Delta Air Lines Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 13, 2023

There are 21 speakers on the call.

Operator

Good morning, everyone, and welcome to the Delta Air Lines March Quarter 2023 Financial Results Conference Call. My name is Matthew, and I will 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.

Operator

Please go ahead.

Speaker 1

Thank you, Matthew, and good morning, everyone. Thanks for joining us for our March quarter 2023 earnings call. Joining us from Atlanta today are Our CEO, Ed Bastian our President, Gunhauenstein and our CFO, Dan Janke. Ed will open the call with an overview of Delta's performance and Glenn 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.

Speaker 1

We ask you please limit yourself to one question and a follow-up, so we can get to as many of you as possible. After the analyst Q and 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. Some of the factors that may cause such differences are We'll also discuss non GAAP financial measures and all results exclude special items unless otherwise noted.

Speaker 1

You can find a reconciliation of our non GAAP measures on the Investor Relations page at ir.delta.com. And with that, I'll turn the call over to Ed.

Speaker 2

Thanks, Julie. Good morning, everyone. We appreciate you joining us today. 2023 is off to a strong start for Delta with record advanced summer bookings, The launch of free WiFi and continued recognition as the industry leader not only by our customers, but by Fortune, Serium and The Wall Street Journal. During the March quarter, we generated earnings of $0.25 per share on revenue that was 45% above last year and a record for the March quarter.

Speaker 2

Delta's operating income was $550,000,000 a more than $1,000,000,000 improvement year over year, bringing our trailing 12 month operating Profit to nearly $5,000,000,000 We generated close to $2,000,000,000 of free cash flow in the quarter, reflecting robust demand for summer travel. Better than expected cash generation enabled us to accelerate debt reduction, moving us closer to our goal of returning to investment grade metrics. All in, a very solid performance by our team in the seasonally weakest quarter of the year. Delivering safe and reliable service remains our top priority and no airline does this better than Delta. I'd like to thank our teams for all they do for our customers The dedication, professionalism and hard work of Delta's 90,000 people worldwide are the foundation of our company.

Speaker 2

Sharing our financial success with our people has always been an important part of our DNA. Our industry leading profitability in 2022 enabled us to Pay out more than $550,000,000 in profit sharing in February, more profit sharing than the rest of the industry combined. And we're looking forward to larger payouts next year as we expect to deliver significant earnings improvement. We also rewarded eligible employees with a 5% pay increase on the 1st April and received strong ratification from our pilots On the new 4 year contract, providing well deserved increases for all of our people. The performance of our people And the momentum of our brand was recognized when Delta was ranked number 12 overall on Fortune's World's Most Admired Company list.

Speaker 2

A remarkable statement about the resiliency of our company given the pandemic challenges of the last few years. Our brand is built on a foundation of service And operational reliability and we are committed to delivering the level of service our customers expect as we ramp operations for the coming summer season. The operating teams have done a great job getting ready and we are planning to grow June quarter capacity 17% over last year To meet strong customer demand. This growth is though a couple of points below our initial plan to fully restore capacity this summer as we focus on delivering the best operation in the industry and remain prudent in our capacity restoration. As I mentioned at last December's Capital Markets Day, aviation infrastructure is still fragile.

Speaker 2

But collectively, We're working to ensure resiliency as we manage constraints around the supply chain, aircraft delivery delays and training needs. I want to commend the FAA for collaborating with the industry to help improve the customer experience in New York by temporarily relaxing minimum flight requirements given ATC staffing challenges. Turning to our outlook. With solid first quarter performance and visibility into the strength Of summer travel demand, we are confident in our full year guidance for revenue growth of 15% to 20% year over year, Earnings of $5 to $6 per share and free cash flow of over $2,000,000,000 the 3 main guideposts we shared with you last December. For the June quarter, we expect to deliver the highest quarterly revenue in our history, a 15% operating margin And EPS of $2 to $2.25 a share.

Speaker 2

Our forecast operating profit of $2,000,000,000 matches Q2 of 2019 demonstrating that the earnings power of this franchise is intact. Glenn and Dan will provide more details on the components of our outlook. As we look to our upcoming Investor Day in June, we'll outline the long term opportunities that we've cultivated through years of investment, Building on our industry leadership position and further enhancing our long term financial profile. One focus Area will be innovation and digital technology where we continue to grow our leadership position. Increasingly, it's one of the reasons customers are choosing Delta With significant growth in direct bookings and higher engagement through our digital channels.

Speaker 2

We have reached an important step in our digital transformation with the formation with the rollout of fast, free, high quality WiFi, which has been a tremendous success. We began this effort several years before the pandemic And it has required significant investment and resources to achieve. In addition, this month we begin rolling out DeltaSync for SkyMiles members, which will unlock a more personalized customer experience in the air and on the ground. When customers join the SkyMiles loyalty program, It enables us to deepen our trusted relationship and create stronger brand preference. As we've rolled out fast free WiFi as well as other benefits, New SkyMiles memberships have accelerated at a record pace.

Speaker 2

Growth has been particularly strong among younger customers With a record 3,000,000 total enrollments during the quarter. Thanks to the size and growth of our loyalty program, The value of our Amex co brand card portfolio continues to reach new highs and leading brands are joining our consumer I look forward to discussing this and more about how Delta is transforming the customer experience on June 27 in Atlanta. Hope you all can join us that day. In closing, the industry backdrop remains constructive, and we are well positioned to grow earnings And cash flow in 2023, 2024 and beyond. Delta continues to set itself apart.

Speaker 2

We are on our way to transcend the industry with our leading consumer brand and deliver financial outcomes that create significant long term value for our owners. Thank you again. And with that, let me hand it over to Glenn for more details on our commercial performance.

