Delta Air Lines Q2 2022 Earnings Report

Delta Air Lines EPS Results

• Actual EPS: $1.44
• Consensus EPS: $1.71
• Beat/Miss: Missed by -$0.27
• One Year Ago EPS: -$1.07

Delta Air Lines Revenue Results

• Actual Revenue: $13.82 billion
• Expected Revenue: $13.40 billion
• Beat/Miss: Beat by +$421.51 million
• YoY Revenue Growth: +93.90%

Delta Air Lines Announcement Details

• Quarter: Q2 2022
• Date: 7/13/2022
• Time: Before Market Opens
• Conference Call Date: Tuesday, July 12, 2022
• Conference Call Time: 11:31PM ET

Delta Air Lines (NYSE:DAL) is a major U.S.-based global airline that provides scheduled passenger and cargo air transportation, aircraft maintenance and repair services, and related travel products. Its operations include mainline domestic and international passenger services, a branded regional network operating under the Delta Connection name, dedicated air cargo carriage, and in-house maintenance, repair and overhaul through Delta TechOps. Delta offers a range of cabin products for different customer segments, including premium business-class service on long-haul routes and tiered economy offerings on domestic and international flights, and it markets customer loyalty benefits through the SkyMiles frequent-flyer program.

The carrier operates a mixed fleet of narrow- and wide-body aircraft from multiple U.S. hubs, serving a global route network that links cities across the Americas, Europe, Asia and other international markets. Delta is a founding member of the SkyTeam global airline alliance and participates in commercial joint ventures and partnerships that coordinate transatlantic and transpacific services with other major carriers to expand connectivity, scheduling and frequent-flyer reciprocity for customers.

Delta traces its roots to a crop-dusting company founded in 1924 that began passenger service as Delta Air Service in 1929. In the 21st century the airline underwent significant restructuring, including a Chapter 11 reorganization in 2005 and a large-scale consolidation with Northwest Airlines that was completed in 2010, creating one of the world’s largest airlines by network size. The company is headquartered in Atlanta, Georgia, and is led by chief executive officer Edward H. (Ed) Bastian, who has served as CEO since 2016.

Delta Air Lines Q2 2022 Earnings Call Transcript

Key Takeaways

• Delta reported Q2 EPS of $1.44, operating income of $1.4 billion and a 12% margin on revenues nearly back to 2019 levels, generating $1.6 billion in free cash flow.
• The airline acknowledged operational disruptions — cancellations, delays and long wait times — and is holding capacity at June levels while investing in boarding procedures and buffers, achieving a 99.2% completion factor so far in July.
• Strong demand continues, with June quarter revenue just 1% below 2019 as premium products and loyalty drive record Amex card remuneration of $1.4 billion; Q3 revenue is guided to be 1–5% above 2019 with an 11–13% margin.
• Non-fuel unit costs were up 21.8% versus 2019 due to lower capacity and higher pay, with Q3 costs expected to be ~22% above 2019 and improvements planned via capacity restoration and operational efficiency.
• Balance sheet strength remains a priority: nearly $2 billion in free cash flow YTD, $2.4 billion of gross debt repaid in H1, $13.6 billion of liquidity, and a target to return to investment-grade metrics by 2024 alongside >$7 EPS and >$4 billion FCF goals.

Presentation

[Operator]

Good morning, everyone, and welcome to the Delta Air Lines June quarter 2022 financial results conference call. My name is Cody, and I'll be your coordinator. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session following the presentation. As a reminder, today's call is being recorded. I would now like to turn the conference over to Julie Stewart, Vice President of Investor Relations. Please go ahead.

[Julie Stewart, VP of Investor Relations at Delta Air Lines]

Thank you, Cody, and good morning, everyone. Thanks for joining us for our June quarter 2022 earnings call. Joining us today from Atlanta, our CEO, Ed Bastian, our President, Glen Hauenstein, our CFO, Dan Janki. Ed will open the call with an overview of Delta's performance and strategy. Glen will provide an update on the revenue environment, and Dan will discuss costs and our balance sheet. After the prepared remarks, we'll take analyst questions, and we ask that you please limit yourself to one question and a brief follow-up so that we can get to as many of you as possible. After the analyst Q&A, we will move to our media questions. Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements.

[Julie Stewart, VP of Investor Relations at Delta Air Lines]

Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measure on the investor relations page at ir.delta.com. With that, I'll turn the call over to Ed.

[Ed Bastian, CEO at Delta Air Lines]

Well, thank you, Julie, and good morning. We appreciate everyone joining us today. It's been a challenging operating environment for the entire industry, and I want to thank our customers for their patience and understanding as we restore the reliability that you've come to expect from Delta. I'll speak more to the operation in a moment. The good news is that we're making great progress to deliver the best-in-class experience that our customers deserve, and I'm pleased with our July performance to date. This morning, we reported June quarter earnings per share of $1.44, with $1.4 billion of operating income and a 12% margin on revenues that were close to 2019 levels.

[Ed Bastian, CEO at Delta Air Lines]

Results improved throughout the quarter, with revenue in the month of June 4% ahead of the June 2019 number, with a June month operating margin of 16.5%. This was only 3.5 points lower than June 2019, despite a near doubling in fuel prices and our schedule only 82% restored. We generated $1.6 billion in free cash flow in the quarter, which brings us close to $2 billion year to date, reflecting the robust demand environment and enabling further delevering as we work to regain an investment-grade balance sheet. June quarter performance represents an important financial inflection and resulted in a profit-sharing accrual for our employees.

[Ed Bastian, CEO at Delta Air Lines]

These results are a validation of the dedication of our people, who have done an amazing job under the most difficult of circumstances imaginable over the past two-and-half years. We're happy to have been able to reward eligible employees with a 4% raise on May 1st, and we're looking forward to Delta people celebrating well-deserved and meaningful profit-sharing payouts for years to come with our return to profitability. Rebuilding Delta's operation during an unprecedented surge in customer demand has been a remarkable feat, and I'm grateful to our people for everything they do on a daily basis. While the demand and revenue landscape is the best we've seen, the operational environment for the entire industry remains uniquely challenged. I'd like to sincerely apologize to those who've been impacted by cancellations, delays, and long wait times over the last two months.

[Ed Bastian, CEO at Delta Air Lines]

This quarter's operational performance has not been up to our industry-leading standards, and restoring operational excellence is our top priority. Steps we've taken include the strategic direction to hold capacity at the June month level for the remainder of this year, as well as additional investments to restore operational integrity, including earlier boarding procedures and operational buffers. We are pleased with the progress, and July is off to a very good start, with a 99.2% completion factor through the first 11 days of the month, which is exactly on par with the same holiday period in 2019. In fact, over the last seven days of this period, we've had only 25 cancellations worldwide on over 30,000 departures. Over this period, 84% of our flights have arrived on time, as measured within 14 minutes of scheduled arrival.

[Ed Bastian, CEO at Delta Air Lines]

Since the start of 2021, we've hired 18,000 new employees, and our active headcount is at 95% of 2019 levels, despite only restoring less than 85% of our capacity. The chief issue we're working through is not hiring, but a training and experience bubble. Coupling this with the lingering effects of COVID, and we've seen a reduction in crew availability and higher overtime. By ensuring capacity does not outstrip our resources and working through our training pipeline, we'll continue to further improve our operational integrity. While our actions delay the improvement we expect in non-fuel cost, we know the best path to driving a competitive cost structure is running a high-quality operation. The most important point I leave with you is that the issues we're facing are temporary.

[Ed Bastian, CEO at Delta Air Lines]

We're already seeing significant improvement and operating in line with our record-setting performance levels of July of 2019. Turning to the revenue environment. Strong demand and pricing trends are continuing into the September quarter. We expect revenue to be up 1%-5% versus 2019, with an 11%-13% operating margin. Consumer demand continues to maintain strength as we look to the fall, and we're seeing steady progress in the return of business and international travel. Like all consumer businesses, we're closely monitoring consumer behavior and have yet to see any meaningful pullback in demand. However, if demand were to weaken, I'm confident we have the tools and resources to remain profitable through the cycle. The last time an economic recession hit our business was in 2009.

