Delta Air Lines Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 12, 2024

There are 17 speakers on the call.

Operator

Good morning, everyone, and welcome to the Delta Air Lines December Quarter and Full Year 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, this call is being recorded.

Speaker 1

I would

Operator

now like to turn the conference over to Julie Stewart, Vice President of Investor Relations. Please go ahead.

Speaker 2

Thank you, Matthew, and good morning. Thanks for joining us Our December quarter and full year 2023 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian our President, Glenn Hauenstein and our CFO, Dan Jenke. Ed will open the call with an overview of Delta's performance and strategy, Glyn will provide an update on the revenue environment and Dan will discuss costs and our balance sheet. After the analyst Q and A, we'll move to our media questions.

Speaker 2

As a reminder, today's discussion contains forward looking statements that represent 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 You can find a reconciliation of our non GAAP measures on the Investor Relations page at ir.delta.com. With that, I'll turn the call over to Ed.

Speaker 3

Well, thank you, Julie, and good morning, everyone. We appreciate you joining us this morning. Earlier today, we reported our full year and December Quarter results, posting 4th quarter earnings of $1,100,000,000 or $1.28 per share On record quarterly revenue that was 11% higher than 2022 and an operating margin of 10%. I want to sincerely thank the 100,000 strong Delta team for their outstanding work in delivering these results and serving our customers. Delta carried more travelers this holiday season than any other time in our history And we delivered industry leading operational performance with the number one system completion factor amongst our peer set throughout the December quarter.

Speaker 3

To put that in context, we carried 9,000,000 customers, a record 9,000,000 customers, I'd add, on 60,000 mainline flights over the holiday period with fewer than 40 cancellations in aggregate. Our December quarter results marked a strong close to year 2 of our 3 year plan. For the full year, we reported earnings of $6.25 per share, the 2nd highest EPS result in our history on revenue that was 20% higher than the prior year. We delivered an 11.6 percent operating margin and pre tax income of $5,200,000,000 a near doubling over 2022. We generated free cash flow of $2,000,000,000 while investing $5,300,000,000 back into the business and we improved our leverage by 2 full turns and reinstated our quarterly dividend.

Speaker 3

Return on invested capital was 13.4%, A 5 point improvement from 2022. A tremendous amount of progress, especially if you consider where we sat a short 3 years ago And I'm so proud of our team across the board. Sharing our financial success is a longstanding pillar of Delta's culture And I'm thrilled to announce that we'll be rewarding our employees with $1,400,000,000 in well earned profit sharing on Valentine's Day. For our employees, the estimated payout will be approximately 10% of eligible 2023 compensation, About double of what last year's payment was. I expect our profit sharing payments will be more than our 3 largest competitors combined.

Speaker 3

Our people consistently deliver operational excellence with a relentless focus on raising the bar at every stage of the travel journey To deliver safe, reliable and caring service for our customers. They are the reason our brand and our customer loyalty lead the industry, Why Delta was recognized as the world's 12th most admired company by Fortune and why Glassdoor named us yesterday as the 13th best employer in the country. In 2023, we made meaningful investments in our people, Our operation and our customers. We provided well deserved pay increases for the Delta team, continuing our philosophy of industry leading Our operational excellence was recognized by Cerium last week, which named us yet again The most on time airline in North America. Our people and our operational reliability are the foundation of Delta's trusted consumer brand And we are building on that foundation as we elevate the premium flying experience and grow our SkyMiles members' engagement with Delta.

Speaker 3

Today, we also announced an order for 20 Airbus 351000 aircraft with options for 20 more for deliveries starting in 2026. These planes complement our fleet Strategy and will offer a world class customer experience for international travelers with more premium seats, Higher gauge and great customer amenities. These aircraft are over 20% more fuel efficient than the 767s that they'll be replacing, further supporting our long term sustainability goals. And with the successful launch of fast free WiFi and DeltaSync, We are enhancing the in flight entertainment experience for SkyMiles members. We expect to have these products rolled out globally by the end of this year.

Speaker 3

On the ground, we are building the airports of the future in some of the most important markets and adding new Delta Sky Clubs to provide our customers A world class airport experience. We completed our transformation at Los Angeles 18 months ahead of schedule, including a state of the art facility and a new Delta Sky Club that was named North America's Best Airline Lounge for 2023 by business traveler. We opened the latest phase of our Salt Lake City expansion and will complete the generational rebuild of LaGuardia this year. Our digital investments continue as we work to increase our agility and provide employees with better tools and customers Customers visited the Fly Delta app over 1,000,000,000 times last year using our self-service tools almost As 2024 begins, our enterprise has moved from a period of restoration to optimization. We are focused on delivering excellent reliability, elevating the customer experience and improving efficiency across the company to support continued growth in our earnings and our cash flow.

Speaker 3

We expect demand to remain strong, particularly for the premium experiences that Delta provides. Consumer spend is continuing to shift from goods to services And our customer base is in a healthy financial position with travel remaining a top priority. And corporate travel continues to improve With demand accelerating into year end. On supply, industry growth is normalizing after several years of network restoration. For 2024, we plan to grow Delta's capacity 3% to 5%, below the mid single digit range that we discussed at our June As the industry adjusts to rising cost of production and we are seeing a positive inflection in domestic unit revenue growth.