Speaker 3

Thank you, Ed. I'd like to start by thanking our employees for the difference that they make every day. We delivered record March quarter revenue at 11,800,000,000 14% higher than 2019 on 2% less capacity. Total unit revenues or TRASM capacity than initially planned. Consumer demand was well ahead of pre pandemic levels and drove strength in domestic and international travel.

Speaker 3

Business travel improved in the quarter with small and medium businesses ahead of 2019 levels, while managed corporate travel showed steady progress led by International. Diverse revenue streams including premium and loyalty generated 56% of total revenue in 1Q. Premium revenue growth continued to outpace the main cabin. Total loyalty and revenue grew 28% versus the prior year With continued momentum in our American Express co brand portfolio, we saw card spend up more than 20% year over year. This Supported a record $1,700,000,000 of remuneration from American Express during the quarter, keeping us on track to deliver over $6,500,000,000 in 2023.

Speaker 3

Throughout the recovery, travel behaviors and patterns continue to evolve. The hybrid workplace is blurring the lines between business and leisure Trips while the removal of change fees has increased customer flexibility allowing them to book trips earlier. This dynamic was more pronounced in the March quarter and so we are continuing to adopt and see opportunities to further optimize our revenue management approach We expect June quarter revenue to be up 15% to 17% year over year on capacity that is 17% higher. This implies unit revenues will be flat to down 2% compared to prior year, including a couple of point impact from higher international mix as well as lapping record cargo revenues. For comparison to the March quarter, the midpoint of this outlook is a 3 point sequential improvement in total unit revenues versus 2019, Driven by improvements in both domestic and international.

Speaker 3

Moving forward, we are sunsetting the comparisons to 2019 and returning to year over year metrics. Domestically, we are growing our seats mid single digits over last year with our core hub rebuild beginning to take hold in June and On international, we are excited with the momentum we are seeing and expect record revenues and profitability for the summer travel season. To meet increasing demand, we are growing our international seats by more than 20% in the June quarter compared to prior year And we already have about 75% of our bookings on hand. In the transatlantic, we are seeing strong demand on our largest ever summer schedule. Our Amsterdam hub performance continues to improve and we are pleased with the outlook for all of our new markets.

Speaker 3

In Latin America, momentum is continuing to build. The breadth of Delta's long haul network to South America continues to improve as we begin to leverage our partnership Pacific demand is accelerating and we expect record margins meaningfully ahead of pre pandemic levels. Our multi year restructuring efforts in the Pacific are paying dividends and our partnership with Korean Air is performing extremely well providing us future growth opportunities. In closing, consistent execution of our long term commercial strategy is supporting industry leading margin performance and just Demonstrating the resiliency of our business model. The long term investments we made in our fleet, global network and technology Thank you.

Speaker 3

And with that, I'd like to turn the call over to Dan to talk about the financials.

Speaker 4

Thank you, Glenn, and good morning to everyone. For the March quarter, we delivered earnings of $0.25 per share and a 4.6 percent operating margin, In line with our guidance, our non fuel costs were 4.7% higher than the Q1 of 2022. This including a one point impact from lower capacity, primarily due to winter storms. Fuel price for the quarter averaged $3.06 Per gallon, this including a $0.25 benefit from our refinery, which continues to provide a unique hedge To fuel volatility, our operating cash flow was $2,900,000,000 that was the highest March quarter result in Delta's history. After investing $1,100,000,000 back into the business, we generated $1,900,000,000 of free cash flow.

Speaker 4

Strong cash generation enabled $1,200,000,000 of debt reduction. This including accelerated debt repayment of $700,000,000 with an average interest rate of 7%. Liquidity ended the quarter at $9,500,000,000 And adjusted net debt of $21,000,000,000 Our leverage ratio improved from 5 times at year end We now expect to complete our full year planned debt reduction in the first half of the year and we'll continue to evaluate opportunistic debt repayment. Over the last year, we accelerated more than $3,000,000,000 in debt reduction, targeting our highest cost debt and reducing our interest expense. Recognizing this progress we are making, S and P and Fitch both upgraded their outlook for our ratings.

Speaker 4

Returning to investment grade metrics is a key priority. We remain focused on reducing net debt and achieving our targeted 2 to 3 times leverage ratio in 2024, while continuing to consistently reinvest in the business. Now moving to guidance for the June quarter. On fuel, we expect our fuel price per gallon to be $2.55 to $2.80 including a $0.10 to $0.15 contribution from the refinery. While lower than last year, I'd note that fuel prices remain volatile and are still approximately 30% higher than 2019.

Speaker 4

On non fuel, we expect unit cost To be 1% to 3% higher than prior year. For the first half, we expect

Speaker 5

to grow

Speaker 4

capacity 17 Approximately 2 points less than our initial expectations with a similar 2 point impact expected on our unit costs. More than 3 months into the year, our absolute costs are tracking as expected. Higher labor rates are fully incorporated across the mainline and regionals. Inflation is stabilizing and we are in the final stages of our rebuild. By the end of June, aircraft Reactivations will largely be complete and training is starting to step down with a third of our pilots moving into production.

Speaker 4

As I outlined on our call in January, core maintenance is higher year over year in the first half of the year. We expect it to decline in the second half, resulting in a 5 point year over year progression in our unit costs from the beginning of the year to the end. Secondly, Achieving scale while restoring efficiency are Delta's largest CASM levers. The pace of capacity restoration remains the primary lever. In summary, we are confident in our year over year decline in the second half and expect a 10 point improvement in our unit cost progression as we progress through the year.