[Ed Bastian, CEO at Delta Air Lines]

Absent fuel hedge losses at that time, which we no longer utilize, Delta was profitable that year. Comparing then to now, Delta's business has structurally evolved in significant ways over the last decade, building a trusted and premium consumer brand with proven competitive advantages within a much improved industry. Our revenues are far more diversified, with much larger contributions from our premium product offerings and high-margin loyalty business, as well as our growing MRO and cargo businesses. Our balance sheet and access to capital are much stronger, as proven during the pandemic. We've recently made major customer enhancements that will strengthen our brand for years to come, including recent openings this quarter of world-class airport facilities at LAX and New York's LaGuardia Airport, two largest markets for travel in the country, as well as new Delta Sky Club in key markets.

[Ed Bastian, CEO at Delta Air Lines]

We spent over a decade building our reputation as the most reliable airline globally, and we're not only determined to deliver that same standard of excellence, but are investing to bring it to an even higher level. In the face of the pandemic, financially, we've been profitable over the last 12 months, with margins this summer beginning to approach 2019 levels, despite meaningfully lower capacity and a doubling in fuel prices. In my opinion, a pretty remarkable turn in performance. With our results in the first half of the year, we remain confident in our 2024 targets for earnings per share of over $7, more than $4 billion in free cash flow, and a return to investment-grade metrics. Now I'll turn it over to Glen to talk about the revenue environment.

[Glen Hauenstein, President at Delta Air Lines]

Thank you, Ed, and good morning, everyone. I want to start by thanking every one of our employees for the professionalism and the care they deliver to our customers every day. We are pleased with the return of demand across all categories and regions. Momentum accelerated through the June quarter, enabling the recapture of higher fuel prices. Looking forward, we are seeing demand and pricing strength carry into the late summer and fall as demand remains strong. The success of our customer-focused strategy and strength of the Delta brand is evident in strong June quarter results across our diverse revenue streams, including premium product outperformance and a record quarter for both Amex remuneration and cargo. We generated $12.3 billion of revenue in the June quarter and achieved a total unit revenue that was 20.5% higher than 2Q of 2019.

[Glen Hauenstein, President at Delta Air Lines]

Revenue compared to 2019 progressed from down 15% in the month of March to up 4% in the month of June, resulting in quarterly revenues that were 1% below 2019 levels. We've seen broad-based demand and yield momentum, with each region generating positive unit revenue growth. Premium product revenue continues to outperform and is at 10 points higher than 2019 domestically, outpacing the growth in main cabin. Domestic consumer revenue remains healthy and is ahead of 2019 levels. International consumer revenue showed significant improvement during the quarter as travel restrictions eased and many countries removed testing requirements, including the United States. Latin America and Transatlantic exceeded 2019 levels in June, and the Pacific is accelerating as Korea and Australia have reopened and restrictions are easing in Japan. Business travel continues to improve.

[Glen Hauenstein, President at Delta Air Lines]

During the June quarter, domestic corporate sales were 80% of 2019 levels on a 65% recovery in volume. International corporate sales improved 30 points during the quarter to 65% of 2019 levels, led by the transatlantic, where the recovery is now on par with domestic. Our recent corporate survey results show positive corporate expectations for business travel in 3Q, with several of the least recovered sectors conveying strong optimism for increased travel this fall. As the recovery progresses in these sectors, we expect an outsized impact on our coastal hubs. Our corporate customers expressed increased plans to travel internationally in the second half of the year, given the elimination of the pre-departure test requirement for flights returning to the United States.

[Glen Hauenstein, President at Delta Air Lines]

Similar optimism was reflected in Morgan Stanley's recent Global Corporate Travel Survey, where respondents indicated travel volumes would reach 84% of 2019 levels in the second half of 2022. This is 20 points above the June quarter volumes and over 90% by 2023. As the leading carrier for business travel with a best-in-class product in the air and on the ground, we will benefit disproportionately as the business community continues to reconnect in person. For the September quarter, we expect revenue versus 2019 to be up 1%-5% on capacity that is 15%-17% lower. The total unit revenues versus 2019 improving sequentially. For the full year, we expect capacity to be 15% lower than 2019. This is a 5% reduction from our initial guidance.

[Glen Hauenstein, President at Delta Air Lines]

As we move to the back half of the year, we expect stronger corporate and international trends to offset seasonally lower customer demand. With a strong brand and diversified revenue base, Delta is positioned to consistently deliver a revenue and profitability premium to the industry. We expect more than 60% of revenue will come from premium products and non-ticket revenue sources by 2024. Premium continues to lead with load factors and yields higher than 2019. As we increase the mix of premium seats in our fleet, improve the display and sales channels, and see progression in the recovery of business, premium will continue to grow. A structural shift to premium is key to managing through inflation and economic cycles.

[Glen Hauenstein, President at Delta Air Lines]

Historically, more price-sensitive products like Basic Economy, which is currently less than 10% of our sold fares, have struggled to keep up with inflation, while high-value premium offerings perform much better and have proven to be much more resilient through the pandemic. Loyalty to the Delta brand is growing at record levels. We acquired another record number of new SkyMiles members in the quarter and achieved record spend and acquisitions on our Amex co-brand card. More than one in four new cards acquired were Platinum and Reserve cards. Our premium tier is providing another proof point on the growing demand for premium products and brands. Amex remuneration of $1.4 billion was 35% higher than the June 2019 quarter. To put this in context, that is more than the remuneration for the full year in 2009.

[Glen Hauenstein, President at Delta Air Lines]

We're on track to receive over $5 billion in remuneration this year from American Express, and we remain confident in our 2024 target of $7 billion. The decommoditization of our business, combined with diversifying revenue through the growth of loyalty, MRO, and cargo, have improved our financial resiliency and cash generation. We enter the second half of the year ahead of many of our commercial goals set at the Capital Markets Day, and we're excited about the opportunities to elevate our performance by extending our advantages and leveraging the Delta platform. Delta has been the most disciplined in restoring capacity and will remain nimble depending on the environment while staying true to our core competitive advantages. With that, I'll turn it over to Dan to talk about the financials.

[Dan Janki, CFO at Delta Air Lines]

Thank you, Glen, and good morning to everyone. For the June quarter, we delivered earnings per share of $1.44, operating income of $1.4 billion, and $1.6 billion of free cash flow. Our non-fuel unit cost was 21.8% higher than 2019, largely because our network is 18% smaller. Our operating margin was 11.7%. It came in below our most recent guidance as operational disruptions impacted both revenue and fuel prices moved higher. Operating cash flow of $2.5 billion was driven by solid profitability and a sequential build in the advanced ticket sales. Quarterly gross CapEx spend was $864 million.

[Dan Janki, CFO at Delta Air Lines]

With nearly $2 billion of free cash flow in the first half of the year, we repaid $2.4 billion of gross debt, ending June with $13.6 billion of liquidity and $19.6 billion in adjusted net debt. Our first half financial performance puts us ahead of our initial expectations at the start of the year, supporting our outlook for meaningful profitability in 2022. The exception to this outperformance is our non-fuel unit cost. At Capital Markets Day in December, we laid out a progression to return our non-fuel unit cost structure to within a few points of 2019 by 2024. The actions that Ed spoke about have changed the pace of our cost progression, but not the destination.

[Dan Janki, CFO at Delta Air Lines]

The primary drivers are slower capacity restoration and additional investments that deliver the operational excellence. The biggest impact is in the third quarter, where we expect non-fuel CASM to be up approximately 22% versus 2019 on capacity that is 15%-17% below 2019. For the full year, we now expect non-fuel unit cost to be approximately 8 points higher than we initially guided. The level of capacity restoration accounts for the majority of this increase, as we are largely carrying the full cost of the airline with only 85% of our flying restored. As a result, we are not fully utilizing our assets. For example, third quarter aircraft utilization is about 10% lower than 2019.

[Dan Janki, CFO at Delta Air Lines]

While we have over 95% of the employees needed to fully restore capacity, we have thousands in some phase of hiring and training process. The remainder of the increase is driven by investments to support the operation, along with smaller items like higher maintenance and inflation. Actions related to reliability include added operational buffers and overtime. Premium pay and overtime is expected to total over $700 million this year. This is 50% higher than 2019. While we're delaying our unit cost recovery, it is pace dependent and within our control. We remain confident in our ability to meaningfully improve our unit cost as we rebuild capacity, improve efficiency, and run our operations in line with the Delta high standard. Now, moving to fuel.

