Delta Air Lines, Inc. (NYSE:DAL) Morgan Stanley's 12th Annual Laguna Conference September 12, 2024 10:00 AM ET

Company Participants

Glen Hauenstein - President
Dan Janki - CFO.

Conference Call Participants

Ravi Shanker - Morgan Stanley

Ravi Shanker

Excellent. Good morning, everyone, and welcome to Day 2 of the 12th Annual Laguna Conference. Again, another long track of airlines and transportation content here in this room. So get comfortable again. I'm very happy to kick off today's festivities with our top pick in U.S. Airlines, Delta Air Lines. Joining us today, Glen Hauenstein, President; CFO, Dan Janki; and Julie Stewart, Vice President of IR. Team, thanks so much for being here.

Glen Hauenstein

Thank you.

Dan Janki

Thank you.

Question-and-Answer Session

Q - Ravi Shanker

So maybe a good place to start would just be -- obviously, it's been a fairly up and down year for the entire industry and quarter as well. You put out an update just a few minutes ago. So maybe you want to walk us through what you're seeing in 3Q so far?

Dan Janki

Why don't you start with commercial backdrop?

Glen Hauenstein

Commercial backdrop is demand is solid. We've had very solid demand throughout the year. And we had a little bit of excess capacity that the industry was producing over the peak summer months of June and July that started resolving itself in August and heading into the fall, the off-peak season. So had a good first quarter, had an excellent second quarter, I think. And then as we headed into third quarter, we really have two things happening.

One is the inflection of unit revenues in two of our largest entities that's domestic, of course, which in the month of September moved to positive as well as transatlantic, which was a very welcome development for us. We had a challenging transatlantic peak summer because of the lack of demand to Paris during the Olympics. And I think we called that out. As soon as the Olympics ended, demand to Paris returned. And so now that entity is solidly in the positive momentum category.

Really having a great year in the transatlantic. Just if you -- the one thing -- the exogenous event, of course, being the Olympics and how large we are in Paris, given the partnership with Air France.

So really good in the fall. We've got also solid demands in the transpacific and we're improving demands in Latin America. So as we look to close out the year in the fourth quarter, I think we see the demand picture being quite solid.

Dan Janki

Yes. So with that demand backdrop commercially, the operations continue to run very well. Delta remains the industry leader. If you look across all on-time performance metrics, we lead all carriers in that position. On completion factor, we're number one related to network carriers.

And that's even with a tough five days that we had as a tech outage in July for that position. And -- but that was tough on our customers, tough on our employees, but very proud of -- the Delta team managed to return us to industry-leading position.

In early July, we disclosed the financial -- early August, we disclosed the financial events of that. There's no change to those impacts. So I think financially, moving to financials, it's always important to look at it ex that impact, so that you really can understand the underlying business.

And we're really pleased with the drivers. If you go back to the initial guidance and you look at where we sat from $1.70 to $2 a share, we're at the high end. The drivers associated with it, Glen talked about the importance on the commercial side, demand in that inflection and where we are from capacity. Fuel has been favorable all quarter, has marched down. We're at a low point here where we sit in the quarter.

We're sitting just outside the bottom end of the guidance range that we've provided on fuel. As it -- related to nonfuel with the operation performing fairly well, we had given guidance between 1% and 2%. We're sitting at the high end, moving up from the midpoint.

We had some weather disruption in early July, particularly in August, the first nine days we had irregular operations driving that. And we also, in the quarter, made a decision to reward our employees with travel passes, much deserved for the hard work and dedication they -- to deliver that industry-leading performance, and that has about a 0.5-point impact.

So we expect the quarter to be up 2.5% year-over-year as it relates to nonfuel excluding the impact from the tech outage. And we're benefiting as it relates to non-op. We exited sold back to clear half our position related to that, that will benefit lower non-op and we continue to see benefits of interest expense. So the underlying driver is quite good. We're pleased with the performance of the business in the quarter.

When you couple that with the first half of the year and the industry-leading position we had $2.4 billion of earnings. And in that period of time, that really puts us in a good position year-to-date, still early as it relates to fourth quarter.