Speaker 4

Running the most reliable operation in the industry is key to delivering a competitive cost structure and underpins our industry leading margins. Combined with our outlook for revenue, we expect the June quarter operating margin to be 14% to 16% and earnings to be between $2 $2.25 per share. With the quarter behind us and the visibility we have in the summer, We have higher confidence in our full year guidance for significant improvement in earnings and free cash flow. We are reaffirming our full year guidance Operating margins of 10% to 12%, earnings of $5 to $6 per share and more than $2,000,000,000 of free cash flow. And we remain on track to earn over $7 per share in 20.24 with more than $4,000,000,000 of free cash flow.

Speaker 4

So in closing, I'd like to thank the Delta people for the elevated service they provide to our customers every day. Our people will always be the Delta Difference. Now with that, I'd like to turn it back to Julie for Q and A.

Speaker 1

Matthew, can you please remind the analysts how to queue up for

Speaker 6

questions? Certainly.

Operator

At this time, we'll be conducting the analyst question and answer session. Your first question is coming from Mike Linenberg from Deutsche Bank. Your line is

Speaker 6

live. Hey, good morning, everyone. I just I have one question, but it's a 2 part sort of pronged Revenue question maybe for Glenn or Ed. There is this ongoing debate about the pace of revenue growth and Whether it's moderating in domestic versus international, I know, Glenn, you gave some color on that. But you did also talk about a shift in the Booking curve, which I think you referred to as being pronounced.

Speaker 6

One, can you dig into that a little bit deeper and maybe How that could be having some impact on the data? And then number 2, when I think about Delta in your network, I mean, you do have the most exposure to the industrial heartland. And you look at the ISM number over the last 5 months, we've been contracting, right? The manufacturing sector may now be in a recession. And that's a part of the world that you have a decent amount of exposure to.

Speaker 6

What both corporate and or discretionary that flow through sort of Detroit and Mini, Is there any additional color that you can that you've seen that you can sort of elaborate with respect to that comment? Thanks. Thanks for taking my questions.

Speaker 3

Sure, Mike. Let me try and answer the first one. And I'd like to just mention that On Tuesday, we had our 2nd highest cash sales day ever in a seasonality that's starting to decline. Usually, those occur earlier in the year. So I think that just points to the strength of the core demand for our products and services, Be it domestic or international, just at a combined level, the number 2 sales day in our total history occurring this week.

Speaker 3

And so Behind that backdrop, a really strong consumer demand across the board, I think what we've seen is travel patterns Changing and shifting a little bit more than they did pre pandemic. We had a lot of stability pre pandemic and we're adjusting here into what I would Call a new normal and we'll figure out exactly where that lands over time. What that meant in the quarter was materialization rates actually went Down a bit throughout the quarter and materialization rates to us is book to flown ratios. Normally just a couple of points accelerating a Couple of more points more than usual, probably attributing that to the flexibility without change fees that we're seeing in the marketplace. And so that's really easy to accommodate as we just turn up slightly our overbooking levels to make sure that we capture And then secondly is the booking trends inside of 30 days.

Speaker 3

And we were knowing that inside of 30 days was declining The strong demand was just outside of 30 days. And so the demand is very strong and it's a matter of how many you let through the gate at what point in time. And we had, for example, wanted to go into month 3 to 4 points ahead. We're tiling that up a little bit to be more like 5 to 6 points ahead, Given that the combination of the materialization rates, which has some impact on that, of course, but also where consumers are booking, I think those are just RM tactics that we're using to adjust to this new demand set and I don't think that it indicates that there is any Softness in core demand strength. So I think we feel really confident in the summer in What we have on the books and what we're seeing real time in terms of demand.

Speaker 3

And so I feel very good about that. Related to industrial recession, we don't really see that. As a matter of fact, if you look at Minneapolis and Detroit, they're actually ahead. Now they're the least restored of our hubs right now, particularly in Detroit is one tick below the rest of the system. But you've also had rationalization in competing hubs in the region.

Speaker 3

And so there's well, you say, okay, well, maybe some of the industrials, these hubs Are not point to point like Boston or New York. They're really the connecting flow within the U. S. So there's opportunity as we Continue to restore those networks to put more flow on the network, not 100% resilient, relying of course on Detroit, Mostly, we're relying on the flow traffic that flows over to Boeing. So I think what we're seeing, we see strength in all of our core Our core hubs are less restored than our coastal gateways, and that's one of the upsides we have for the rest of the year as we move through the year.

Speaker 3

And they're producing incredible returns and incredibly strong demand sets.

Speaker 6

Great. Thanks, Glenn.

Operator

Thank you. Your next question is coming from Jamie Baker from JPMorgan. Your line is live.

Speaker 7

Hey, Good morning, everybody. Glenn, as we think about the swing year on year in the Q2 from domestic strength last year to International momentum this year. Do you recall what the domestic portion of the International Journey contributed to last year's 2nd quarter domestic revenue, what it's likely to contribute this year and what the normal second quarter contribution You know, used to be?

Speaker 3

Domestic portion of International Journey is right around 10 Percent of domestic travel.

Speaker 8

Okay.

Speaker 3

So it's not that big of an impact. And last year, it was probably 7 or 8, And this year it's probably going to be 8 or 9. So I wouldn't say there's significant changes in that. The summer, of course, is highly reliant on the local demand since we sit in Very big local markets for international marketplace, so New York and JFK being the largest in particular. And generally, if you can take local, you prefer local because yields are higher.

Speaker 3

So and JFK is largely 80% For international travel, so maybe less reliant Atlanta, of course, has more flow on it, But still a large local component.

Speaker 7

Okay, helpful. And as we assess the, I guess, achievability of the 2nd quarter revenue guide, could you disclose what percent of revenue is already booked by entity? International tends to book further in advance, so I'm assuming that's your highest confidence. Are we 70% booked internationally and 40 domestically, sixty-thirty.

Speaker 3

We are 75% internationally and we're significantly less than that domestically.