[Dan Janki, CFO at Delta Air Lines]

Second quarter fuel expense increased nearly 60% sequentially on higher prices and volume, with an adjusted fuel price per gallon of $3.82. The refinery continues to provide a hedge to historically high cracks, contributing $269 million of operating income during the quarter. This resulted in a $0.31 benefit to our adjusted fuel price per gallon. For the September quarter, we expect adjusted fuel price per gallon between $3.45 and $3.60, including a $0.27 per gallon contribution from the refinery based on the forward curves as of last Friday. We expect fuel efficiency to be about 5% better than 2019. Based on our September quarter outlook for revenue and cost, we expect operating margins to be between 11% and 13%.

[Dan Janki, CFO at Delta Air Lines]

Gross CapEx is expected to be approximately $1.8 billion as we take more aircraft deliveries. We've seen some delays in deliveries, and it's possible this trend continues. Debt reduction remains a key priority. We expect to end third quarter with adjusted net debt of approximately $20 billion. Our goal is to reduce net debt by $5 billion through 2024, bringing us back to investment-grade metrics. We remain confident in our ability to make this goal, unlocking significant equity value for our shareholders. In closing, we have made meaningful progress in restoring our financial foundations. With this progress, our opportunities ahead, and the resilient demand for air travel, we remain confident in our 2024 financial targets. In closing, I'd like to thank the Delta people for their hard work, the service they provide our customers day in and day out.

[Dan Janki, CFO at Delta Air Lines]

Our people will always be the Delta difference. With that, I'll turn it back over to Julie for questions.

[Julie Stewart, VP of Investor Relations at Delta Air Lines]

Cody, can you please remind the analysts how to queue up for a question and start the Q&A?

[Operator]

Absolutely. Thank you. If you'd like to ask a question, please begin by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, please limit yourself to one question and one follow-up before reentering the queue. Once again, that's star one, and we'll take our first question from Jamie Baker with J.P. Morgan. Please go ahead.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

Hey, good morning, everybody. So Dan, you know, building on the prepared remarks, what needs to happen in order to achieve the 2023 capacity plan, you know, being flat with 2019? You're running well below right now, which you concede. Training bottlenecks, you know, presumably ease at some point, but the pilot shortage seems more acute than at Capital Markets Day. Regionals cutting back. You mentioned delivery delays. Maybe there's a utilization issue, you know, that I'm not modeling for. I'm just trying to assess the feasibility of getting back to 2019 capacity next year, you know, given the implication that that would have on ex-fuel CASM.

[Dan Janki, CFO at Delta Air Lines]

Yeah, certainly. We can talk about the feasibility of getting back and really the progression of non-fuel CASM. Maybe I'd start with the framework when you think about the total year with the eight points. We had originally guided seven to 10. Pick nine points as the starting point, you add the eight, that's 17. When you think about that, we did that on capacity that was 85% restored. You assume you step up to that 100%, that's 15 points of capacity restoration. That drives 12 points improvement in that as you get that utilization of your resources and your capability. Now, as I talked about in the prepared remarks, it's not about the hiring as Ed talked about. It's really we have 95% of the people.

[Dan Janki, CFO at Delta Air Lines]

We'll be substantially complete with that hiring and training as we move through the second half by year-end. We'll be well-positioned for that 100%. Additionally, there's two points in there of rebuild that we're incurring to do that, to bring those employees on, to hire them, to train them. As I talked about, we're running overtime and premium 50% higher than 2019, and that was a level that was already elevated. You take that out, that's another two points. That's 14-point improvement by just better leveraging your infrastructure utilization and the sunsetting of that rebuild off that 17.

[Dan Janki, CFO at Delta Air Lines]

That along with, we're certainly gonna continue to invest back in the airline, as we laid out at Capital Markets Day around the airports and that capability continue to have that marker in there as it relates to escalation, around our workforce, and the components around that and managing our supplier inflation. That really puts you in that single digit level for 2023 on a run rate basis. It really comes back to, we're building it to be fully restored. We'll have those assets on. It's really then dependent on bringing that capacity online.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

That's fully restored on a full year basis or fully restored by the fourth quarter of 2023?

[Dan Janki, CFO at Delta Air Lines]

That one is for Ed.

[Ed Bastian, CEO at Delta Air Lines]

Hey, Jamie. This is Ed. Let me jump in here for a moment.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

Hi, Ed. Thank you.

[Ed Bastian, CEO at Delta Air Lines]

You know, good questions. I thought Dan did a good job laying out the, you know, challenge. This is entirely within our control. If there's a

[Ed Bastian, CEO at Delta Air Lines]

An underlying sentiment that, you know, we've kind of lost something in the operating prowess. I don't see that at all. It's not a full year number of 2023 in terms of capacity. We're gonna pace it to demand.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

Yes. Okay.

[Ed Bastian, CEO at Delta Air Lines]

I think in my opinion, by summer of 2023 would be our target to get back to 100%. I think we could do it maybe a little earlier or a little later, depending on what we see in the economy, what happens as the, you know, the last phases of the restoration of the industry comes together. I think we have all the piece parts together. We just are very careful that we not, you know, incur any of the disruptive influences and elements that we saw during that six-week period from mid-May to June, and we're gonna stay within our capabilities. I don't think there's anything that's outside of our control here.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

Okay. Thank you for that, Ed. Just a real quick follow-up for Glen. You know, the strength in premium, any changes in how consumers are purchasing premium products? You know, is the percent sold at initial ticketing and the subsequent percent sold, you know, pre-departure, you know, is that staying the same? I'm just wondering if the inflationary backdrop is causing any changes in the buying patterns of premium. I realize the aggregate outcome, you know, remains very encouraging.

[Glen Hauenstein, President at Delta Air Lines]

Right. No, we had record paid load factors in every one of our premium cabins during the quarter. We had record yields. You know, the travel patterns are pretty sustainable in terms of most of it still being purchased at time of purchase. Actually, you know, the encouraging factor is the continued momentum in corporate authorizing premium travel for.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

Hmm.

[Glen Hauenstein, President at Delta Air Lines]

their employees who are traveling frequently. As we move into September, we expect that to continue as we get back into a more seasonal business travel market.

[Jamie Baker, Senior Airlines Analyst at JPMorgan]

That's great. Thank you to all three of you. Appreciate it.

[Operator]

Thank you. We'll take our next question from Andrew Didora with Bank of America.

[Andrew Didora, Senior Equity Research Analyst at Bank of America]

Hey, good morning, everyone. You know, first question for Glen. It seems like the June trend is continuing into 3Q here, but can you comment a little bit on what you're seeing into your September bookings and, you know, kind of how you view the pace of unit revenues throughout the quarter? You know, I would think you're baking in a September that is probably lower than July and August. Am I right on that? And then any thoughts that you could provide around how you're thinking about the corporate and leisure recovery come the fall would be helpful as well. Thanks.

[Glen Hauenstein, President at Delta Air Lines]

Well, our thesis is really what I outlined in my comments, that as we get towards the end of summer into the more traditional business travel season, that we're going to see an uptick in corporate travel. That's been, you know, reinforced by a couple of surveys. The Delta survey, which really just closed last week, had some very encouraging statistics in it that our customers are expecting that travel will pick up meaningfully as we get to the fall. I think the other piece is the international and the rebound of international, and it's, you know, that was delayed and came later than the rebound of domestic. As we look out to September, we have some really very, very strong data points in terms of travel for international for September.

[Glen Hauenstein, President at Delta Air Lines]

As a matter of fact, September, what we have on the books today, which is about 60% of the total bookings for international, is at record levels much higher than what we experienced in June. That piece, which we already have in our books, is very, very strong. We're just anticipating that there's a shift from high demand leisure to a little bit better mix of corporate versus leisure demand in the fall.

[Andrew Didora, Senior Equity Research Analyst at Bank of America]

Got it. Makes sense. You know, look, obviously everyone's trying to find the cracks out there in services spend. Obviously, you have a big partner in Amex that has kind of, you know, a lot of data around this. How are you working with Amex to maybe identify potential areas of weakness in the consumer? You know, what are they telling you about, you know, how consumers could behave in the back half of this year?

