Delta

Delta boasted to analysts of having their best performing quarter ever

Delta Airlines CEO proudly told analysts their “results mark clear financial progress as we report the highest quarterly revenue in Delta’s history.” “Ed Bastian — Chief Executive Officer: Delta will continue to support our people and our communities the recovery and rebuilding. The demand for air travel remains very strong, and that is reflected in today’s results and outlook. We generated earnings of $1.51 per share in the September quarter. Our results mark clear financial progress as we report the highest quarterly revenue in Delta’s history, 3% above the third quarter of 2019 and $1.5 billion of operating income, generating a 12% margin.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta executives agreed with Wall Street analysts that higher prices and fees were here to stay

An analyst pressed Delta on if prices and fees would remain elevated, asking if “there’s a structural shift in the way airlines think about pricing and the consumer takes that price?”“Sheila Kahyaoglu — Jefferies — Analyst Good morning, guys. Thank you for the time. Maybe I wanted to ask a big picture question, Ed. Industry unit revenues are up fairly substantially over the long-term trend due to a number of factors you guys have talked about. I know you don’t want to comment on forward pricing trends for you, but broadly about the industry. Do you think that through the pandemic — with the growth of expansion of premium, growth of loyalty products and other shifts, do you think that there’s a structural shift in the way airlines think about pricing and the consumer takes that price?” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s President responded affirmatively, saying ‘the industry has done a good job historically now in recovering the higher cost in both fuel and nonfuel. And I don’t see anything that would indicate that that’s not going to be the case moving forward.” “Glen Hauenstein — President: Yes. I don’t — we don’t ever comment on forward pricing. And I think what you’ve seen is that the industry has done a good job historically now in recovering the higher cost in both fuel and nonfuel. And I don’t see anything that would indicate that that’s not going to be the case moving forward.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

An analyst pressed Delta on whether the company was “maintaining capital discipline,” noting “ investor concerns about that tension between adding capacity to lower cost versus potentially adding too much capacity and tipping over the fair cart?” “David Vernon — AllianceBernstein — Analyst: Hey, good morning, guys. Thanks for taking the question. So Dan, you mentioned the cost of adding incremental capacity right now is very low as we get through to ’23. ’24. Can you talk about how low that is relative to the average? And then, maybe as a follow-on, Ed or Glen, can you talk to the topic of maintaining capacity discipline, right? Obviously, if there’s a way to unlock cost, you want to unlock the cost, but you also don’t necessarily want to flood the market. How could — how would you suggest we kind of sue the investor concerns about that tension between adding capacity to lower cost versus potentially adding too much capacity and tipping over the fair cart?” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s President said the company was seeking to grow capacity “to ensure that our margins stay where we need them to be.” “Glen Hauenstein — President: On capacity, we are just going to continue to monitor it as we move forward. And each one — each market is different. And when we look at it not at an aggregate level, but at a market level to ensure that our margins stay where we need them to be. And so, I think that’s our — has been our approach historically. It’s worked quite well. And our approach moving forward is that it’s — it’s actually a very granular thing. And what we’ve seen is demand has come back very different in 2022 than it left in 2019. Although the aggregates are now above where we were in ’19, where people are flying and why they’re flying is very different. And so, that’s where we’re going to continue to focus on, seeing opportunities and capitalizing them in ’23 as we move forward with our rebuilt.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s CEO responded to analyst asking about the importance of profitability over market share: “It’s always about profitability and margins.” “’David Vernon — AllianceBernstein — Analyst: So is it fair to say that profitability is more important than achieving some unit costs and market share goal?’ ‘Ed Bastian — Chief Executive Officer: Of course. It’s always about profitability and margins. And that’s why I said in my remarks, I think we are uniquely positioned to do both, to grow where we haven’t had the opportunity to grow as quickly as others have grown with strong demand supporting that, coupled with a significant unit cost benefit as we move forward because we already own all the assets and we already have the full staffing numbers pretty much on property.’” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta executives admitted that the company was raising prices by restraining capacity