Speaker 3

Internationally, we expect another strong year as we optimize our network and leverage our global JV partners. With that backdrop, we are providing full year 2024 guidance for earnings of $6 to $7 per share and free cash flow of $3,000,000,000 to $4,000,000,000 Free cash guidance is up to $2,000,000,000 higher than 2023, driven by growth in profitability, lower CapEx and improved mix of cash sales. As we continue to grow earnings And reduce debt, we will further reduce leverage and advance our balance sheet towards investment grade metrics. Glenn and Dan will provide more details shortly, including our outlook for the March quarter. In closing, The people of Delta delivered a remarkable 2023, leading the industry operationally and financially, while providing a world class experience for our customers.

Speaker 3

Delta is well positioned to build on our momentum in the New Year with continued growth in earnings and cash flow in 2024. I could not be more excited about what's ahead for Delta and our customers and I am confident And our returns focused strategy will drive significant value creation for our owners in the years to come. Thank you again for the support you show to our company. And with that, I'll turn it over to Glenn.

Speaker 1

Thank you, Ed, and good morning, everyone. I want to start by thanking all of our employees for their hard work and dedication this year. For the full year, we delivered record revenues of 55,000,000,000 With international delivering record margins and profits, we finished the year with unit revenues 3% higher than 2022, Also about 20% above pre pandemic levels. Diversified revenue streams including premium and loyalty generated 55 The rollout of Delta Premium Select on long haul international is nearly complete and the revenue generation has been above our expectations. As we continue to increase our premium seat mix and segment the cabin through our 5 product strategy, we have structurally improved the international margins.

Speaker 1

Our loyalty program continued to exceed our expectations with record SkyMiles acquisitions in 2023. Total loyalty revenue was up 19% over the prior year with 15% growth in co brand spend and increasing mix of premium cards in our Amex co brand portfolio. In recognition of our commitment to the business traveler, Delta was named number 1 in Business Travel's news airline survey for an unprecedented 13th consecutive year. Delta gained corporate share during the year and Successfully launched SkyMiles for business providing small to medium sized companies new benefits to support further growth in the important SME segment. Corporate sales accelerated into year end, including double digit year over year growth in the month of December.

Speaker 1

Technology and Financial Services led this momentum for the December quarter with media and auto sectors seeing notable traction following the strike resolution. December quarter revenue was a record $13,700,000,000 11% higher than 22. While unit revenues were 3% lower than last year, we are entering the year with momentum in our highest and had We expect March quarter revenue growth of 3% to 6% over 2023 on capacity growth of 6%, which includes one point from LEAP Day, Implying unit revenues will be flat to down 3% over last year. This is a 2 point sequential improvement on a year over year basis from the December quarter. Our March quarter faces headwinds from 3 dynamics when compared to last year.

Speaker 1

These include higher international mix, The normalization of travel credit utilization and lapping a competitor's operational challenges. Looking through these headwinds, environment, we expect domestic unit revenues to inflect to positive in the March quarter. The Transatlantic, Our largest international entity continues to perform well with strong demand through the shoulder period and we expect unit revenues to grow in the March quarter. In Latin and Pacific, we are rebuilding our networks and improving connectivity with our JV partners, accounting for the majority of capacity growth in the March quarter. These investments are supporting higher short term profitability, but with lower unit revenues.

Speaker 1

Turning to our outlook for the full year, premium consumer trends remain strong and spending on travel experiences continues to outpace overall GDP by 2 to 3 points. We expect solid growth in business demand with nearly 95% of respondents in our recent corporate survey Expecting to travel as much or more in 1Q than 4Q. This is a double digit improvement in travel intentions from our last survey. Our commercial strategy in 2024 builds on Delta's competitive advantages by optimizing our network, Growing high margin revenue streams and investing in our future. First, we have a unique opportunity to further optimize Delta's network to capitalize on our This is the first time we've been able Vacation through high margin sources remains an important differentiator for Delta.

Speaker 1

We have runway ahead as we continue adding more premium seats to our aircraft, Further improve our retail capabilities and expand loyalty revenues and travel adjacent services. We expect American Express remuneration to grow 10% over 2023 levels. Finally, we are investing in the future to enhance the premium travel through our next gen fleet, generational airport builds and digital transformation. With continued investment, Delta's brand strength and leadership position We'll extend in the years ahead. In closing, I'm incredibly proud of the team's performance in 2023 And we're entering the new year with momentum.

Speaker 1

I'm excited about Delta's opportunities to grow our lead in 2024. And with that, I'll turn it over to Dan to talk about the financials.

Speaker 4

Thank you, Glenn, and good morning to everyone. 2023 was another meaningful milestone in restoring our financial foundation. We delivered earnings of $6.25 per share And pre tax income of $5,200,000,000 nearly double our performance of last year. Operating margins of 11.6 percent was up 4 points from last year and expected to lead the industry. We generated operating cash flow of $7,200,000,000 enabling reinvestment in our people, our fleet and technology.

Speaker 4

After gross CapEx of $5,300,000,000 we generated free cash flow of 2,000,000,000 During the year, we paid more than $4,000,000,000 of gross debt. This included accelerated repayment of $1,700,000,000 of higher cost debt. We ended the year with liquidity of $6,800,000,000 and grew our unencumbered assets to $26,000,000,000 Our leverage ratio improved 2 turns to finish the year at 3 times. Return on invested capital improved to 13.4%, up 5 points over 2022. S and P upgraded our credit rating in the second half of last year.

Speaker 4

We are investment grade rated at Moody's and we are now only 1 notch away from investment grade with outlooks improving at both S and P and Fitch during the year. With this progress, we reinstated our dividend last summer, broadening our appeal to yield focus investors. We closed out the year strong, reporting a December quarter pre tax profit of $1,100,000,000 on operating margins of 9.7%, resulting in earnings of $2.28 per share. Non fuel unit costs were up 1.1% year over year in line with our guidance. Now moving to our outlook.