[Glen Hauenstein, President at Delta Air Lines]

You know, Amex is our closest and best partner, and we talk to them constantly. They're not seeing any indications yet, and I think we're all looking for it. As of now, I think we're enjoying the very, very robust demand that's not only in our spend, airline spend, but in our whole portfolio, Amex portfolio spend as well.

[Ed Bastian, CEO at Delta Air Lines]

Andrew, this is Ed. Let me add to Glen's comments. I spoke to some of the media last night, this morning about this as well. You know, there is such pent-up demand for our product. You've got to remember, people have not had access to our product for the better part of two years, many, particularly business and some higher-end consumers. We're not gonna satisfy that quench, that thirst in the space of a busy summer period. There's a lot in there that is yet to come, that is our thesis, as Glen mentioned.

[Ed Bastian, CEO at Delta Air Lines]

Yes, the data, you know, supports what we're seeing today, but we also acknowledge that our crystal ball is only about, you know, three to four months right now, and it doesn't go, you know, all the way as far as people would like us to think. Everything we see, you know, tells us that we've got to run. The only, you know, fly in the ointment, in my opinion, is if we don't run a quality operation. I mean, that will keep people from the product. That's why we are so focused on delivering a high-quality operation, which is exactly what our team is delivering and that we'll continue to deliver.

[Ed Bastian, CEO at Delta Air Lines]

The second thing, you know, it's been talked about in the industry and we talked about it last Investor Day. It's not just the move from goods to service spend. It's our economy is a lot larger today than it was in 2019, regardless of whatever you think that, you know, GDP is, whether we're already into a technically mild recession or not at present time. I think by most estimates, our economy is about 15% higher than what it was in 2019, and our industry is only about 90%-95% restored. That's a pretty big cushion or delta or edge, depending on your point of view, in terms of where the demand strength will be supported. For Delta, it's even lower because we're only about 85% restored.

[Ed Bastian, CEO at Delta Air Lines]

When you put all those factors together, it gives us confidence that we're going to see continuing strength. We will see some seasonal shift, as Glen mentioned, but I don't think the season will be as pronounced as it's been in the past. We expect as long as we run a high-quality operation, which we are doing and will continue to do, we should be well-positioned.

[Andrew Didora, Senior Equity Research Analyst at Bank of America]

Great. Thank you, everyone.

[Operator]

Thank you. We'll take our next question from Scott Group with Wolfe Research.

[Scott Group, Managing Director and Senior Analyst at Wolfe Research]

Hey, thanks. Good morning, guys. Dan, can you help us on the 22% CASM in third quarter going to around 10% in Q4? Can you help us sort of bridge to that? Then as I look out to the 2023 CASM guide you gave at Capital Markets Day, I understand the impact of, you know, we'll see how much capacity we can add back. If I look this year, CASM's eight points worse on five points less capacity, so there's a call it three points of sort of underlying cost. Should we just take that three points and add that to 2023, or can some of that go away as well?

[Dan Janki, CFO at Delta Air Lines]

Yeah. Two pieces. Let me bridge it first to fourth quarter and the step down. We're gonna come out, as Ed talked about, and run capacity at our June levels as we progress through the back half of the year. As you do that and you run that consistently, you get relative restoration in the fourth quarter. Capacity is to step up to be 94% restored, a 10-point step up from the midpoint of our range. When you do that's where you get that relative improvement as it relates to capacity and efficiency and utilization relative to 2019.

[Dan Janki, CFO at Delta Air Lines]

That along with a step down in some of the rebuild expenses in the quarter, that gives you your over your 10-point improvement, really gets you to that 10% level as we go into as we go and execute through fourth quarter. That was the first one. The second one, you know, when you think about that, yes, there are. We're building ahead so that some of that cost that you're seeing of those three points are costs that we're incurring ahead related to it. Some of it is the additional point that I talked about in rebuild. We're incurring more overtime and more premium to run the airline this year, so you'd expect that one, those costs to come out. It's both making the investments and those rebuild costs that will diminish that. You'll see improvement in.

[Dan Janki, CFO at Delta Air Lines]

You know, one of those costs is we put costs in regards to our reporting practices and the changes associated with that. Yes, that's an increase, but that's gonna create efficiencies for us throughout our network in regards to how we run and operate that throughout the system. We did a lot of work, the operating teams did a lot of work to test that, validate that, and we know we'll get those efficiencies as we go forward.

[Scott Group, Managing Director and Senior Analyst at Wolfe Research]

Okay, thanks. Then just a second question, just more about the third quarter guide. It sounds like June had revenue up 4% and margins of 16%, and I'm sure there was some impact from operational issues. Sounds like that's getting better and fuel's coming down. Just, I'm trying to understand the 11%-13% margin guidance for Q3 relative to that 16% in June. Any thoughts there would be great. Thank you.

[Dan Janki, CFO at Delta Air Lines]

16%. You have the

[Ed Bastian, CEO at Delta Air Lines]

Talking about the month of June.

[Dan Janki, CFO at Delta Air Lines]

For the month of June. As you think about it, let me.

[Ed Bastian, CEO at Delta Air Lines]

Sort of know where-

[Dan Janki, CFO at Delta Air Lines]

July will be a lot like June, and then you step down as you progress through. The June and July, you get that momentum, but then you get the seasonality and the step down that Glen talked about regarding the top line as you progress through the rest of August and September. Then the other element in there as you think about guide, underneath that, remember, we're coming off of June capacity rates, so we have underlying volume growth associated in that, about 7%-8% associated with that, so you're getting rich on that.

[Ed Bastian, CEO at Delta Air Lines]

I think the other thing, Scott, this is Ed in there, that we have a pretty significant profit sharing accrual.

[Dan Janki, CFO at Delta Air Lines]

Yeah

[Ed Bastian, CEO at Delta Air Lines]

Also in the September quarter. In June, most of the results were offset by the loss in the first quarter of the year. We have a profit sharing accrual, but it's modest. I think we're looking at close to another

[Dan Janki, CFO at Delta Air Lines]

200

[Ed Bastian, CEO at Delta Air Lines]

$200 million ±, at these guidance levels of additional expense for profit sharing, which also affects a little bit of the trend there.

[Scott Group, Managing Director and Senior Analyst at Wolfe Research]

Okay. Very helpful. Thank you, guys. Appreciate the time.

[Operator]

Thank you. We'll take our next question from David Vernon with Bernstein.

[David Vernon, Senior Analyst at Bernstein]

Hey, Dan, just to kind of pick on the cost outlook here. You know, we're looking for up low- to mid-single digits. We're ending 2022 up 8% or 18%, I guess, or 15, 18, whatever the number is, a little bit worse than we were before. Just can you help us sort of, kind of understand, like, are we still looking up to the low- to mid-single digits off of the costs that have been pulled forward, or should we be expecting that to moderate a little bit?

[David Vernon, Senior Analyst at Bernstein]

As you think about those, the overtime and the costs that have been put in ahead of the demand recovering, is there gonna be some sort of deceleration in some of that cost, even in kind of independent of the volume as we kind of think about the back half of this year? Or is that gonna also be pushed into 2023?

[Dan Janki, CFO at Delta Air Lines]

Yeah. You see that step down slightly in fourth quarter on that, and then it really starts to sunset as you flip the calendar and move into 2023 related to that. You certainly do. The first part of the question, I missed the very beginning of it.

[David Vernon, Senior Analyst at Bernstein]

As you look at, I think the guidance from the Capital Markets Day was up low to mid-singles on unit costs. Should we be kind of moderating that because of the 2022 sort of outperformance on cost, or is it still sort of in that same kind of range from a directional standpoint?

[Dan Janki, CFO at Delta Air Lines]

Yeah. I think it's again, as we talked about, the Destination 2024 hasn't changed in regards to it. It will be pace dependent. As Ed talked about, it's in our control. Putting the costs in ahead, it will be really when that capacity comes in and the pace of that capacity that comes in that will dictate that as we progress through 2023. We'll have to, you know, as we get to the end of this year, we're gonna look at that capacity and how we bring it on, and that will pace how the calendar falls out associated with it. We expect the leverage that we're gonna get in the incremental CASM to be right in line with where we're expecting it. Yes, no change in leverage.