Speaker 8

Okay. All

Speaker 7

right, perfect. Thank you. Appreciate it.

Operator

Thank you. Your next question is coming from David Vernon from Bernstein. Your line is live.

Speaker 9

Hey, good morning guys. Glenn, please don't drop the mic. Question for you. Can you walk us through why revenues maybe came in at the lower end of the 1Q range And talk to us if there's anything in there that was trailing off through the quarter. I ask this because the market is really struggling with whether Delta is limping or leaping into the June quarter.

Speaker 9

And any color on what drove the source of weakness in 1Q and whether that may carry forward in the 2Q could help a lot? Thanks.

Speaker 3

Clearly, I think we talked a little bit about the 2 components. One was we have 1 point less capacity, driven by some weather events and recovering from those weather events. The second is the fact of the lower materialization rates and the RM systems adapting to those that we couldn't do it real time because You have to see if they're stable before you adjust for them. So I think that's what we're looking at in the second quarter. And as we mentioned in the Versus 'nineteen, we have positive momentum 1Q to 2Q both domestically and internationally.

Speaker 3

So I think We're feeling I know there's a lot of anxiety about domestic demand for the summer, but we don't share that anxiety.

Speaker 9

Okay. Thanks for that. And then Maybe just as a quick follow-up. You mentioned sort of corporate domestic or core domestic sort of corporate bookings at 85% recovered. Is the expectation can you talk a little bit bigger picture about how you expect that to trend throughout the rest of this year based on the research work you've done, based on what your bigger corporate flyers Are telling you right now and the level of certainty that maybe they have on some of those plans?

Speaker 3

Right. Our corporate travelers are telling us they expect that to continue to accelerate. We are not counting that in our we're counting a stable, 85% revenue and 75% of traffic.

Speaker 9

That's in the 2Q guide?

Speaker 7

Yes.

Speaker 3

All right.

Speaker 7

Thank you.

Operator

Thank you. Your next question is coming from Savi Syth from Raymond James. Your line is live.

Speaker 10

Hey, good morning everybody. Maybe switching gears a little bit. It looks like capacity in 2Q is a couple of points lower than you were thinking back in December. Where is that? Is that mostly coming out of the domestic market?

Speaker 10

And along those lines, as you go into the summer months, How do you kind of think about the 4 entities? I know you gave a little color on international domestic for 2Q, but just a little bit further in.

Speaker 3

Yes, it's being driven by our desire to ensure that we have an industry leading operational And what we saw in the March quarter was we had a little bit longer than we would like in recovering from weather events. So we canvassed where the short calls And they work primarily in domestic narrow body. We want to ensure we have the right resources behind them because we know we'll have Weather events in the summer as we always do. So it was just a bit of a step back, not really by demand, but really by supply Our supply was a little bit more constrained than we had hoped. And that should provide us the ability to provide whatever level we want Capacity in the fall depending on how the global environment shapes up.

Speaker 10

Understood. And then Maybe a question for Dan. There seems to be less kind of cost of prices this year. Could you talk a little bit about what's leading to that better predictability?

Speaker 4

We're just deeper into the restoration. And I think as we've gotten deeper in, we've continued to have better visibility To that, we've had all the labor dialed in as we've talked about. You're seeing stabilization in the regionals. That was one that we chased last year. As it relates to 3rd party suppliers, the peak of the Contract inquiries and repricing was heavy in Q4 of 'twenty one begin in the first half of 'twenty And if you look at those requests coming in, they've dropped off meaningfully for that.

Speaker 4

So I think you're starting See that stabilization in the inflation component of 3rd party and coming in very in line with What we expected from that perspective. So just better visibility, I think we're deeper into the restoration, so operationally Arms on it related to that. So our absolute cost visibility is good at this point in time. Certainly, the unit cost metric as we've talked about is impacted

Operator

Thank you. Your next question is coming from Duane Pfennigwerth from Evercore ISI. Your line is live.

Speaker 11

Hey, thanks. Good morning. Most of the sort of short term revenue questions have been asked, but just on corporate, Can you talk a little bit about maybe the changes, if any, that you saw since mid March? Any commentary on Financial Services or Banking in particular. And then relatedly, there's so much There's so many headlines around technology and layoffs and I know you're less levered to that.

Speaker 11

But could you just contrast How recovered is the technology vertical from a corporate travel perspective relative to other industries that you serve?

Speaker 3

Sure. Technology is one of the least recovered. Financial Services is actually showing some momentum, surprisingly. And so I think as we think about our geographic pulp, one of the things we're excited about is New York was really not back last year and of We have a lot of exposure to New York and we're seeing really good New York not only as an origin market improvements, but New York is a destination market improvements as well. So that should bode well for us for the summer.

Speaker 3

And again, I think what's really interesting It's more of the blurred lines between the yields of corporate and high yield leisure that didn't exist back Pre pandemic 5 years ago. And so we're not selling those premium seats to corporates. We are selling them at near corporate rates

Speaker 2

Duane, One thing I'd add to that is that you're seeing corporately a pretty significant push to get workers back in the office. And we have Seeing a high correlation between the opening of offices with the return of corporate travel, principally with consultancies, Advisors, people being available to take meetings. And so that underlies the strength. And I think you're going to continue to see that over the course of the year. It's going to be, I think, a good tailwind for us on the corporate revenue front.

Speaker 11

Thanks. And then just On for my follow-up with respect to the core hub restoration and maybe getting back some of your RASM premium to the extent that See that as a driver. Where are we on core hub restoration and sort of what part of the calendar as we think about the balance of 2023 Would you expect that to really contribute? And thanks for taking the questions.