Speaker 4

For the March quarter, we expect earnings of $0.25 to $0.50 per share on approximately 5% operating margin. We expect March Quarter fuel price to be $2.50 to $2.70 per gallon with a $0.05 to $0.10 refinery benefit. The refinery profit is expected to be down more than $130,000,000 from last year due to elevated crack spreads in early 2023. For the full year, we expect to deliver earnings of $6 to $7 per share. With our reduced outlook for capacity growth, We expect full year non fuel unit costs to be up low single digit over 2023 with the March Quarter unit costs up approximately 3%.

Speaker 4

The last 2 years were a period of intense restoration With unnatural high growth to rebuild our network. Growth is normalizing and we've entered a period of optimization with a focus on restoring our most profitable core hubs and delivering efficiency gains across the enterprise. The intensity of hiring and training has moderated and investment and reliability are beginning to pay off with continued improvement in operational We expect to deliver efficiencies through the year that will help fund investments in our people, the customer experiences that Ed spoke to earlier. On maintenance, we have a higher number of heavy airframe and engine checks this year, resulting from the timing of new aircraft deliveries over the last decade and the reactivation of our Flex fleets. At the same time, industry wide supply chain constraints are continuing, driving higher costs and extended turnaround times.

Speaker 4

For the full year, we expect maintenance expense to be up $350,000,000 over 2023 as we prioritize continued improvement operational reliability and running our fleet for the peak summer period. We expect the majority of this increase to be in the early part of the year. Unit cost growth is expected to improve from the March quarter levels as we deliver efficiency and lap investments we've made in the second half of twenty Now on to cash flow, we expect cash flow of $3,000,000,000 to $4,000,000,000 of free cash flow, including CapEx of 5,000,000,000 The improvement in free cash flow is driven by growth in profitability, lower CapEx and a higher mix of cash sales. As cash sales are expected to compose a larger percentage of overall bookings as travel credit utilization normalizes. We plan to pay cash for $3,000,000,000 of 20.24 debt maturities and for approximately 45 aircraft deliveries, Growing our unencumbered asset base to $30,000,000,000 We expect to reduce leverage to under 3 times, Returning the balance sheet to investment grade metrics, while continuing to invest in the business remains our focus for capital allocation.

Speaker 4

We'll continue to evaluate shareholder returns with a focus on dividend growth as we reach our targeted leverage. In closing, Delta is well positioned as we enter the final year of our 3 year plan to restore our financial foundation. We are continuing to prioritize the objectives we laid out at Investor Day with emphasis on earnings durability, free cash flow and capital efficiency. Our industry leading operational and financial performance As a result of the hard work and dedication of the Delta people, I'd like to thank each of them for what they do every day. With that, I'd like to turn it back to Julie for Q and A.

Speaker 2

Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions?

Operator

Certainly. At this time, we'll be conducting the analyst question and answer session. We do ask that all Q and A participants please limit to one question and one follow-up question then reenter the queue. Once again, if you have any questions or comments, please press Your first question is coming from Michael Linenberg from Deutsche Bank. Your line is live.

Speaker 5

Hey, good morning, everyone. This is a question probably to both Dan and Glen. With the new A350-1000s Coming in 2026 and knowing that you do have some additional Airbus wide bodies delivering over the next few years, are you still going to be in a situation where maybe you have to Extend your 767 fleet. I know that, that is to be fully retired. I think it was going to be by 2025.

Speaker 5

Will you have enough lift? And If not, are we going to see additional investments into maybe some of these older aircraft to keep them running through Until you take deliveries of the bigger airplanes.

Speaker 4

As we move through 2025, 24 through the back half of the decade, we expect to retire the 7, 6, 7,300 through that period of time On a pretty consistent basis as you step through while continuing to fly the 400s.

Speaker 5

So you'll continue to fly the 400s beyond 2025, Dan?

Speaker 1

Yes. Mike, I don't think we'll never have 25. To have the fleet grounded by 25, it was our intent to have them out of international long haul by 2028 and retired by 2,030.

Speaker 5

Okay. Okay. Makes sense. They're a bit younger. And then Glenn, just my second question, what was the headwind Due to the cancellation of the Israel services in the Q4 and Is that a good way to think about the March quarter impact if you don't restart those services by the 31st?

Speaker 5

Thanks.

Speaker 1

So Mike, the initial hit was clearly the greatest because as we move through the quarter, we redeployed the assets to other markets. So I would say it was about a point Our revenue in 4Q and that really goes to very little impact in 1Q and beyond. And of course, we're assessing the issues in Israel. Our current intent, we have loaded for sale April. We'll see how that manifests as we move through, but our priority is always

Operator

Thank you. Your next question is coming from Helane Becker from TD Cowen. Your line is live.

Speaker 6

Thanks very much, operator. Hi, team. Thanks for the time. I see two questions. One for I think Ed, you mentioned this morning on CNBC that you were seeing Improvement in corporate, especially in the tech sector.

Speaker 6

So I'm kind of wondering if you or Glenn can talk about what you're seeing in corporate By sector and maybe by geographic region?

Speaker 3

Well, I'll start and Glenn can add his color as well. We are seeing continued improvement in the corporate sector and we had a number of laggards, tech being by far The largest in terms of that had essentially not returned to travel and we're finally starting to see tech companies traveling again. And again, I think a lot of it is to return to office That is driving some of that. The consultancies as well, which have also been laggards, again, given their clients have had their offices somewhat reduced, Office hours opening is helping there and we've seen it across the board. The other thing I mentioned this morning also was the auto and entertainment sectors Have rebounded nicely, entertainment clearly and auto is starting to rebound following the strikes in the 4th

Speaker 6

That's very helpful. Thank you. And then just for my follow-up question, as you Think about international. I noticed that in your schedules you're elongating the season With maybe just January February and international being seasonally lower, are you seeing travel move into those months As well so that you would extend your add especially to your coastal hubs more international service going east?