[David Vernon, Senior Analyst at Bernstein]

Glen, maybe just to kind of shift gears for a second and talk about corporate. As you think about the way corporates are buying, are you seeing a return to sort of close-in travel, or has that changed a little bit in the booking windows being a little bit more elevated? How does that change the load factor you ought to be running the operation at? Or does it have any impact on that?

[Glen Hauenstein, President at Delta Air Lines]

You know, what we've seen is a little bit of an elongation of the booking cycle. I think that is also dependent on the relaxation of the cancellation fees. I think one of the things that we didn't talk about is, you know, when you look at our quarterly results here, remember, we have no change fees, and that was $1 billion that we had to overcome in the bottom line. I think we're all learning what the new world is without change fees, and we're seeing some change in travel patterns in terms of APs and in terms of stays.

[Glen Hauenstein, President at Delta Air Lines]

I think we've got that well managed, and we are going to run load factors that I think are very similar to 2019 levels throughout the rest of the third quarter and likely into fourth Q.

[Operator]

Thank you. I'm gonna take our next question from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Hey, good morning, guys, and thank you. If we think about the overtime pay in the $700 million range for the full year, how much of that was incurred in the first half? How do we think about it for the remainder of the year, just given the operational adjustments you've made?

[Dan Janki, CFO at Delta Air Lines]

Yeah. It's pretty balanced. I would say second and third quarter were the highest with it stepping down slightly that we anticipate in fourth quarter as we stabilize and run the operation.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Okay, great. As a follow-up to that, I appreciate you guys have the hardest job on the planet here, but how do we think about flex options as we think about labor and salaries, just the number of employees you guys have in 2023, just given the potential different economic scenarios we might have next year? How are you guys planning for that?

[Ed Bastian, CEO at Delta Air Lines]

Sheila, this is Ed. Let me take a stab at that. Obviously, we haven't given 2023 specific guidance. We've given you ranges and direction, but we haven't given you guidance. I'm gonna defer on getting into any detail as to labor in 2023, what the cost implications are. We mentioned at the Capital Markets Day that we do have long-term cost, you know, growth built into our model. That is true for all of our workgroups. We'll see, you know, how the year progresses. Obviously, we're in the midst of a pilot contract negotiation, which I'm not going to speak to publicly.

[Ed Bastian, CEO at Delta Air Lines]

We'll learn more as we go, but I don't see anything there to lead me to believe that the core elements of what we described back in December are gonna be that much different when you get to 2024, but the trajectory is. You know, one other thing, I know a lot of the, you know, Dan's been getting a lot of the questions on cost, which I fully understand. Thinking about it from our seat, you know, the last two years, we've been all about, you know, trying to drive down costs, and I think our team has done a really good job.

[Ed Bastian, CEO at Delta Air Lines]

In fact, we, for the better part of the pandemic, we had over 50% of our costs out, which was unheard of, showing, you know, unforeseen flexibility, which we're gonna avail ourselves to once we get the operation stabilized. My direction has been to stabilize and drive reliability. Now that we have demand like we haven't seen ever before as well, all hands are on deck to support and serve that demand. We're gonna get to equilibrium, you know, over the course of the next 12 months, where, you know, cost and revenue and everything are gonna be in balance. I'm confident we're gonna end up in a better net spot on it all.

[Ed Bastian, CEO at Delta Air Lines]

When you have revenues already surpassing 2019 levels, you know, it's hard for the operations to make sure we have enough staff on hand and the focus there. There's also a lot of costs that are embedded within the system that are hard to tease out, but are a function of a very intense period of time that we're under.

[Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies]

Okay, great. Thank you so much.

[Operator]

Thank you. We'll now take our next question from Brandon Oglenski with Barclays.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

Hey, Ed, maybe expanding on that answer. You know, obviously, it was a challenging operational period in 2Q, but you mentioned it yourself, you know, your employment levels are, you know, close to 95% recovered. I think your own disclosure of pilot headcount is actually kind of flat with where you were in 2019. Can you speak more to maybe what unfolded, what's changed in July? And, you know, thinking about it from a brand perspective and a premium revenue perspective, obviously, if you incur a lot more cancellations and queuing at Sky Clubs and things like that, doesn't that erode that ability in the future? How are you, I guess, protecting that moving forward?

[Ed Bastian, CEO at Delta Air Lines]

Oh, it absolutely does erode that into the future. That's the risk, Brandon. I agree with that. You know, what we've seen in July as compared to that last you know six weeks of the end of the second quarter is some different scheduling practices that we've taken within all of the work categories, including our pilots, but our flight attendants and others. We've made schedule adjustments as well. We've taken any growth out. We're positioned not just for the next month or so.

[Ed Bastian, CEO at Delta Air Lines]

We're positioned for the balance of this year to kind of stay where we're at, and that level of stability gives the operations the capability to focus on the task at hand rather than continuing to invest and build on growth at the same time. We're gonna have the capacity to grow when we're ready, but we wanna make sure we're focused on serving what we have. It's really remarkable being in this business for 25 years now. You know, you run a better airline, you know, everything runs better, and the efficiencies start to materialize. The overtime, you know, goes away on its own. The lines start to move quicker.

[Ed Bastian, CEO at Delta Air Lines]

We can also, you know, accelerate the training and the experience of our team. When you think about the fact that we've got 18,000 new people that have joined us, you know, many of them over the last 12 months, there's a lot of experience that they're gaining. That experience and scale is gonna pay off. You don't step into these jobs, and you learn it overnight. There's a significant learning factor that we're also going through, and that's whether it's in the airports with what you guys see or what's going on behind the scenes in tech ops or in reservations or in all categories of employment, even technology.

[Ed Bastian, CEO at Delta Air Lines]

You know, you know, you see all behind the scenes, all the moving parts and how much new folks, new leadership we have in place. It's breathtaking, and I'm optimistic they're doing a really good job. There's a pretty big learning curve, which hard to put a dollar amount against, but I know it's going to really pay off as we move forward.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

I appreciate that. I'll just keep it to one.

[Operator]

Thank you. We'll go ahead and take our next question then from Helane Becker with Cowen.

[Helane Becker, Managing Director and Senior Research Analyst at TD Cowen]

Oh, thanks very much, operator. Hi, everybody, and thank you very much for the time. So my one question is related to when you add time, which is what I assume you're doing in changing the boarding process, you're adding time between flights. Does that exacerbate pilots and flight attendants running out of time? Does it help baggage handling? Like, how should we think about that? I think, Dan, you already talked to the cost side, but how should we think about that from the actually day-of-operation side?

[Ed Bastian, CEO at Delta Air Lines]

I'll take that. You know, it doesn't, Helane. Obviously, it's a fact that you gotta look at the full impact on overall utilization. Obviously, utilization comes down a touch. So it's embedded into the aircraft utilization. Dan talked about our aircraft utilization's already having been down versus 2019, and we're capitalizing a little bit on that to take advantage of some boarding time. The fact of the matter is that we were running with the large narrow bodies in the domestic system, you know, too hot in the airport environment. We didn't have enough time, you know, for our customers. This is just recognizing the reality of the operation which we're already running, which enables everybody to get in position ahead of time.

[Ed Bastian, CEO at Delta Air Lines]

Yes, we're tweaking, you know, turn times, report-in times and when the actual assets are being operated. But it doesn't really change a lot in the dynamics. It's gonna give our people a little more time to board promptly. It's also giving us the opportunity, which we haven't been able to fully take advantage in the past, to actually depart early when ready, and we're seeing that in meaningful ways. It's improving baggage performance. I think the only pinch point we're seeing is making certain we have enough time to get the cleaners off the planes because, you know, we're not gonna compromise on cleaning either. You know, this has been worked on for the better part of the last year.

[Ed Bastian, CEO at Delta Air Lines]

It wasn't something we thought of overnight. I think we're fully plugged in across all the operating groups that it's gonna be a better customer experience. It's gonna be a much better employee experience. Behind that, it's gonna be a better brand experience as well.

[Helane Becker, Managing Director and Senior Research Analyst at TD Cowen]

That's very helpful. Then just for my follow-up question, is on what kind of technology can you use to speed the boarding process? I know you were working with biometrics and doing some of that leading edge stuff pre-pandemic and then even during the pandemic, but can you accelerate your IT spend to speed the process up and help day-of operations, I wonder?