Speaker 3

No, thanks for that question because I think it's very important. I think when we outlined back in December, Core restoration is one of the highlights of 2023 that is distinctive about deltas. What we didn't say is when that occurred in 'twenty three and Kind of a maya culpa on that because in the first half of the year that really wasn't what happened. And it starts right around now and it goes through the fall. So

Operator

Thank you. Your next question is coming from Connor Cunningham from Melius Research. Your line is live.

Speaker 12

Everyone, thank you for the time. So the range of outcomes on revenue is still pretty wide for the full year.

Speaker 6

I'm just curious if

Speaker 12

you could unpack The high and low assumptions, presumably you have pretty good visibility on the first half. Just curious on the swing factors as you think about the second half for your revenue.

Speaker 3

I think we see the same reports that all everybody sees. I think Ed outlined very well that There is still remaining pent up demand from the 300,000,000,000 that was not spent on airline travel during the pandemic. So we'll see how that plays out in the fall and we have a lot of flexibility in terms of what we offer as we get out of the summer. What we're saying today is we are confident through And then we'll take another look as we get closer to it. Do we see any demand trends changing?

Speaker 3

I think what we hear from the marketplace, everybody is looking for those signs. We don't see them right now. So we would tell you if we did. And if

Speaker 12

Okay. And then maybe following up on Savi's earlier question. Dan, I think you mentioned that you have 2 points lower capacity in the first half, which is certain CASM ex. And I don't think you changed Your 2023 capacity and cost guidance. So just curious like what the offsets might be?

Speaker 12

Or is the first half impact just going to impact the full year

Speaker 8

from that level. Thank you.

Speaker 4

Yes. Sure Connor. We had the 2 point impact on capacity that had a 2 point impact on unit cost. We're still sitting here in April. So we have a lot of the year to play out as it relates to capacity.

Speaker 4

And as we progress through the year and set that, That will ultimately determine it. If you went through the year and you made that up, you pick that up. If not, it would have a corresponding impact on unit cost as you progress. But as we talked about on the point with Avi is, our visibility to absolute cost is clear and And better than it's been in the restoration. And as you go through the back half, you get that inflection point, the points that we've Talked about with core maintenance stepping down from being a headwind to a 2 to 3 point benefit.

Speaker 4

And as Glenn talked about with the restoration of the Just start to pick up scale and efficiency associated with that and the rebuild steps down. So that gives us confidence in the progression. Ultimately, we'll be where on a unit basis, where do you fall out as it relates to capacity impact that has. But as you know here, we're focused on running Great operation and the alignment is to the primary financial outcomes, which is margins, earnings and cash.

Speaker 7

Okay. Thank you.

Operator

Thank you. Your next question is coming from Catherine O'Brien from Goldman Sachs. Your line is

Speaker 13

live. Hey, good morning everyone. Maybe just a follow-up on the cost side. Just a clarification on that 10 point cost progression. It's March quarter up just under 5%.

Speaker 13

Does that mean we should be modeling December quarter to be down 5% or how should we be thinking about that 10 points? And then that improvement, that's driven by cost you have really good visibility on, right? So timing of maintenance events, I think you said The 5 point swing and then some benefit from planned training decelerating. If you could just talk a little bit more about that, that would be great. Thanks.

Speaker 4

Yes. That's right. You think about the 10 point progression from beginning to end and that would be down mid single digits from that perspective. The maintenance is the 5 points, 4 to 5 points related to first half being up to back half being down. The other driver is there is rebuild, that does transition rebuild costs.

Speaker 4

We incur about 80%, eighty 5% of them in the first half of the year, really aircraft reactivation, it's training, it's hiring components, Those step down and I mentioned that in the prepared remarks, pilots being one of the crews being one of them. We're putting 600 pilots into production. So it's really the first time over the last 18 months that our actually SchoolHouse will actually step down here And then the other components are the efficiency, scale and efficiency that start to step in as you get the core rebuild, About 5 points of aircraft utilization, and we just get a better use of our facilities and our people as we progress through the back half.

Speaker 14

Great. Makes a

Speaker 13

lot of sense. Then maybe one for Glenn. Can we just dig into the corporate sales international ex China 90% recovered?

Speaker 3

Can you just walk us through

Speaker 13

how that looks from your different cabins? Are your business class cabins running at a similar level restored? And then by type of trip, are you still seeing a

Speaker 3

Great question. Most of the business travel internationally is in the front cabin. So I'd say 75% to 80% is in the front cabin. So that's fueling Front Cabin strength. I'd say all of our premium products in the long haul international markets are doing incredibly well.

Speaker 3

This is really the 1st year we have premium economy at scale. About 85% of our flights long haul now have it. That will be 100% By next year, but so we're flying this for the first time with ubiquity in the international arena and we're seeing amazing results on the premium economy count of the premium So very excited about the rebound in international Travel, both leisure as well as business. Now what was the second part of your question? I'm sorry.

Speaker 13

Yes, just Like on the type of trip, are you still seeing those kind of like shorter Road Warrior out and back type trips to the same degree? Or are you seeing

Speaker 3

We are seeing the length of trip change and Road Warriors are not staying one day, day trips are down. And that's really what we're trying to harness here as we move forward is normally we would use AP Advanced Purchase as one of the big key drivers 1st operating out business versus leisure. Now it's really stay. And even with stay, it's not as defined as it used to be. So Those are the fences we're trying to rearrange how we think about our pricing systems and fencing.

Speaker 3

We don't want to get too much into how we think about that, Clearly, AP is one that we're leading out of.

Speaker 13

Clear. Thanks for the color.

Operator

Thank you. Your next question is coming from Scott Group from Wolfe Research. Your line is live.