We'll give you a more detailed update as we get to earnings, but with that demand backdrop at that Glen talked about, where we're sitting with fuel favorability, I feel really good about the year. And this morning, we reaffirmed that we'd be within the $6 to $7 a share with and without the impacts of the tech outage. So that industry-leading position has also allowed us to generate a lot of cash to invest back in the company.

We are very pleased this quarter to get the upgrade from Fitch that puts us in investment grade. So continuing to strengthen the financial foundation of the company.

Ravi Shanker

Got it. That's great to hear. Maybe just to start with the tech outage, obviously, kind of a onetime event, but any learnings from that? And just kind of -- I think the investors are going to want to make sure that there's no kind of lingering impact kind of through multiple quarters there?

Dan Janki

Yes. That was, as I mentioned, that was a tough five days for our customers and our teams. The teams have gone back and really like any event, whether it's winter season, summer season and event like this, you go back and you do a hard look and reflection in regards to where you can get better things that you can do differently. There's definitely a set of learnings related to all elements, people, process policy. As it relates to technology, no change.

I mean we've been investing billions in technologies since 2016 and on this drumbeat to modernize that we have over 90% of our applications in the cloud. We're going to complete that journey by the end of the year.

So no change as it relates to investment around that. We will prioritize differently like we do any quarter. And any year, especially as we go through the fall here, we'll take those learnings and think about how do we prioritize as it relates to applications and improvements and things that we want to do from a technology perspective. But the annual CapEx, OpEx related to technology will be very consistent going forward.

Ravi Shanker

Got it. And on the commercial side, kind of NPS scores, bookings have all kind of come back to normal after that event.

Glen Hauenstein

Absolutely.

Dan Janki

Yes.

Ravi Shanker

Got it. So just kind of moving on, kind of on the demand side, obviously, a lot of focus on the consumer out there. And so far, travel demand has been extremely resilient and appears that is still the case. Any further color you can share with us kind of what are you seeing in terms of travel intent, especially on the premium end, the corporate side, kind of what would you say to people who are concerned that the consumer may be slowing?

Glen Hauenstein

Well, I think everybody knows that we have an affluent consumer at Delta, generally speaking. And our consumer is strong. Our consumer is very strong and demand for premium products continues to outpace demand for main cabin products. So that's what we've seen all year long. That's what we've seen in a multiyear journey, and that's what we're continuing to see as we move forward here is that premium products are driving unit revenue improvements.

As far as the subcategories, business travel is quite strong on a year-over-year basis, up high single digits, low double digits. And that appears as though it's accelerating as we head into the fall. So we're excited about business travel, the continued return of corporate travel. Of course, business travel in totality is already way above where it was pre pandemic levels. But managed corporate travel has been a laggard, but it is really approaching -- well, is at 2019 levels, now going beyond that.

So enthusiastic about that, enthusiastic about our continued products that we're putting in place to make our premium products have more of a moat. And I think yesterday, we had the opportunity to tour the new LAX club, the Delta One Club in LAX. And I think for customers in New York, how many of you are here from New York? Raise your hand. Hopefully, you've had the opportunity to visit the Delta One Lounge, if you haven't yet, I highly recommend doing that. It's an incredible lounge, I think.

Ravi Shanker

Yes. I was there on the way over here, and it was absolutely incredible. I will validate that completely objectively.

Glen Hauenstein

And when you think about building premium products that are moats, I think you have to think about what the experience will be on JFK-LA for us and for our customers. So in JFK, which is, by the way, the largest revenue market in the United States. So if you think about JFK, most of the pieces are there. At the end of October, we will be opening the dedicated security line just for Delta One customers. So never wait, walk right through the airport.

You won't have to worry about being early to the airport for security purposes. And then when you get to L.A., it's the same thing. It's this dedicated security line for -- dedicated check-in, dedicated security lines, and into the Delta One Lounge, which, of course, features fine dining on premises and then experience onto the airplanes, which are mostly widebodies and then free WiFi and a real experience that we think sets us apart from all the competition in the most competitive markets in the country.

Ravi Shanker

Understood. I want to follow up on your comments on corporate travel. What have your recent corporate survey has been saying? Kind of -- so you did mention that total business is well above pre-pandemic levels, managed corporate is there as well. What is the future of corporate travel, both managed and non-managed? How big do you think that can get?