[Ed Bastian, CEO at Delta Air Lines]

Yeah, we're doing that. We're seeing a lot of that's on the front end, coming through security. You may have seen that we've added additional biometric processes and face ID and working with CLEAR and TSA to get customers through the security queues faster. At boarding, at the moment, I don't see any magic bullets to get physically the number of people that we have on the plane and seated with their bags stowed that much sooner. We're trying to make it more comfortable process. I don't think it's gonna be faster, but hopefully it'll be more comfortable.

[Helane Becker, Managing Director and Senior Research Analyst at TD Cowen]

Great. Thank you.

[Operator]

Thank you. We'll now take our next question from Michael Linenberg with Deutsche Bank.

[Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank]

Oh, yeah. Hey, good morning, everyone. Hey, Glen, I wanna go back to the point that you made where you talked about, you know, some of the revenue segments that you focused on, you know, to some extent a hedge against inflation. You talked about Basic Economy being under 10%. How has that progressed over, say, the last few quarters as inflation has picked up and presumably some of the more price-sensitive passengers are just getting crowded out by your premium customers? Can you give us sort of a sense of how that's trended?

[Glen Hauenstein, President at Delta Air Lines]

Well, I think you just described what's happened is as fares came up and as inventory controls went into place, while the fares for Basic Economy were filed, they were not readily available, as they were squeezed off by higher-yielding customers. Our target has been, and really these are soft targets, but to have less than 20% of our capacity available in Basic Economy. That's our, a very soft kind of macro target that we have. That's come down to below 10% or right around 10% as the high demand through the summer has really displaced those customers. That's a result, not an intent.

[Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank]

Okay, great. Can you give us a sense if we go back to 2019 and we looked at sort of how many points of load factor on domestic flights connected to international and sort of where we are today? Because I would think that there's probably some decent upside there as you start to turn on more of Asia, for example. You are a fairly big connecting airline. Where were we then and maybe where are we now?

[Glen Hauenstein, President at Delta Air Lines]

The domestic portion of international journey is generally about 10% of our total capacity or less.

[Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank]

Mm-hmm.

[Glen Hauenstein, President at Delta Air Lines]

It's right now in the high single digits, so that's a couple of points of load in the domestic system.

[Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank]

Okay. All very high margin, I presume, as it comes on.

[Glen Hauenstein, President at Delta Air Lines]

Absolutely. You know, the recovery has really been led by domestic premium. Now what we're really seeing is the acceleration of international premium as we move into the late summer and fall. Very exciting for us.

[Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank]

Very good. Thanks, everyone.

[Operator]

Thank you. We'll now take our next question from Savi Syth with Raymond James.

[Savi Syth, Managing Director and Equity Research Analyst at Raymond James]

Hey, good morning. I noticed the kind of used aircraft purchases this quarter, and I was wondering if you could kind of take a step back and as we look to like 2023, 2024, kind of plan and maybe even a little bit beyond, guessing that, you know, the small RJ reduction in your fleet is probably faster than you had expected back at Investor Day. I'm just kind of curious, you know, what holes you have in the order book. Essentially, you know, what do you need in terms of growth or replacement compared to what you have in your order book today? Like what could we expect in terms of additional either used or new aircraft that needs to be added to your outlook?

[Ed Bastian, CEO at Delta Air Lines]

Hey, Savi, this is Ed. You know, we're reasonably good place with the order book. Obviously, we have opportunity in the next, you know, 3-5 years of delivery for some additional narrow-body large narrow-body acquisitions, and that's something that we're always talking to Airbus and Boeing about and whether that's used or whether that's new. There's opportunity there. On the wide bodies, we have focused a lot of our energy the last few years on the wide-body and specifically the three fifty and the three thirty, and we're pleased with the used three fiftys that we've acquired. We've got a pretty healthy stream of wide bodies coming.

[Ed Bastian, CEO at Delta Air Lines]

I'd say the focus in the back end of the five-year period is on the large narrow bodies.

[Savi Syth, Managing Director and Equity Research Analyst at Raymond James]

All right. Helpful. I'll just leave it at that. Thank you.

[Operator]

Thank you. We'll take our next question from Stephen Trent with Citi.

[Stephen Trent, Managing Director at Citi]

Good morning, everybody, and thanks for taking my question. Just one quick one here. You know, when we look back earlier this year, there was this ongoing noise about these 5G towers getting installed in our airports. That all seemed to quiet down. In that sort of general theme, are you seeing anything from other industries or maybe government proposals, you know, that are causing some concern at the moment or, you know, have these conversations with other industries, with Secretary Buttigieg, and not giving you any sort of concern like that?

[Peter Carter, EVP, Chief Legal Officer and Corporate Secretary at Delta Air Lines]

Steve, hi, it's Peter Carter. Thanks for the question. You know, we have a very, I would say, direct and open dialogue with the administration, with the secretary and the FAA. We don't see any, I'll say, storm clouds with respect to any of the initiatives that the government has been talking about. You may have seen that the secretary proposed a bill of rights for passengers traveling with disabilities last Friday. That was just a restatement of, you know, existing regulations that Delta has been following. Obviously, we do everything we can to make sure that our disabled passengers are taken care of every step of the journey.

[Stephen Trent, Managing Director at Citi]

Okay. Really appreciate the color, and I will leave it at that. Thank you.

[Operator]

Thank you. We'll take our next question from Duane Pfennigwerth with Evercore ISI.

[Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI]

Hey, thanks. I almost fell asleep. Nice to speak with you both. Ed, with a longer-term view that operations will kind of normalize, and clearly there's a lot of non-recurring in the baseline this year that your unit costs will normalize into 2023. What sounds like a constructive view on demand, meaningful free cash flow generation this quarter. How do you and the board think about your stock here in the twenties? I think the plan was to stick to your knitting on deleveraging, but you know, are you shocked with where your equity is trading? And is there any increased emphasis or increased thought on buyback with your stock down here when the restrictions come off?

[Ed Bastian, CEO at Delta Air Lines]

Thanks, Duane. I think we're all surprised with where the stock is for the industry, by the way. It's not Delta-specific, is trading at. I think it's a function of all the distractions or noise, whatever you wanna call it. We've got a lot of moving parts in the industry as we get through the last phases of this pandemic, and we see the whipsaw effect, whether it's extraordinarily high revenue or, you know, high cost to serve that revenue and fuel prices. There's a lot of moving parts there. We can't do anything at the moment with respect to CARES Act limitations, so I can't provide you any specifics on that.

[Ed Bastian, CEO at Delta Air Lines]

You know, we talk over the long term that we've got a responsibility to all constituencies, to our customers, to our employees, and importantly to our owners, as well as our communities. Our owners shouldn't be forgotten about, and we didn't forget about them during the pandemic. We did not dilute our owners, one of the only airlines that didn't do that. You know, it's an important point to us, but you know, at this point in time, really can't speak much about that.

[Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI]

Okay. Maybe just one last one on transatlantic. Some constructive comments from Glen. Can you talk about recovery, sort of U.S. point of sale versus Europe point of sale, and how you see that sort of changing over the balance of the year? Thanks for taking the questions.

[Glen Hauenstein, President at Delta Air Lines]

Right. Well, I'm glad I got this question 'cause I actually rehearsed for it. Thank you for the question.

[Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI]

You're welcome.

[Glen Hauenstein, President at Delta Air Lines]

You know, I think one of the issues is with the euro exchange parity is what are we seeing in terms of E.U. point of sale and E.U. demand set. What I'd say is that, right now the difference between E.U. point of sale and U.S. point of sale in terms of referencing back to 2019, they are almost identical in terms of the fare increases that we've realized. Now, you know, one of the things I historically never understood is most things in Europe are more expensive than they are in the U.S. on a dollar-adjusted basis. Airfares in Europe to the United States were never one of those.

[Glen Hauenstein, President at Delta Air Lines]

We've gotten some leverage here where we've gotten some nice fare initiatives and structures in place that are taking some of that disparity out of the U.S. point of origin versus the European point of origin. I think we like where we sit. I think the one concern is right now we are in a high U.S. point of sale. Everybody likes to go to Europe in the summer. As we shift to the fall, late fall, certainly that extends throughout the October IATA season. As we get into the November through February, I'd just like to point out it'd be a great time for you to go to Europe. The after-Christmas sales would be very good, and your U.S. dollar would go further than ever.

[Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI]

Balance sheet saved your trip.