Speaker 1

Absolutely, I think we've disclosed this previously is that we've seen the seasons along a more leisure travel to Europe and really March through October now is pretty strong. Of course, the shoulder It's still not as strong as the peak summer, but in response to that and again this is part of our optimization of how we fly is Tailoring our capacity to when demand actually exists.

Speaker 6

Okay. That's really helpful. Thanks team. Have a nice day.

Speaker 1

Thank you. Thank you.

Speaker 6

Of course.

Operator

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

Speaker 7

Good morning, everybody. Glenn, on the pending inflection in domestic RASM, I appreciate we're seeing capacity plans tighten up across the industry. My question is whether you're seeing Any revisions in how the growth year airlines are behaving outside of nearly cutting capacity? Anything else interesting we should be focused on? Or is it simply a supply exercise that's driving the improvement?

Speaker 1

Well, I think Jamie, you've got a couple of contributors to it. One is what Ed just mentioned, the improving conditions in the corporate environment. And It's been a slow and steady rebuild since the end of the pandemic, but we are at post pandemic highs somewhere right around 90% restored to pre pandemic levels We have some of the rationalization of capacity, but we also have continued improvements in segmentation and pricing. I can't talk to our competitors. I just know how we are Working now and 20 years ago we were only worried about the lowest fares in the market and now we are worried about the entire ladder continue to segment the customers in a more enlightened way moving forward and that's going to be one of the key drivers as we head through this year.

Speaker 7

Okay. I appreciate that. And then a second question for Ed. During your interview with Phil this morning, You mentioned you're still holding out hope for the $7 earnings outcome this year. If we fast forward to a year From today, give or take, and that indeed has been the outcome, what do you think the primary Driver will have been.

Speaker 7

I guess, better way

Speaker 8

to ask is, do you

Speaker 7

think there's upside Based on what Delta can control or do you think it will simply be exogenous factors like, hey, fuel cooperated or I don't know, maybe the consumer leaned even further into premium, that sort of thing.

Speaker 3

Sure. Thanks, JB. I get the question. I think the level of volatility that we see is what causes us To be a bit cautious and prudent in giving that $6 to $7 EPS guide in 2024. We've been signaling that a bit For the last 6 months and that's where we sit today.

Speaker 3

I have great confidence in us hitting that guide, which is what I think the Street wants to know Where our confidence level is, there are a bunch of macros that we look at into the year, which we'll have to see how they play out. Clearly, the Geopolitical front continues to be quite testy, including the fact that this is a political election season, Not just in the U. S. But around the world. Energy prices, we saw this morning just how volatile energy prices are.

Speaker 3

And to me, the supply chain, both the cost and the constraints that we see in this industry Continue unabated. We're not making nearly the progress on the supply chain improvements, if anything. Every news we get seems to be a bit worse, Not better, so that constrains growth and increased cost. That all said, my internal stretch For myself and our team is to still get to that $7 number this year. I think we have a possibility to get there.

Speaker 3

But I also think that The macro weighs on that assessment and I think to be prudent, we should set expectations maybe a little bit lower And hope to overachieve just by the way we did in 2023. We gave a $5 to $6 guide and came in on the top end and I'd like to see a year from now that we're reporting that same type of result.

Speaker 7

Glenn and Ed, thank you very much for taking my questions. Take care.

Speaker 1

Okay.

Operator

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

Speaker 9

Hi, everyone. Thank you. Just on the regions in general, you obviously sound more constructive domestically, but I think you mentioned that you still see a lot a fair bit of upside in terms of international. If you could just level set on your overall like regional expectations in 'twenty four,

Speaker 1

Well, I think we're expecting domestic to continue to improve. The comps get easier as we move through the year. So we So you should see some nice momentum there. We had a fantastic year in the transatlantic. We're hoping to beat that, but there's a really high bar as we move What we have on the books today is really pretty exciting for the month of April where we have about 40% of our transatlantic bookings in place.

Speaker 1

We have unit revenue sitting at high single digits up, which I think most people wouldn't expect. Of course, we have a lot of booking to go there, But the early returns for spring and summer are very favorable as we sit today. Pacific where we have an incredible amount of capacity, it's being absorbed nicely And we expect that to inflect into a positive territory as those growth rates come down when we move through the year. And last but not least, Latin and our ambitious build of South America with our partners LATAM is paying very good Strong dividends, we're improving our profitability, albeit at lower unit revenue. So I think We're very excited about where South America sits and the beaches this winter seem a little oversaturated that We'll rationalize itself out as we move through the year.

Speaker 9

Appreciate that. And then, Dan, on 2024 costs, I was hoping if you could provide some thoughts just on the shape of the cost trajectory. It seems like a lot of it just has to do with timing of maintenance and Really, really that type of stuff. So just any color, additional color there could be helpful. Thank you.

Speaker 4

Yes. I said maintenance was up 3.50 for the year with a focus on the 1st part of the year. The other piece of it is You think about efficiencies, efficiencies just build as you progress through the year. One example is we're down on We're fully staffed. The one place we're hiring is pilot.

Speaker 4

That will be down 50% over 50% from last year. But again, front half centric and with training associated with it as you get ready for the summer and that really normalizes to historical levels in the back half So just a good steady drumbeat of efficiencies as we pace through the year.