Glen Hauenstein

Well, the late -- the recent survey, which we talked about on the last call, I think it was 80-some-odd percent of customers expected to maintain or increase their spend. That wasn't quite a record, but it was much higher than the norm. So we expect continued demand strength through the fall. We also have two exogenous things that occurred last year. One is the writers' strike, of course, which was for May through November, and then next week, we will start to lap the auto strike and of course, having a hub in Detroit that was pretty impactful to us there.

So we've got some good events in our corner as we head into the fall. But demand seems to be continuing to improve. And I think what we've decided, and we talked a little bit about this yesterday for a few minutes is that we want to attach ourselves not only to the corporation and not only to the travel management company, but we really want to work on that relationship with the end consumer.

Because in the end, the end consumer is the one who really chooses what flight they want to be on and what airline they want to be on. And historically, our sales teams were geared to just make sure we had the right agreements with the corporation, and we had the right agreements with their travel management company to ensure that Delta was in the mix.

I think moving forward, we realize that loyalty resides more at the personal level than at the corporate level. So how, when you're flying for corporate, do we offer you products and services that make you want to fly us not only when you're under corporate, but when you're on your leisure.

Because when we look back at who the customers are on our airplanes, when you're on us for corporate, your probability of being on us for leisure is extremely high. And there's been a convergence with the premium products of what corporate fares are and what high-end leisure fares are. And the people who are buying the higher-end leisure fares tend to be the people who are buying the corporate fares.

So there's a synergy and getting that synergy to work better for Delta and better for you is something we're very, very focused on, ensuring that it's not only B2B, but it's B2B2C.

Ravi Shanker

Understood.

Dan Janki

Ravi, you look at your event. It's great to see so many people and how robust it is -- great. You put on a great product and a great location, but attendance-wise.

Ravi Shanker

Thank you. It was a great point to shout out that attendance is up 25%. This was not coordinated. A couple of questions on international, if I may. So you mentioned that, obviously, the Olympics were an air pocket as they usually are, but things have normalized since. How do we kind of think about that in detailed terms? Do people bias going to other parts of Europe during the Olympics? And is there pent-up demand on both sides of it? Kind of how do you think about that overall transatlantic travel on both sides of it?

Glen Hauenstein

Well, sure. Some people who were going to go to Paris as their first choice decided to go elsewhere. Some people just put off the trip. And so it's always a combination of what actually occurred. So we had high teens year-over-year decreases in unit revenues to Paris, we're disproportionately impacted because of course, we're partners with Air France, and we fly from the U.S. to a lot of places in the United States -- I mean, from Paris to the U.S.

So we were disproportionately impacted there. And I'm sure when they decided to go elsewhere. Some came on us, some went on other carriers, but it was really the impact for June and July. And then as soon as the Olympics were over in August, it was like turning the light switch on, and everything went back to the trends that we had pre-Olympics.

And that, of course, moved the transatlantic back into positive territory, which is great for us to see. As we head into September, October and November, which are historically shoulder seasons, but have continued to strengthen. I think from somebody who travels a lot to Europe, September and October, my favorite times to go. And I think people who don't have the requirements of being out of school or having vacation are discovering that September and October are amazing times in Europe and U.S. demand, we think this year is going to be at record high.

So we had -- everybody knows the amazing year we had last year in the transatlantic. And I think people were doubtful we could replicate that. And I think had we not had the Olympics, it would have been even better on slightly more capacity. And as we sit here planning next summer, we are going to -- we're anticipating another really robust demand set from U.S. to Europe.

Ravi Shanker

Got it. And just kind of at a higher level, coming right out of the pandemic, obviously, we massively over-indexed to domestic because international was closed. And then it felt like the pendulum swung in the other direction in the last kind of 12, 18 months or so. Do you think it swings back towards some kind of balance between domestic, international, like '25, '26, kind of what's the right equilibrium compared to where we are right now?

Glen Hauenstein

I think the U.S. consumer, and it's really comprised of the younger people who want to see Europe on their own and a lot to do with the baby boomers retiring and this incredible disposable income. If you look at the people who are sitting in the Delta One product right now in the transatlantic, the average age is probably 50, 55. And that's skewed, right? There are people in their 30s and 40s, but there are people in their 60s and 70s.