[Glen Hauenstein, President at Delta Air Lines]

We will keep a close eye on that balance as we move in, given the fact that the euro has weakened substantially, but that's something I think we can accommodate through capacity offering.

[Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI]

Okay. Thank you very much.

[Operator]

Thank you. We'll take our next question from Ravi Shanker with Morgan Stanley.

[Ravi Shanker, Managing Director and Equity Research Analyst at Morgan Stanley]

Thanks. Morning, everyone. A question for Glen or Dan. What percentage of your corporate contracts right now are still grandfathered contracts, i.e., pricing from pre-pandemic levels, where there could potentially be an opportunity to renew at much higher yields?

[Glen Hauenstein, President at Delta Air Lines]

Most of our contracts are based off of published fares and inventory that's available in those published fares, so it floats. I think what we're seeing, and when we look at 65% recovered in terms of volume and 80% recovered in terms of sales, you see that we're getting a lot of yield momentum on the corporate side as well. Hopefully, as we get into the fall and corporate continues to return, we can realize those increased fares that are in the market today.

[Ravi Shanker, Managing Director and Equity Research Analyst at Morgan Stanley]

Got it. Thanks for the clarity. Maybe just want to follow up. Obviously, thank you for all the commentary on how you expect 3Q to pan out. Just wanted to confirm that based on the visibility you have in the booking curve right now, which I think should give you at least three months of visibility, you are not seeing any drop-off in domestic leisure demand post Labor Day beyond normal seasonality. Is that a fair comment?

[Ed Bastian, CEO at Delta Air Lines]

That's fair.

[Ravi Shanker, Managing Director and Equity Research Analyst at Morgan Stanley]

Thank you.

[Julie Stewart, VP of Investor Relations at Delta Air Lines]

We'll now go to our last analyst question.

[Operator]

Thank you. We'll take our final analyst question from Christopher Stathoulopoulos from Susquehanna Financial Group. Please go ahead.

[Christopher Stathoulopoulos, Senior Equity Research Analyst at Susquehanna Financial Group]

Good morning, everyone. Thanks for getting me in here. Ed or Dan, there was some news out recently about Boeing perhaps getting close to doing a sizable order. I guess if I understand, if you don't wanna comment on it, we might hear more on Farnborough in two weeks. That would, you know, I think if I understand that, put that first delivery in 2025. I'm just trying to understand if there's a pilot shortage out there, the consensus view out through mid-decade, which is a gating factor for domestic ASMs. Could you just sort of frame, you know, what is the peak year, if you will, for retirements for your current pilot workforce?

[Ed Bastian, CEO at Delta Air Lines]

You raised a lot of speculation in your question, so I'll be careful to speak to what I can. You know, we don't have a massive reduction or retirement bubble in the Delta pilot workforce. We have pilots retiring each year over the next handful of years. You know, we were the only airline that offered a significant retirement inducement for our pilots, and close to 2,000 of our pilots took them back in the summer of 2020. It's easy to have revisionist history and wonder whether we should have done that or not.

[Ed Bastian, CEO at Delta Air Lines]

You put yourselves back in summer of 2020 when the total revenues were probably less than 20% of 2019 levels. There was no knowledge of what a vaccine could do, when it would be found, the effectiveness, et cetera, and how the world was gonna start to reunite. I don't look back with any regret at all about those decisions. That said, when you take out 2,000 pilots, and you could imagine most of them were at the senior most levels of the company, that causes churn at a much higher level of Delta than other airlines, because you effectively wind up training everybody at some point over the following couple of years because everyone will have an opportunity to move up and move to different categories and the like.

[Ed Bastian, CEO at Delta Air Lines]

We've done a good job of bringing in the next 2,000. We have many of them hired. We still have a few. We have some to go, but we're through much of that. I don't see any pilot shortage issue for Delta at all. It is the place pilots wanna come to. Certainly by the period of time that you were speculating on the latter part of 2025, 2026, 2027, I think we'll be in a great spot with respect to our pilot staff.

[Christopher Stathoulopoulos, Senior Equity Research Analyst at Susquehanna Financial Group]

Okay. Appreciate that. Just to follow up, so your survey work, I think you mentioned in your prepared comments, is fairly constructive post-Labor Day, and your answer to Ravi's question echoes that. In your survey work, I know you do a lot of very detailed survey work. Have you looked at, you know, travelers that have not yet flown during the pandemic, and for those that have, the frequency. Just trying to get a sense here or kind of look at this sort of pent-up demand from another angle using some of the survey work from the leisure side that you've done over the last few months. Thank you.

[Ed Bastian, CEO at Delta Air Lines]

Yeah. The survey work Glen mentioned was largely around corporate travel that we spend an awful lot of time with. We also survey SkyMiles customers, and we have an active survey dialogue going on there. There's still pretty, you know, some meaningful, you know, pent-up demand there. It's not just people that haven't traveled. It's volumes of trips that we anticipate people will take, you know, looking forward as they start to catch up on all the experience and all the opportunities that they lost. When you think about, you know, this pent-up demand, you know, it sounds very impersonal. It actually is very personal. It's people investing in themselves to go see friends and family and have life experience that they haven't had time.

[Ed Bastian, CEO at Delta Air Lines]

I can't, you know, put how many, you know, weddings are being held now. You know, all the reasons why people travel have not gone away. They've just been deferred, and now they're being accelerated in the next period of time. Whether it's the next 12 months, 18 months, 24 months, there's a lot of catch up to be done. Every data point we look around indicates that. People aren't fearful of traveling. I mean, there's still some, but it's a significantly shrinking number. There's a lot of people that, once they're now out on the road, they wanna get back on the road.

[Ed Bastian, CEO at Delta Air Lines]

The only inhibitor that I see that I hear about is running a quality operation, and we're taking that off the table as a risk factor for our customers.

[Christopher Stathoulopoulos, Senior Equity Research Analyst at Susquehanna Financial Group]

Thank you.

[Julie Stewart, VP of Investor Relations at Delta Air Lines]

That will wrap up the analyst portion of the call. I'll now turn it over to Tim Mapes, our Chief Communications Officer, to start the media questions.

[Tim Mapes, SVP and Chief Communications Officer at Delta Air Lines]

Thank you, Julie. Cody, if we could, as we thank the analysts for their time this morning and transition to questions from the media, just remind the members of the media what our process is, and we'll try to get four or five questions answered while we have time here.

[Operator]

Absolutely. Thank you. If you'd like to ask a question, please do so by pressing star one on your telephone keypad. Again, if you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one if you'd like to ask a question from members of the media. We'll pause for just a few moments while we assemble a queue.

[Operator]

We'll take our first question from Alison Sider with The Wall Street Journal. Please go ahead.

[Alison Sider, Reporter at The Wall Street Journal]

Hi. Thanks so much. Just wondering if you could talk a little bit about what you're seeing with fares. You know, the CPI data came out this morning and seemed to show some softening, you know, have you seen that? Does that reflect any softening in demand or more resistance to higher fares, or is it just fuel prices coming down?

[Glen Hauenstein, President at Delta Air Lines]

You know, we don't really generally talk about future fares, so I'd like to stay away from that. What we see is a very robust demand set and our ability to harness that through both pricing and inventory in the future. I think we expect that very strong demand set to last through the remainder of the summer and into the fall. As Ed indicated in his previous comments, we do believe there's a lot of pent-up demand for people who maybe didn't make it in the summer or got priced out of the summer who will be able to travel in the fall and the winter.

[Alison Sider, Reporter at The Wall Street Journal]

Curious if you're seeing any issues with replacement parts, including engines. Are you seeing any lack of availability of spare parts, and is that causing any operational issues?

[Dan Janki, CFO at Delta Air Lines]

Certainly. When you think about the supply chain as it relates to aviation, it certainly has been challenged. It's been well documented from that perspective. We certainly have seen disruptions. It's forced us to think about the inventory levels that we carry. We're fortunate that our team has deep expertise and has been doing this for years, where they're able to navigate that where it hasn't impacted in any way entry into service or availability of aircraft in a material way. It's allowed us to fly what we wanted to fly. But it's certainly ongoing. We certainly see those disruptions. We feel them.

[Dan Janki, CFO at Delta Air Lines]

We work closely with our OEM partners on that and to ensure that we're at the top of the list, but we're working proactively with them to increase the flow. It's day-to-day.