Speaker 9

Appreciate

Speaker 1

it. Thank

Operator

you. Your next question is coming from Stephen Trent from Citi. Your line is live.

Speaker 10

Good morning, everybody, and thanks very much for taking my question. This might be for Ed or Glenn, but You addressed

Speaker 8

it a little bit in an

Speaker 10

earlier response, but how deep do you think the supply chain stuff goes? First, we have the GTF engine, Now the MAX 9 door plug, do you think we've kind of reached the bottom or are you concerned there could be More to come 6 to 12 months from now.

Speaker 3

Thanks, Stephen. This is Ed. I hope there is No more surprises, but I'd be lying to you if I thought that's the case. I mean, I think we're continuing to work through the in this Post pandemic world, the implications of the supply chain issues that we saw and the MAX 9 issue is a one off Separate issue, I'm not referring to that. I am referring principally to the engine side of the business and There's a lot of work on Pratt.

Speaker 3

We have a lot of reliance on Pratt and their challenges that they're facing have been well chronicled, one of the things that we see on the engine side is as a lot of the incremental resources that our engine Providers and suppliers have put their resources against it also strips away resources The maintenance work on their existing business with us. So we're working through in an efficient manner with Pratt they were in this week and We spent a lot of time with them. Rolls and gee, everybody in the engine world has challenges, not just on the original build, but More importantly on the parts and the repair side of the business and a lot of it's an experience factor level. All The suppliers in our industry lost a tremendous amount of experience due to the pandemic and it's taking time to get that back to get The turn times down to where they need to be and we have higher turn times that not only delays the entry into service, it also causes cost to go up.

Speaker 10

I appreciate that, Ed. Thank you. And as my follow-up, I appreciate as well what you mentioned On the Latin market doing well, any high level color with respect to Sort of deep LatAm versus short haul LatAm. I mean, I presume a lot of the uplift you're Seeing as from the JBA spooling up, I just wanted to make sure I understood that correctly. Thank you.

Speaker 1

Yes. I think you described it perfectly. There's a little pressure on the short haul lab and particularly on the resorts where a lot of capacity was added by the industry year over year. But we're having really incredible performance into Deep South America as we continue our coordination of launching the JV with LATAM And we're very excited about the short term and the long term prospects there.

Speaker 10

Great. I appreciate that Glenn and thank you very much.

Operator

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

Speaker 11

Hey, good morning guys and thanks for taking the question. So Dan, as you think about what happened in 2023 as far as kind of The cost creep has led us to a little bit of a higher cost position than maybe you would have thought in the beginning of the year. Can you give us a kind of rundown around kind of what you missed In 2023 and then with that as kind of a backdrop talk to some of the sources of risk that you might see to that low single digit outlook for CASM ex in 2024?

Speaker 4

Yes. Predominantly, yes, David. Certainly, 2 drivers. First, we flew less capacity And kept the cost in to invest back into the business, that was one. And the second piece was What we talked about a lot in the second half of the year was the investment in maintenance And the cost associated with maintenance.

Speaker 4

And those were really when you look at where we were from what we got it to where we ended up Just over plus 2, those were the single two biggest drivers associated with that. When you think about that As we go into New Year 4 here, a lot different backdrop as we're in a more normalized growth environment. When you're thinking and planning and the teams are executing the 3% to 5% growth versus 17% to 20% growth, the focus Really less on this training and hiring and the restoration of the airline and our operating teams are focused on The operational performance and fine tuning that. And as you do that, that sets the stage to drive the efficiency. And And things that we actions that we took in Petrie are paying off.

Speaker 4

If you look at the maintenance doing a lot of work and there's a lot to still go, But the 4th quarter performance aircraft out of service down 30%, maintenance cancels down over 80%. So that those actions that they're taking around proactive reliability, getting the touch time on the aircraft But that's really what allows us when you're in that normalized environment, you can really stay after that consistently day in and day out. That sets the stage for the execution around efficiency. David, if I could jump in here. It's hard to overstate Just how hard it was to bring the full business back up

Speaker 3

again over the last two and a half years and the intensity of that It has been phenomenal and our team has done a great job. It has taken every fiber of our being and hiring and resource we have to try to get ahead of it. We're there now, okay. And you see the results in the 4th quarter. They were remarkable, the best 4th quarter operational results I think this company has ever posted.

Speaker 3

And that is, I think, the big opportunity as we enter the year. I don't know that we know yet just how much we have available to us As we start to return to a normalized environment, we start tweaking those efficiencies. I think it's going to be significant. And it's kind of hard to forecast Because this team has been for the last 2 plus years in a very different part of the build, But I'm confident we're going to see some great, great opportunities. And that's to Jamie's earlier question, some of my internal Expectations of hoping that we can get to that $7 above EPS number.

Speaker 3

I'm willing to put that number on paper quite yet, But yes, I think the opportunity is there.

Speaker 11

All right. Thanks for that added color. Just to maybe kind of follow-up on that point a little bit. As you think about The optimization efficiency gains that are ahead of you, I appreciate that it's hard to quantify at all. But can you give us a sense For what the driver of some of these things are kind of big picture wise?

Speaker 11

Is it about utilization of aircraft? Is it about getting the staffing optimized or is it more about just working some of the friction costs in the business out and sort of continuously improving on chasing down a bunch of little dogs and cats across the business. I'm just trying to get a sense for kind of what do we look at here? Are we looking at A large set of projects or are there 1 or 2 things that are going to be super pivotal around the optimization side of this?