And I think that demand from this retirement is going to carry us really, really well through the next few years here as the baby boomers continue to retire. But I think we've got a lot of things going on in Europe. We've got a business which has been strong and continuing to grow in the transatlantic as well, with maybe the exception of Germany. So a strong core business demand, real high demand for the premium products. And I'm talking about Delta Premium Select.

This was the first summer, we really had ubiquity in Delta Premium Select and introducing that cabin has been highly accretive to our transatlantic. But I think as we continue, that product is really only 1.5, two years old as we head into our third season there, we'll do even better with that product as people understand it and people enjoy it, and we've been working to improve it. We listened to the feedback of our customers in year one and they saw places that we needed to add value, and we did in this past year and the response has been very positive.

Ravi Shanker

Got it. Let's shift gears a little bit and talk about, obviously, capacity across the industry. This is not necessarily a Delta issue, but it's an industry issue that -- there may be some indirect influence on you guys as well. You said that you are seeing capacity start to come out. How far towards where we should be, do you think we are? And how much more work do you think does the industry need to do to normalize demand versus supply going into the back half of the year?

Glen Hauenstein

I think we're there. I think when you have fuel heading down and you have revenues heading up, that's a pretty good indication that the airline industry is in a good spot.

Ravi Shanker

To that effect, I was always telling kind of both management teams and investors kind of coming out of 2Q earnings that if your RASM is not inflecting positive, you don't have -- you still have more capacity to cut, right? So the fact that you're seeing RASM inflect and virtually every other airline that's put out an update in the last few days has said they're seeing that. That is the kind of smoking gun to say, if you will, that you are seeing...

Glen Hauenstein

The good news.

Ravi Shanker

The good news. Yes, yes. The good gun.

Dan Janki

With a good consistent demand backdrop, right? And you see that in the TSA throughput consistently through the year.

Ravi Shanker

Got it. And so I think historically or maybe in the last couple of years, I think the industry has said that there's a pretty strong correlation between RASM and jet fuel. Does that kind of necessarily have to hold in both ways? Or kind of how do you think about that? As jet fuel starts to maybe come down and hopefully stays down. Does that put pressure on RASM in the coming quarters? Or do you think that just given other cost inflation like you guys can hold on to some pricing here?

Dan Janki

I think the industry, you can see, needs to take action, right, overall. And I think we were talking about a little bit over dinner last night with you is that, you're seeing the industry take that action related to capacity regardless of where fuel is, right? They have to get revenue up, unit revenue up to deal with step function change that we've seen in cost over the last couple of years on nonfuel. And you're seeing those actions take place. I think lower fuel just helps move you forward on that journey. But across the industry, you've seen the carriers take the action.

Glen Hauenstein

Got it. If you had said fuel is going to be a multiyear low, would that be a good time for the industry to take a fair increase. Historically, you'd say, no, that just happened. So I think there's evidence there that people are trying to cover their nonfuel costs, which as you know, half the industry isn't making any profits. And the only way for them to make profits is to grow revenue.

Ravi Shanker

Absolutely. I think structurally, that's a good sign for industry earnings. Let's talk about premium. I know you addressed this a little bit kind of in talking about the Delta One Lounge and such. But specifically, obviously, you would consider yourselves to be the premium leader with good reason.

But the rest of the industry is starting to premiumize, you're now seeing ultra-low-cost carriers with a business class-equivalent product. What does this mean for Delta? Kind of -- does the fact that the premium tidal rising across the industry kind of lift your boat as well? Does it feel like others are catching up? Kind of what's the opportunity here?

Glen Hauenstein

Well, I'd just say the truly produced premium is not cheap. And so if these carriers want to produce premium, which many of them are indicating they do, that's going to come at a cost. And the cost is going to be higher nonfuel unit cost to produce that product and largely lower density so that you can get people more room that, that premium product requires. On top of that, you've got club access. You've got all these things.

