve our $7 billion of Amex remuneration in 2024. So really hitting on all cylinders in terms of the brand and really trying to move it more from just an airline seat to a brand experience.
Ravi Shanker
Got it.
Dan Janki
No. Actually, I agree with everything he said. If you just take [indiscernible] sitting here, we talk about the quarter, right, demand backdrop and Glen talked about good operations really improving through the standards. We’re pacing in line with our financial guidance. That’s even being at all-in of capacity and with less fuel efficiency given how we’ve operated the airlines and weathered about 1.5 points. We’re ahead of where we wanted to be for our internal purposes for 2022 and we put out a plan to where we want to be in 2024. And we all sit here today with a lot that changed over the last 9 months being even more confident in that today, to be at that greater than $7 of earnings per share, mid-teen margins, mid-teens return on capital.
For me, that’s exciting but it’s a backdrop into really how much the business model has changed over the last decade, the durability of it, the resiliency, the pieces that Glen spoke about. So really powerful.
Ravi Shanker
A room full of people, an airline management team with confidence in the outlook. It looks like this is 2019 all over again. I’d love to see it. I’d love to hear it. Glen, Dan, Julie, thanks so much for joining us and this concludes the presentation.
Dan Janki
Thank you.
Glen Hauenstein
Thank you.
Question-and-Answer Session
End of Q&A
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