[Alison Sider, Reporter at The Wall Street Journal]

Got it. Is it especially engines or other parts that have been a particular challenge?

[Dan Janki, CFO at Delta Air Lines]

It cuts across both engines and components.

[Operator]

Thank you. We'll now move on to our next question from Mary Schlangenstein with Bloomberg News.

[Mary Schlangenstein, Reporter at Bloomberg News]

Hi. I wanted to try to follow up really quickly on Ally's question. With the CPI report showing that fares fell in June after three straight months of double-digit increases. I know you don't wanna comment specifically on fares, but could you just comment on, you know, is that a signal now that being able to continue to increase fares across the industry is likely being limited? A second quick question. I wanted to see if you would comment on the report that you're close to a deal for a dozen or so new A220s with Airbus. Thank you.

[Ed Bastian, CEO at Delta Air Lines]

Hi, Mary, this is Ed. I think Glen answered it well. You know, I didn't look at the CPI report yet that came out this morning, but you know, I think that measure's kind of going from month to month. When you think about our selling season, you know, we're selling now into the latter part of the summer, early fall already, which seasonally is a little less amount of demand than what we've seen on the front end of the spring and summer surge. You know, the fare environment, it continues to be healthy. It's not something that we would talk about, but it is, you can see in our guidance for Q3, you know, the demand is quite strong.

[Ed Bastian, CEO at Delta Air Lines]

Your question relative to future acquisitions, as you know, we don't comment on such matters.

[Mary Schlangenstein, Reporter at Bloomberg News]

Thank you.

[Operator]

Thank you. We'll take our next question from Leslie Josephs with CNBC.

[Leslie Josephs, Airline Reporter at CNBC]

Hi, good morning. Thanks for taking my question. On the training and experience backlog, can you provide a little more detail on how that affected you, financially, operationally, and also where are you in the hiring? Do you have any hiring goals for this year, or do you think that the pace is gonna start to slow? Anything surrounding your plans would be helpful. Thanks.

[Ed Bastian, CEO at Delta Air Lines]

Yeah. On the, you know, a lot of it's in training, and I'll talk about pilots. We have an enormous amount of pilot activity and training going on. I'm not sure the exact number, but at any one point in time, we have 1,500 or more pilots in training, which is much larger than we would normally carry. By the way, it's not just the training, because you have pilots waiting to be trained that are sitting on reserve. There's a backup there as well in the process. You know, it really impacts your overall productivity and efficiency that will eventually sort itself out as we move through, you know, move the snake, the bubble through the snake here and we get to the other end of that.

[Ed Bastian, CEO at Delta Air Lines]

It's gone on with technicians, with mechanics. It's experience we see with our vendors, our contractors, their ability to repair parts. They're having some of the issues with experience the same way we have as new people learning. It touches every part of our operation. The good news is that we've got all our folks, and so we're at peak with respect to quote-unquote training and, you know, I wouldn't call it inefficiency, but the cost of efficiency. You know, every month that goes by, it's gonna get better.

[Leslie Josephs, Airline Reporter at CNBC]

In terms of the hiring numbers, do you expect the pace of hiring to slow for the rest of the year?

[Ed Bastian, CEO at Delta Air Lines]

Yeah.

[Leslie Josephs, Airline Reporter at CNBC]

You know, being you know full or

[Ed Bastian, CEO at Delta Air Lines]

Yeah. As I mentioned in my remarks, you know, we're at roughly 95% of 2019. There's more hiring to be done in pilots. There's more hiring to be done in flight attendants, in mechanics. The big areas that we are hiring at much larger numbers previously were in the airports and in reservations. In those two areas, we are largely where we need to be. Some additional staffing certainly, but that is largely resolved.

[Operator]

Thank you. We'll take our next question from Dawn Gilbertson with Wall Street Journal.

[Dawn Gilbertson, Travel Columnist at The Wall Street Journal]

Hi, good morning. Ed, you gave some really good statistics on, you know, the nascent turnaround here in July. I wondered if you or Glen or somebody could talk about the baggage handling situation. You know, I'm just hearing anecdotal evidence, not just with Delta so on, you know, some baggage handling issues, lost bags. Can you share, I mean, how is Delta doing in baggage handling, and if there are trouble spots, where they are and how you're addressing them? Thanks very much.

[Ed Bastian, CEO at Delta Air Lines]

Sure, Dawn. You know, as you can imagine, when you hit a rough patch in your operations, the bags are gonna be, you know, affected probably even more, so than customers. Indeed, that's what we saw happening in May and June. That said, in July, month to date, we're actually ahead of goal that we had set for ourselves in terms of baggage performance. It's early, but it's a good indication. We missed our goal by a relatively modest amount in June, the month of June. One of the things I was impressed with is the Atlanta Airport, which is our biggest baggage center and our biggest customer point, was actually ahead of goal for June.

[Ed Bastian, CEO at Delta Air Lines]

The baggage issues for us are not domestic. Domestic, our operations are running in a really great place. It's tended to be more on the European side, where the European airports have—don't have the staff, and they haven't had the ability to invest ahead of time the way we've had here in the U.S. We're working with our airports, with our partners, with people on the ground. We've gone as far as recently, we had a separate charter just to repatriate bags back to customers that have been stranded because of some of the operational issues the European airports were having. You know, we did that on our own nickel just to reunite our Delta customers to their bags as quickly as possible.

[Dawn Gilbertson, Travel Columnist at The Wall Street Journal]

Thank you very much.

[Dan Janki, CFO at Delta Air Lines]

Thanks, Dawn. Cody, we have time for one final question, and then we'll turn it back over to Ed for closing comments. Thank you.

[Operator]

Absolutely. Thank you. We'll take our final question from Rajesh Singh with Reuters.

[Rajesh Singh, U.S. Aviation Correspondent at Reuters]

Well, hi. Thanks for taking my question. We are told that Delta is in talks with Airbus to expand the existing order for A220s, and a deal could be signed next week. Is this accurate? If it is, can you please share the details? Thank you.

[Ed Bastian, CEO at Delta Air Lines]

We don't comment on upcoming decisions that have yet to be taken. I'll leave that at that. Well, I wanna thank you all for joining us today. There's been a lot happening in our industry and in our business, and it was a very active second quarter. I'm proud of the work our team did to deliver a great financial result, a real inflection point as we coined it. We look forward to a strong third quarter ahead. We'll keep a close eye on the operations and encouraged with what we're seeing. We expect to report even better results when we get to the Q3 report in October. Thank you for joining us, and hope you have a good rest of your summer.

[Operator]

Thank you. That does conclude today's conference. Thank you for your participation today.

Participants

Executives

• Dan Janki, CFO
• Ed Bastian, CEO
• Glen Hauenstein, President
• Julie Stewart, VP of Investor Relations
• Peter Carter, EVP, Chief Legal Officer and Corporate Secretary
• Tim Mapes, SVP and Chief Communications Officer

Analysts

• Alison Sider, Reporter at The Wall Street Journal
• Andrew Didora, Senior Equity Research Analyst at Bank of America
• Brandon Oglenski, Director and Senior Equity Analyst at Barclays
• Christopher Stathoulopoulos, Senior Equity Research Analyst at Susquehanna Financial Group
• David Vernon, Senior Analyst at Bernstein
• Dawn Gilbertson, Travel Columnist at The Wall Street Journal
• Duane Pfennigwerth, Senior Managing Director in Equity Research at Evercore ISI
• Helane Becker, Managing Director and Senior Research Analyst at TD Cowen
• Jamie Baker, Senior Airlines Analyst at JPMorgan
• Leslie Josephs, Airline Reporter at CNBC
• Mary Schlangenstein, Reporter at Bloomberg News
• Michael Linenberg, Managing Director and Senior Company Research Analyst at Deutsche Bank
• Rajesh Singh, U.S. Aviation Correspondent at Reuters
• Ravi Shanker, Managing Director and Equity Research Analyst at Morgan Stanley
• Savi Syth, Managing Director and Equity Research Analyst at Raymond James
• Scott Group, Managing Director and Senior Analyst at Wolfe Research
• Sheila Kahyaoglu, Managing Director in Equity Research at Jefferies
• Stephen Trent, Managing Director at Citi