And it's just a -- it's a monumental test to think how a carrier that has been really about unbundled bare bones product, transitions themselves into having premium products and services without adding an incredible amount of cost to their profile. So I think it's good. I think that within each category, there are people who want better than average. And I think it's going to be a great event that the industry is finally realizing that quality matters. And the more we can produce a product that people want to buy as an industry, the better that's going to be for our industry.

And so I'm very bullish on everybody getting on the bandwagon. I think that you'll see different products in the end, but choice is good.

Ravi Shanker

Right. And within your planes itself, kind of what is your ideal mix of first class versus premium economy versus main cabin?

Glen Hauenstein

Well we're working on that. Stay tuned for our Investor Day. A little plug for November. But I think we're going to have some interesting announcements. Now that we have many years -- in the beginning, when we went -- started on this journey, we didn't sell the premium products, we gave them away.

And that caused the biggest money-losing cabin to be the premium cabins. And after years of reengineering and years of changing policies and moving distribution, improving distribution, now those are the most profitable cabins on the airplane. And we always said that our first line of defense was to maximize pricing, maximize -- but then we always say at the end, we could always change the LOPA if demand exceeds supply.

And I think we're getting to that point with these products being five, six, seven years old and knowing that we still have more channels to open up where people can actually see what they're buying better, improve the distribution experience that we see demand for these products continuing to accelerate in the coming years.

Ravi Shanker

Understood. A couple of questions on the loyalty side. Obviously, SkyMiles is one of, if not the strongest loyalty program in the industry. How do you continue to monetize that? Kind of what are the opportunities there? Kind of at both ends of the age spectrum if you will?

Glen Hauenstein

Yes. Well, I think one of the things we're most excited about is the growth in SkyMiles because if you think about SkyMiles as a barometer of who you're bringing into your net, your travel net, if you will, we've never had more people coming online and we've never had a more youthful demographic than we have today. So we've been growing the demographics, and we've been making them younger. And I think that's really important when you think about how the life cycle of a traveler is, in the beginning, you're probably not going to buy the premium cards because you just can't afford them. You're probably not going to fly in Delta One because you can't afford it.

So we want to be sure that we're best in every class. So if you're starting out your journey and you just got out of college and money is important or you just got out of school and you're starting a trade and money is important, that we want to have the best products and services. And with the free WiFi and the free snacks and I think we have best-in-class in that category. And so that allows us to bring in young people. Then the question is, how do you monetize that over time?

Because as people get older and older and accumulate more wealth, their taste change. Just like we were talking about yesterday, my first car is a lot worse than the car I drive today. And I think that's the same thing for air travel. Your first experience is on your own, after your parents stop buying your tickets, are going to be probably your lowest, unless you're a trust fund baby, which I wish I was, but I can't go back and change that. So now you're in our program, and now we have to continue to get you to do the things we need you to do to bring you along the life cycle of our journey.

And that includes downloading the app. When you download the app, your Delta experience, you get a 20-point pop in your NPS score just by downloading the app. So we've got to get them to download the app. We've got to get them to join the frequent flyer program. And then we've got to get them over time to buy the card that's right for them and have different cards with different access and different perks for different people.

And so I think that's really been the success of the American Express card, the main source of that card is people using Delta who already are SkyMiles members. And the fact that we have this giant young wave who has not entered that period of their travel, where they're attaching at a higher rate and with higher products including credit cards, that's exciting for us because we're talking about a pool of people that is multiples of the pools that we had five or 10 years ago, the farming. And so we think that's going to be really -- on our journey to $10 billion, we think that's going to be one of the key drivers.

Ravi Shanker

Free WiFi for the win. That was a really good move there. But we did hear a few weeks ago that DOT is looking at loyalty programs across the industry. Can you just talk about your conversations with them kind of what may have precipitated this in terms of where we go from here?

Glen Hauenstein

I would say maybe -- we haven't had any conversations with them over this. So this was -- we kind of got this letter and we thought, "What? This is a surprise." But these are giveaway programs and they're very popular. And so we're looking forward to it. These are the most popular loyalty programs of any industry and people are joining at record numbers. And so I'm sure we'll figure out how to best comply with their requests. But I think it's hard to say -- nobody paid anything to get this benefit. How are you going to -- so we'll see.

Ravi Shanker

That is interesting. Any questions in the room?