Speaker 3

David, I think it's all of the above. And it's not just what you mentioned on the cost side, it's also on the revenue side. Consumer behaviors have changed A lot. And to this point, we've been using somewhat older models to predict behavioral patterns. And we now have actually a good baseline over the last year and a half of what how consumers are purchasing, what they're purchasing, when they want to travel, Which Glenn and his team will use to drive better network and revenue outcomes for our business.

Speaker 3

It's in the cost line. The fact that we have 10% more employees today than we had at this point pre pandemic essentially driving the same level of operations, Tremendous amount of opportunity to get efficient. But when the operators know what they can count on and they've got their arms around the full operation, I think you're going to see the cash register start to ring with cost and savings efficiency. So I know it's a bet on the come a little bit, but I'm optimistic we'll get there. But it's really hard to quantify at the same time.

Speaker 11

Thank you.

Operator

Your next question is coming from Ravi Shanker from Morgan Stanley. Your line is live.

Speaker 8

Thanks. Good morning and happy New Year everyone. I know your commentary on Devon sounds So pretty good. But can you unpack a little bit more detail on what you're seeing in the forward booking curve through spring break And maybe even the activity through like the Paris Olympics over the summer kind of what kind of forward indicator do you have that people might be traveling more?

Speaker 1

Well, I think I mentioned it as a response to one of the other questions, but we have pretty good visibility on the early bookings for the summer transatlantic season. And we have a higher book load factor as well as higher yields. So those are the 2 things you watch for And both are indicating quite positive for the Transatlantic. The U. S.

Speaker 1

Has of course a closer in booking But as far as we can see out through spring break, things look great for the U. S. And as I mentioned earlier, some of the close in beach resorts have a little bit Too much industry capacity this year that will probably get rationalized out over time, but still will be very profitable as we move through the peak winter season. And then as Pacific, as we continue to lap the buildup of our Pacific as we move through the year, we expect those unit revenues Accelerate demand, particularly strong to the Incheon hub as well as to Japan in the spring season. So very exciting as we look forward.

Speaker 1

I hope we can be out to our plan.

Speaker 8

Got it. And probably if I missed this earlier, but did you I mean, some of your peers are having issues with the potential extended grounding Some aircraft for inspections. Do you see any kind of spillover benefit for that in the short term and kind of is any of that in your 1Q guidance?

Speaker 1

Yes, we've seen minimal improvements in what we have seen is mostly in Seattle, where they've had to cancel a significant portion They're scheduled out of Seattle, but we'll see how long that stays out. But right now, I wouldn't say it's a significant number in the grander scheme of things. It's

Operator

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

Speaker 8

Hey, good

Speaker 12

morning. Maybe just on the cadence of the non op savings And the component drivers of that, is it spread pretty evenly throughout the year or is it more kind of second half weighted?

Speaker 4

The driver is $75,000,000 to $100,000,000 really driven by interest expense. And As we've accelerated the debt reduction action, that drives the benefit. We expect pension To be flat on a year over year basis, the team did a great job. The pension delivered at or slightly above its Targeted return, so no headwind associated with that. You get some about a little bit around some of the equity earnings of our partners, but we expect to

Speaker 12

Thanks. And then just a follow-up for Glenn. You've done a nice job taking some active steps to on the capacity sequentially 4Q to 1Q. But could you just speak to seasonality and maybe by entity, where is You know seasonality a lot different than it used to be, you know where is it kind of normalized. So any sort of key trends You'd highlight, in change in the underlying seasonal patterns here into the Q1.

Speaker 1

Yes, I think we're at our new norm and our new norm is different than 2019, but what I see mainly is an So we mentioned that in an earlier question that it used to be the summer peak was just June, July, August and now I We're moving into a April through March all the way through October is a very strong season, particularly for Southern Europe. Northern Europe starts a little bit later. And then the other thing I just mentioned, I mentioned in an earlier call as well is that the beach, The Mexican and the Caribbean beaches just seem to have a little bit too much capacity this year and we'll work through that as we go through the year. But it's If you look, those are up 20%, 30% across the board and having a little trouble keeping up with that, the demand keeping up with that kind of capacity And I imagine it is people plan next year that they'll trim on the margin those back down again or let that demand catch up. So Generally, I think we're in a good spot here with supply and demand as far as the eye can see.

Speaker 1

We're positive in all the future months and almost all the future Almost every entity with the exception of Latin.

Speaker 8

Thank you.

Operator

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

Speaker 4

Hey, good morning, everyone, and thanks for taking my question. I guess, Ed or Dan, I mean, looking back from your prior 2021 targets, you guys are guiding at the top end here to Effectively reached that and I think not a lot of people gave you credit. So that's the context of my question. But that said, valuation in your stock is still pretty low. I think investors Are just concerned that we've seen peak airline profitability and your guidance would effectively say about flat profitability this year in 2024 versus 2023.

Speaker 4

So maybe coming back to some of these prior questions, what is in your control that can get profitability higher, maybe looking beyond this year that can give investors comfort That this business should be earning mid teens.

Speaker 3

Thanks, Brandon. And you're right, when you Think about when we set that target, it was in December of 2021. I'll never forget we were at the exchange. I believe you were there. And Omicron was just being announced as the newest Therian.

Speaker 3

So the level of knowledge that we had to the future and Where this thing was going, it was candidly kind of maybe a bit crazy for us to put out a 3 year plan, but I thought it was really important and for us as well as our investors to let them see how we're thinking about The progress and the great news is through the 1st 2 years, we are at, if not ahead of plan along that way. And I think if I was to go back and say what has Changed that maybe it's given me a little bit of pause for 7, not longer term, but just in the short term. I think it's the higher cost of labor certainly was not known back then, the higher inflation rates We're not known back then and most importantly the supply chain constraints, the full extent we're not clearly not known, I have no knowledge of the challenges we face. So when you think about all the macros we encountered, I think we've done a very good job of controlling those things that we can control. And as you've heard from several of the questions, I still internally am targeting us to get to that $7 number this year and I think we can.