Speaker 15

Hey, thanks. Good morning. I got just a couple of near term thoughts and then a longer term question. So the 70% booked for Europe and Significantly less domestically, how does that compare with pre pandemic sort of levels entering Q2? And then The overall unit revenue flat to down slightly, is there a difference domestically, internationally

Speaker 8

on the year over year trend?

Speaker 3

We are 75% is about where we would expect to be at this point in time For international long haul, domestic, we are within a couple of points of where we would expect to be. It's really the How much you want to take in advance and when you think about 90 days, it's not all 90 days, inside of 30 days, we want to be ahead. So that's the difference. Second question, I'm sorry.

Speaker 15

There was just like the RASM for the unit revenue flat to down slightly For Q2, is there a difference domestic, international?

Speaker 3

Yes, it's a mix difference. International is up significantly and domestic is Relatively flat versus year over year.

Speaker 15

And then Ed, you on the prepared comments, you said you expect strong earnings growth again in 20 Is that a market macro comment or are there company specific tailwinds that you Have that you can share just like when I look at the second half guide, right, it's sort of flattish year over year. So what changes in 2024 to get back to Strong earnings growth, anything company specific?

Speaker 2

Well, I don't know what you're inferring on the second half guide. We really haven't given a I think you're just backing into the overall. We haven't updated our full year. I think it's too early in the year to give an updated 'twenty three guide. But if you look at our 'twenty four guide, it's to get to north of $7 a share.

Speaker 2

And that's the trajectory we're on. And 2, One comment I made, which I haven't heard anyone pick up on that for the Q2 forecast, we are forecasting to be already at $2,000,000,000 of Operating profit, which is the same amount that we were at the Q2 of 2019, it's quite a statement in terms of how the recovery is going and you Consider that at a much higher fuel price, it's at much higher labor rates and it's also with the system not restored. So I think all of that gives you continued opportunities. We're looking to take the non fuel CASM down in the back half of the year, which is going to be a meaningful tailwind for us. We don't see revenue declines in terms of demand strength.

Speaker 2

I know everyone has their own point of view on that and we don't have A great crystal ball beyond the next 4 or 5 months, but from what we're hearing from our travelers, what we're hearing from the market, what we're hearing from agencies, This is a very different recovery trajectory than other consumer businesses are experiencing.

Speaker 7

Thank you.

Operator

Thank you. Your next question is coming from Andrew Taddura from Bank of America. Your line is live.

Speaker 16

Hi, good morning, everyone. So the $11,000,000,000 air traffic liability, Pretty staggering number here versus the $6,000,000,000 to $7,000,000,000 that you had in 2019. I assume it's this number that gives you a lot of the confidence In your outlook, but I guess my question, just curious if any of the dynamics within the APL have changed today versus say pre pandemic where maybe a lower percentage gets translated into revenues because of no change fees or something else. Just curious there.

Speaker 4

Yes. Let me a few things. One, I think the level of it is what gives us confidence in the Q2 and the Q2 revenue and Revenue through this summer, the strength that we're seeing both internationally and domestic. You get the benefit of the people more comfortable Booking longer, elongation of the curve, you certainly have bears that are up. But I also think, Delta, with the policies that we've taken during this period of time, being customer focused, customer friendly, People have gotten comfortable with no change fees and booking out and that's driven the elongation of the curve and we've seen the behavior within that To be very consistent in regards to how it's been performing.

Speaker 4

So yes, it's a step up, but I think it's a sign of strength. And in regards to the customers feeling comfortable with the policies and changes that we've made.

Speaker 16

Thanks. And Ed, just as a follow-up, Ed, we spoke about kind of I know you've been tweaking down capacity a little bit, but What have you done from an operational perspective to minimize the risk of having the disruptions that you saw during last year's summer peak? Thanks.

Speaker 2

The teams have well, we spent a lot

Speaker 4

of time in regards to just ensuring that we have the right resources in The right places with the right level of training. So a lot of efforts gone into this over the path month after month after month across the operating teams, Everything from the crew activity and ensuring that we're aligned network to crewing, all the way down into tech operations in regards to The staffing that we have in place as it relates to line maintenance, they're continuing to focus on turnaround time regarding aircraft out of service and the associated items. So we continue to be ensuring that we're putting those types of capabilities, buffers in place for the readiness And then the proactive actions that we talked about with adjusting June capacity based on, Glenn mentioned it, the resiliency and the ability to recover from storms. We know that they will happen in the summer and we're targeting that around areas that we want to ensure that we have deeper resilience around And the teams are focused on that.

Speaker 2

If I could add to Dan's comments, one major thing in addition is that our team has another year Under their belt of experience, we have a very young team out there and leaders as well as frontline employees and Getting through another year gives you a lot more confidence in terms of what we're seeing. Secondly, we are pretty much Through the hiring, we've been still higher, but the hiring rates that we're at now are just normal hiring rates for normal attrition, not the massive Bulge that we needed to go through to restore the business. And so not only are we able to Reduce the focus on getting out and hiring people, we can take the people that have been doing the training and put them back in the business because our employees Train and we have some of our very best employees that do the training. So getting them back focused into the business for the summer will also be A very nice benefit as we go through this. But there's a list of 50, fifty sets of 50 things that we're doing that We review in great detail and we're confident it's going to be a very, very strong operational summer for Delta customers.

Speaker 16

That's great. Thank you all.

Operator

Thank you. Your next question is coming from Brandon Oglenski from Barclays. Your line is live.

Speaker 5

Good morning, everyone, and thanks for taking the question. Glenn, I'm going to ask kind of a nerdy one, but your load factor did seem to step down sequentially in the Q1, did that have an impact from this actualization factor that you're talking about? I guess, Can you expand on how you control for that in the future with your RM system? Do we even get to like backwardation on yields or no?