Unidentified Analyst

Since the global IT outage, like have you seen any slowdown in near-term bookings or any impact on book-aways for 4Q?

Glen Hauenstein

We saw for the first week or 2, it was pretty short. We track our revenues versus the industry and through a surrogate data. And we thought we saw -- what was it?

Dan Janki

Just really in the July period. Once we kind of cleared August and...

Glen Hauenstein

It was $20 million in August. It was a very nominal number for August and in September, I think. We normally run a premium to the industry, which we ran in August. So normally, it's 2.5 to 3 points. We ran 2.5-point load factor premium to the industry in August.

And so we would say mostly, that's closed during the month. So no lingering.

Dan Janki

No impact, yes.

Ravi Shanker

Yes. Got it. So maybe in a few minutes we have left, just to bring us home, Glen, Dan. I think obviously, a very good story, a very strong brand, kind of, especially with the loyalty program, kind of almost annuity like revenues. Demand looks really good.

What do you think the market is missing? Kind of sell side analysts kind of -- I keep getting asked all the time, I ask the question all the time. Kind of if you were to send a message out there to investors, what do you think the market is missing on the stock?

Dan Janki

I'll start -- it's when you really reflect back on the 15 to 20 years of change and the accumulative impact that, that's had on the strength and really the durability of the business model and is the company to be able to produce double-digit margins, returns that we'll be approaching here mid-teens. And that provides a consistency of cash flow that allows us to invest back in the company from 8%, 9%, 10% of revenue consistently and also grow off $3 billion plus of annual free cash flow that allows you to return capital via strengthening the balance sheet and debt reduction back to investors consistently with a dividend yield.

And when you put all that together, that's quite powerful in your earnings returns on capital that are mid-teens in the upper half of the S&P 500. And so it's been a 15- to 20-year plus journey, but -- and we still have a lot of opportunity in front of us. And as Glen mentioned, we look forward to sharing that when we get to November.

But we still got a long ways to go.

Glen Hauenstein

And I would just add to that. I think we gave guidance at the beginning of the year, which was $6 to $7 a share. A lot always happens in a year, you don't know what's going to happen, right? And we certainly didn't have CrowdStrike. But if you isolate CrowdStrike out of it, we would have come in at the top half of that.

We went through the period where the industry had too much domestic capacity, producing solid returns. The industry had to rationalize around that. So now we're heading into a better back half of the year. And I think that's one of the things that we appreciate. We didn't take our targets down -- absent of -- our profits this year will be roughly the same as they were last year.

And to do that with a CrowdStrike embedded in a $500 million -- $380 million, right? Embedded. I think it shows that this is a more durable model. And I think that's one of the things that we're really proud of is creating a model that's more durable. And I think one of the -- you have to go through a different litmus tests.

And I think the litmus test we went through this summer is can you still make good returns while the industry has too much capacity at the bottom end. And you'd have to put a big check mark in that column. And I think that's underappreciated in the long run.

Dan Janki

Your comments are sending tremors.

Ravi Shanker

No, I'm saying say -- I'm was going to say make -- Delta is on solid ground versus shaky ground here. But very quickly, does it encourage you to -- I mean the industry scored a little bit of an own goal in 2Q with this capacity stuff, but does the response to that encourage you to the fact that everyone owned up and...

Glen Hauenstein

I think we mentioned that on the call because in the second quarter, we said we saw the industry acting more responsibly with capacity as we headed into the third quarter. And I think that's a big driver in the ability, not only -- we were profitable through the entire year, but some of these other carriers who were not profitable being able to say they're improving.

Ravi Shanker

Understood. I think we're just out of time. Glen, Dan, Julie, thanks so much for the time. May I recommend the Delta One Lounge in JFK as your next Investor Day venue. I think it's big enough to host all of us.

Glen Hauenstein

Absolutely. I would just say, not only do we have LA and -- but later this year, Boston will also open so anybody from Boston, a great experience there. And then early next year, Seattle will also open. So we've got a slew of really great products and services coming, and come back to Investor Day, we'll tell you about a lot more.

Ravi Shanker

Very good. Thank you so much.

Glen Hauenstein

Thank you, Ravi.