Speaker 3

I really do, but I think it's also prudent that we give a nod to some of those macros that we're facing. I think the optimization Opportunities, as I mentioned, are significant and they run across every single part of this business and all of our leaders are working hard to ensure We're delivering an excellent quality product, which unleashes that optimization benefits. I think the work that we're doing on the balance sheet with all the debt reduction is de risking and taking that down is important. We're on track with our free cash flow guidance $3,000,000,000 to $4,000,000,000 this year and we're still looking at a $10,000,000,000 Target between $23,000,000 $25,000,000 for free cash. So I think there's a you're right, there's a lot of noise that we were lowering guidance.

Speaker 3

Don't really look at it that way. I just think it's giving nod to some of the macro realities and wanted to give you a prudent estimate to what We are confident we can deliver this year with a nod towards there's some real upside here.

Speaker 4

Thank you for that, Ed. And then Dan, the maintenance issues have been present now for probably over a year, if not longer. I guess, what are you doing longer term planning to maybe mitigate that? And is there any favorable offset longer term here in your MRO business? Thank you.

Speaker 3

The one is we continue as we

Speaker 4

get into a period here where we're more Normalizing growth, it's allowing us to extend our planning horizon where we're able to look out on a rolling Not only 12, but 18, 24, 36 months. And I think the more visibility and stability that we get from that Allows us to better plan as it relates back into how we run our fleet and how we balance that capacity with cost. And I think that will continue to give us more certainty around that. The other piece is just the heavy lift that our entire tech ops team has in working closely with the supply chain And with all our partners across that getting clarity in regards to the things that they need to do and we can do on their behalf As it relates to Delta in regards to continuing to improve the execution of that over time. And we've got to work closely with those partners to continue to improve that.

Speaker 4

And then to the last piece on MRO, yes, there will be an opportunity to continue to grow. I think as we've talked about before, we're well positioned on all these platforms. The focus has been and we'll be right here, making sure that we've got strong foundation on Delta and Delta's fleet, But we also do have an eye to continue to grow the MRO business and you'll start to see that start this year, but really in earnest in the years 2 3 years

Speaker 1

Thank you.

Operator

Thank you. Your next question is coming from Andrew Didora from Bank of America.

Speaker 1

Your line

Speaker 4

is live. Hi, good morning, everyone. So a question for Glenn. I think you started ramping up your Core hub growth in the middle of 2023.

Speaker 11

Is there any way

Speaker 4

you can quantify maybe what the benefits of this build out were to your revenue performance Over the back half and what share of your capacity growth this year will be growth in these hubs?

Speaker 1

Yes, I think we just alluded to a majority of our growth will be in our core hubs or to partner hubs. So Probably 75% to 80% of our growth will be in those locations. We feel that we accelerated the Coastal Gateway growth earlier in the process with our once in a lifetime opportunities to From the leading carriers in markets like Los Angeles and Boston, and those are paying huge dividends for us as we head into 'twenty four with Boston, for example, leading the unit revenue ascension for this quarter. So we're really, really pleased with the way Shaked out and we still have some more rebuild to do in our core hubs. It will probably take us through this year and into next year given the lower growth rates that we have, But that's what we're working on for the next 18 to 24 months.

Speaker 4

Got it. That's helpful. And then just Dan, in the $3,000,000,000 to 4 $1,000,000,000 of free cash flow. Are you assuming any sort of cash taxes this year or when do you expect to become a cash taxpayer? I thought it was Number of years out, but just curious if there's any update there.

Speaker 4

Thank you. No, we don't expect cash taxes this year And we'd expect that potentially cash tax payments starting in 2025 and beyond.

Speaker 8

Thank you.

Speaker 2

Matthew, we'll now go to our final analyst question before then going over to the media.

Operator

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

Speaker 13

Hey, good morning, everyone. Maybe a quick one for me. Just, you talked about pilot hiring being down 50% year over year and you heard similar comments from the industry. Just curious what that means for your regional operation and if there was much of a drag in 2023, either to cost or to revenue from that operation and what you can expect this year and next year?

Speaker 1

So thanks for that question. And I think that plays well into some of the other themes that we've talked about or what are the potential upsides to our plan that could get you towards the $7 We have plans for stability in the regionals after two and a half years of really instability where we didn't know how many hours we had really 3 to And what we've seen is that there is a lot more stability. What we haven't accounted for is the full utilization of our fleet. So we still have 50 to 100 airplanes less of utilization than we have on the ground in our fleet. So should that lower hiring at the mainline translate into more availability in the back half of the year, that would be potential upside to our

Speaker 13

Perfect. All right. Thank you.

Speaker 2

All right. That will wrap up the analyst I'll now turn it over to Tim Mapes to start the media question.

Speaker 14

Thank you, Julie. Matthew, if we could reiterate for the members of the media the instructions with regard To accessing the call and follow ups, please.

Operator

Certainly. At this time, we'll be conducting a Q and A session for media questions. Your first question is coming from Ted Reed from Forbes. Your line is live.

Speaker 8

Hi, thanks for taking the question. It's for Glenn. I just wondered if the Delta passenger in 2024 looks different than the passenger in 2023. And I'm also asking whether The age of revenge travel is over and are we past revenge travel? Thank you.