Speaker 3

I think really there's 2 things I'd talk about in that realm. And one I just want to mention Even though it wasn't in the question was, there's 2 things we need to do better next year. And one is harness the demand set better that is the new norm in Post pandemic world and I think we're getting that real time now and we'll make those adjustments. And so Materialization rate is relatively easy to combat because it just relates to your overbooking model. So if you were at 103% on average And you have two extra points, you just go to 105 in terms of what your ability to take is.

Speaker 3

There's a little bit of risk in that and so we probably Won't go to 105 right away, we go to 104, see how that works, more to 4.5 and that's why you have to retrain yourself and see what the actual events happen Because these are changing in relatively condensed time periods, we don't want to overshoot and cause a disruption. So we're going to be a A little bit more careful on getting that real time. But the other piece is doing the whole network over Better next year, right, is that we saw travel patterns evolve that are very different than pre pandemic and where People are flying and so as we get to one of the things that gives us real confidence about improving next year over this year is When we look at what we did in January, being able to do that better in terms of where we have our capacity placed. And that's the part I think I'm really We now have the real post pandemic travel patterns, which are very different in terms of cities that people fly to and places they want to go. You take New York to Florida, which has never been bigger.

Speaker 3

There's a reason why, right, as people have decided that they can live in Florida and work in New York. And Those are the things that we're now incorporating into our analysis as we move forward and things I think we're really excited about in the future.

Speaker 5

Appreciate that, Glenn. And then very quickly, related to the ATL being close to $11,000,000,000 And your free cash flow guidance for $2,000,000,000 this year, does that guidance incorporate the payment to the pilots? And how do we think about free cash as the year progresses now?

Speaker 4

Free cash flow, as we mentioned in December and on Q1, The one time ratification payment that was made was not the special item you see at this quarter, it's not in the free cash And certainly going back to the ATL, the cash performance in total as it relates To the operating cash and where we are in free cash flow, gives us confidence in being greater than $2,000,000,000 for the year.

Speaker 5

Thank you, Dan.

Speaker 4

1st quarter and through the half.

Speaker 7

Thank you.

Speaker 17

Thanks very much, operator. Hi, everybody, and thank you very much for the time. Ed, you talked about something I had a question about actually, and that was productivity improvements, which you mentioned that so many people have a year or more's worth of experience. Can you is there any way you or Dan Can put any numbers around that and just say it's like X percent of CASM improvement or cost improvement?

Speaker 4

When you there's a lot of different benchmarks you'll use and you certainly look at this at every operating group And things have changed. We used 2019 as a benchmark, as a waymarker, but I don't know that that's always Your operations changed, how the teams execute has changed, but it's an anchoring point that we use and we look at our operating groups each Those by where they were, what's changed, how are they tracking to those levels. And we certainly have by group metrics and we know where we're at. But when you look at the total, when you bring it back up and you think about what's in our run rate, take out the rebuild component, But just around efficiency, there's 2 to 3 points, 4 points of opportunity in there as it relates to us getting better as we move forward through the back half of the year into next year. And those are all going to move at different paces in regards to it.

Speaker 4

The one that's going to be, for instance, probably the Flow is here will be around regionals and the regional flying that we do. We know we're at elevated levels, we're underutilized by Almost 30% as it relates to the aircraft and capability and that one will cure over the 'twenty four period and into

Speaker 2

Elaine, a couple of added points. We've mentioned in past calls the amount of incremental training that we're doing is in the 100 of 1,000,000 of dollars a year. Obviously, a lot of that's going to dissipate now that we get into a more normalized pattern. We're going to get the employees, not just The cost of that training, but the instructors are doing the training back into the operation and providing that leadership. The other thing is that as Glenn mentioned, the network is continuing to evolve and what we've seen is the staffing has been a bit lumpy During this recovery from the pandemic and getting your employees and your shifts to the schedule and understanding what the schedule looks like, There's a lot of opportunity in there at the airport level and efficiency across the board.

Speaker 2

So I think efficiency is Certainly a big part of the reason why we expect in the second half of this year to bend the trajectory on nonfuel CASM and start taking it down Relative to prior year versus the continued upward push we've been seeing.

Speaker 17

That's hugely helpful. Thanks, Ed. And then Just for my follow-up question, as you know, being in New York, the FAA asked you to cut capacity by 10% this summer. So that adds To your inability to be back to where you really want to be, does that continue into The Q4 and then have you talked to them about getting more experienced controllers in the region A, B and B, is this something we need to look forward to every single summer? I mean, Don't they have to do their part too in terms of improving their infrastructure?

Speaker 18

Hello. Hi. It's Peter Carter. Thanks for the question.

Speaker 6

Hi, Peter.

Speaker 3

So good to hear from you. So

Speaker 18

that release is until September 15, so it does not get into the Q4. But what I would say is that It is hopefully going to be only something we would need to do this summer Because we are engaged in ongoing discussions with the FAA precisely on the topic of ensuring that they have The appropriate staffing for that New York, and frankly, it's beyond New York, but for Our National Air System. And I think the one thing you've probably seen from them In their granting this waiver is that they are acknowledging that they have an issue that they need to solve, which is really an important, I think, acknowledgment because it allows us to work together to try to solve it, help them solve it together. So, we're it is the most efficient and safest

Speaker 17

Thank you, Peter. Thanks, everybody.

Speaker 1

Thanks, Celine. Now we'll go to our final analyst question.

Operator

Thank you. Your final analyst is going to be Sheila Kahuloglu From Jefferies, your line is live.

Speaker 14

Thank you. Good morning, everyone.