Speaker 1

Well, I mean, this is all an opinion, right, is that revenge travel, I think, has years to go, particularly in Long Island International. When you look at The aging of the demographics that people in their retirement years Want to travel and they were involved with the ability to travel for 3 years and we weren't able to accommodate them all last year. I think We continue the combination of that for the next several years until that revenge travel catch up. I think domestically, we're done. The revenge travel was Early in the process and we're kind of at our new equilibrium and that gives us the opportunity to optimize as we move forward.

Speaker 1

And do they look

Speaker 4

different? They always look different.

Speaker 8

As for destinations, are we more in the unique Is it more unique transatlantic that they're looking at or more than traditional transatlantic or something else?

Speaker 1

I think it's more than traditional Italy, Spain, those are 2 of the Italy, Spain and Greece are such hotspot. Portugal is a hotspot. And I think During the peak summer, we're really excited about the prospect of bringing SAS along with us and now having hubs in

Operator

Thank you. Your next question is coming from Kelly Yamanucci from Atlanta Journalist Constitution. Your line is live.

Speaker 15

Thanks. Ed, you mentioned having 10% more employees today than pre pandemic and essentially driving the same level of I was wondering if that means growing operations with the same number of employees or potentially cutting the staffing level?

Speaker 3

Hi, Kelly. No, there's no plans to cut staffing levels at all. This is about our people being able to Garner more experienced because a lot of the new employees that we've added over the last few years are adding to that 10% And continuing to be a bit more efficient in productivity and the staffing levels. But no, we have no intention to make any reductions in

Speaker 13

Okay, great. Thank you.

Operator

Thank you. Your next question is coming from Leslie Joseph from CNBC. Your line is live.

Speaker 15

Hi, good morning, everyone. Wondering if you were seeing any increased bookings since United and Alaska have had to ground their MAX 9s? And then separately, maybe this is a question more for Glenn. But do you think you're done with the measures that you had to take last year in terms of the SkyMiles Program and lounges to sort of combat crowding since this year is going to be so busy, and if you have enough Premium seats to offer the

Speaker 1

market currently. Well, I'll take the second question first is, we Made some serious changes to our programs that were designed to really put the right people in the right category so that we could deliver industry leading premium experiences. And as you know, while they were announced in the fall, most of them don't take into effect until 2025. And I think what we've estimated is that should we should be done with that those kinds of major changes to our programs. Of course, those programs are Changing, but I think the changes moving forward will be much more minimal.

Speaker 1

So I think that's behind us. We'll see how that plays out at the end of By the end of this year and into 2025. And your other question was, oh, the MAX.

Speaker 15

On bookings. Yes. Yes. We've seen a small

Speaker 1

We've seen a small uptick specifically in Seattle, but Seattle is a small portion of our entire system. So It's kind of minimal in the grander scheme of things, but it's relevant in Seattle.

Speaker 15

Thank you.

Operator

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

Speaker 15

Yes, my question was asked. Thank you.

Operator

Thank you. Your next question is coming from Alison Sider from Wall Street Journal. Your line is live.

Speaker 15

Thank you. I was wondering, do you still think Delta still has the same advantage over rivals just in terms of reliability in its operation? Is that something that you're kind of working on?

Speaker 3

Hi, Ali, this is Ed. The one thing that we've seen over the last Couple of years, which has been great for customers is that the overall reliability in the industry has improved and carriers increasingly are competing Over operational performance rather than other some other things in the past that people May have been focused against and I think that's great and I think it pushes us to be even better and I think it's a great outcome for the industry as a whole. So Yes, the competition is definitely more focused on reliability than ever before. And I still expect Delta to maintain its Premium lead in that sector.

Speaker 15

And then if I could ask about sort of labor shortages, are you concerned at all or starting Feel the impact of the shortage of maintenance workers, is that something you expect to come to the head this year?

Speaker 3

We are not experiencing any Issues around labor shortages, maybe in very small isolated places. We still have some additional people we'd like But we are at where we need to be. And for us, it's less about the shortages. It's more about the new people that we brought on Continuing to gain experience and that's a big deal, particularly in the maintenance

Speaker 5

area. Thanks.

Speaker 14

Thank you, Ali. Matthew, we have time for one final question, please.

Operator

Certainly. Your last question is coming from Robert Silk from Travel Weekly. Your line is live.

Speaker 16

Yes, good morning. Glenn, you mentioned that you all had gained corporate share this year. I'm wondering if you could elaborate on what caused that you think, how you gained it and if there was any impact, some of it might have come from the removing of Fares from the traditional GDS channel by other your main competitors?

Speaker 1

Yes. I think one of the issues were we were very inventory constrained in constrained in 2022 as we were behind the industry in our rebuild. And in 2023, We caught up back to basically a pre pandemic level of capacity And those additional seats were enabled more corporates to get on the aircraft. I'd say what's different about now versus pre pandemic is Between the yields on corporate and the yields on non corporate high end leisure were significant. And these days those have closed.

Speaker 1

So now you have competition for the premium seats between those 2 categories that didn't exist pre pandemic and that's exciting for us as we manage them. But I think getting more seats available is one of the key priorities in the

Speaker 16

Okay. Thanks. And what about seeing any sort of share shift based upon your strategy of leaving All your fares available in

Speaker 1

the traditional Edifact GDS? Yes. Clearly, we think that our strategy is more customer friendly. And I'm sure that's part of it, but we don't quantify it.

Speaker 16

Okay. Thank you.

Speaker 14

Matthew, that will wrap up the call if you want to close it up.

Operator

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

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Earnings Conference Call
Delta Air Lines Q4 2023
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