Speaker 10

Just to touch gears a

Speaker 14

little bit, maybe talking about the loyalty program, it continues to be pretty That's all revenues up 27% year over year in the quarter and I know you laid out 2024 targets, but generally how are you thinking about growth runway from here? What levers are there to pull and how do you think about the correlation to the broader economy and the broader macro and if there's any

Speaker 3

I think there are 2 components of that. 1 is the accounts in force and that It is of course related to our ability to bring new customers in and we have posted record acquisitions in the last year and we just had another In the month of March, it was a record monthly acquisition for in the history of the card. So I'd say We see real strength in the brand and that's really what drives the acquisitions. People want to associate with Delta and they want to associate with the SkyMiles program Because it does supply great value to those customers. So put that in one side and then put them the actual spend on the accounts in force And that I think is more a fluctuation of the economy.

Speaker 3

We see that continuing to be strong as we sit here today. But that's the piece I think that could shift up or down a little bit depending on how the economy rolls out in the second half of the year. What we're counting on is more that being more than offset by our new acquisitions accounts in force and really more and more premium And I think that's an exciting thing that we'll talk about in June. So stay tuned on details on that. We're going to give you some more details on how we see that evolving.

Speaker 10

Great. Thank you.

Speaker 1

That will wrap up the analyst portion of the call. I'll now turn it over to Trevor Bannister from our Corporate Communications Department to start the media

Speaker 19

Thank you, Julie. And just to remind everyone, we've got time for one question and one follow-up each, and we'll get to as many as we can in the time remaining. Matthew, if you could please reiterate for the members of the media the instructions for joining the question queue.

Operator

Certainly. At this time, we'll be conducting the media question and answer session. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Your first question is coming from Your first question is coming from Alison Sider from Wall Street Journal. Your line is live.

Speaker 20

Hi, thanks so much. I was wondering if you could talk a little bit about the recent near miss or safety incidents that we've been seeing. Have you looked at your own data? Have you noticed anything Any kind of trends or anything that would suggest if there's sort of a cause behind some of these incidents?

Speaker 2

Hi, Ali. It's Ed. We talked about this several weeks ago around the time of the summit At the FAA convened, we thought was a very positive step to bring all the stakeholders together to talk about What we're seeing and what we can do to continue to improve upon the very best safety aviation system in the world, Yes, there's no question that we've had some additional incidents than you would see that are a bit out of the norm in terms of Fortunately, the safety systems caught those incidents, but we've got to be vigilant at all times and continue to Find ways to get better in that environment. So nothing that gives us pause. It is by far the safest form of travel period, Any form of travel, but we want to make certain the stakeholders are all focused as this industry works through The infrastructure rebuild that FAA is seeing as well as the airlines are seeing.

Speaker 20

And you mentioned sort of like the relative newness or an experience The workforce as a factor in the operational issues, do you think that that has played a role in kind of that uptick in safety incidents as well?

Speaker 2

There is no evidence that that is necessarily the case. Listen, we have the World's foremost safety management systems and risk mitigation focus in the aviation community And we knew that we have younger people and so we get out ahead of that. We don't wait for something to happen. We are on the front end of that with training and added procedures, added buffers, added focus in the operation. So no, I would not lay it necessarily at the hands of experience.

Speaker 20

Thank

Operator

you. Thank you. Your next question is coming from Mary Schlangenstein from Bloomberg News. Your line is live.

Speaker 20

Thank you. I wanted to get one quick clarification and then I have a quick question. When you were talking about corporate recovery and you were saying You've recovered 85 percent of revenue, 75 percent of traffic in the 2nd quarter. Is that like total overall domestic and international corporate or was that a segment of that?

Speaker 3

That's System.

Speaker 20

Okay. Okay. And then the second question I had was on high end leisure travelers continuing to buy up. Are you seeing these folks buy up into what you would normally see business or first class seats? Are they buying up only to the top premium economy level?

Speaker 20

And if it's the former, is that something that you Expect to continue long term where these passengers are buying up into your ultimate highest classes.

Speaker 3

They're buying all the way up to domestic Fertus and Delta 1 on the long haul international. So and this is a phenomenon that we've seen in making it more accessible. I think that's really been part of our long term journey that we've been talking about for many years. It is something we wanted to achieve is to make those products more accessible to people. And I think we've seen success through the pandemic and coming out of the pandemic, once you we see high stickiness to those products.

Speaker 3

So Once you start flying in those cabins, you tend not to go back.

Speaker 20

And you expect it then to be durable To maintain well beyond the pandemic or post pandemic years?

Speaker 3

Absolutely.

Speaker 14

Okay. Thank you.

Operator

Thank you. Your next question is coming from David Shlodnik from TPG. Your line is live.

Speaker 8

Good morning, everyone. Thank you

Speaker 3

for the

Speaker 8

question. You touched on this a little bit in the analyst portion, but I wondered if you could talk a bit about staffing levels, both On the flight deck, elsewhere throughout the operation and really with your 3rd party vendors, have you had any Disruption and do you expect any disruption because of short staffing say with caterers or refuelers or anything like that?

Speaker 2

We said on the call that we're getting into our normal staffing ranges and the amount of churn and Turnover we're seeing both on the 3rd party support staff as well as the added staffing we've hired It's starting to get in a pretty good place. So no, I don't again, there's always a one off pocket where you have some unique pressure, But on balance, no, that's not a problem.

Speaker 8

Okay, thanks. And then, you said that you're 75% booked for International travel this summer, just with change wave change fees and everything, what percent of that would you normally expect to see change their flights

Speaker 3

That will be in the high single digits.

Speaker 8

Okay, great. Thank you very much.

Speaker 19

Thank you, David. And that covers our media questions for today. So we can go ahead and wrap the call. We want to thank everyone for their time and participation.

Operator

Thank you. That concludes today's conference. Thank you everyone for your participation today.

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Earnings Conference Call
Delta Air Lines Q1 2023
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