Delta’s CEO: “We’re not operating at Delta anywhere close to what we used to operate in the past, and that’s why the demand of our product and the pricing for the product has been so strong.” Ed Bastian — Chief Executive Officer: We mentioned in our remarks that — and I really do believe it. So the airline industry, not just Delta, is in a countercyclical recovery because we’re still building back from where we were. And so, the amount of supply that’s in the market probably has already taken into account somewhat of any recessionary risks. We’re not operating at Delta anywhere close to what we used to operate in the past, and that’s why the demand of our product and the pricing for the product has been so strong.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s CEO said the company was operating with 15% less capacity than in the summer of 2019: “the fleet we have has taken a pretty significant utilization hit as we’ve reduced supplying and bringing it back.” “Ed Bastian — Chief Executive Officer: And Leslie, on your second question, this summer, we operated roughly 15% below where we were in the summer of ’19. And we said our goal is for next summer to close that gap and have our network fully restored. So I think that’s a ballpark number of 15%. That doesn’t mean we’re going to have 15% more people or 15% more planes. It’s really just utilizing the people we already have because we’re already at pretty close to 2019 staffing levels. And the fleet we have has taken a pretty significant utilization hit as we’ve reduced supplying and bringing it back. So it’s really using the assets and the people we already have more efficiently. That’s going to generate a meaningful amount of that growth.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta reported a $1.5 billion operating profit on a network that was 17% smaller than 2019. “Dan Janki — Chief Financial Officer: Thank you, Glen, and good morning to everyone. The September quarter demonstrated progress on our financial priorities to drive margin improvement and reduce debt. We reported a $1.5 billion operating profit, and that’s on a margin of 11.6%, our second consecutive quarter with a double-digit operating margin. That is on a network that’s 17% smaller than 2019.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s CEO: “we’re not going to fall in the trap we were last spring where we pushed ourselves too hard. ““Ed Bastian — Chief Executive Officer: You can expect our network rebuild to be disciplined. It’s going to steadily grow. But we’re not going to fall in the trap we were last spring where we pushed ourselves too hard. So we learned from that. We’re not going to accelerate it faster, and we’re ready to deliver.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta executives stressed they were limiting lower fair options in favor of pushing tickets with higher costs and fees

Delta’s President appeared to admit that “basic economy” fares only existed as a ticket category to compete with lower cost airlines and weren’t consistently available on flights. “Glen Hauenstein — President Basic economy is not a hard cabin. It’s an availability of a fare, and we want to keep that in place. It’s a very effective tool. We haven’t used it as much historically because we’ve been so full. But as we get to a more normalized environment, there probably will be more basic economy in — available in ’23 than there were in ’24. And we created that because the way that the ultra-low-cost carriers price their products where they don’t show you all of the add-ons, they show you a very low intro fare and then add on everything from carry-ons to soda. And so, we wanted to have a relatively de-counted product, although it’s still far superior to the product that you buy on the ULCCs. It doesn’t have all the products and the upgradability that the higher fare structures do. And it’s a very effective competitive tool. But as I mentioned earlier, it’s — the fare structures are there, and they’re either available because there — we’re not selling out on airplanes or they’re not. And so, that’s the way we’ve created it, and it’s not a cabinet in and of itself. Where the premium products are actually hard cabins.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta told analysts that in the past quarter “a record 54% of our total revenue was generated by premium products and diverse revenue streams. We expect this to grow to 60% by 2024.”“Glen Hauenstein — President: Thank you, Ed, and good morning, everyone. I want to first thank our employees for their hard work restoring our operations and delivering for our customers during a very busy summer travel season. Demand for travel on Delta remains strong. Investments in our products, airport service and the liability are reshaping customer perceptions and driving record satisfaction scores. Brand affinity supports our revenue premium to the industry, and we’re making meaningful progress against our multiyear commercial strategy. September quarter results reflect momentum in premium products and loyalty, supporting continued diversification of our revenues. This quarter, a record 54% of our total revenue was generated by premium products and diverse revenue streams. We expect this to grow to 60% by 2024.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta reported a quarter record revenue of $12.8 billion with unit revenues 23.4% higher than 2019, driven by “premium revenue growth.” “Glen Hauenstein — President: September quarter revenues of $12.8 billion is a new quarterly record and 3% higher than 2019 on 17% less capacity. Hurricane Ian impacted revenues by approximately $70 million, with the impact evenly split between the third and fourth quarters. Total unit revenues finished 23.4% higher versus 2019, improving three points sequentially as international demand accelerated. Demand was strong throughout the quarter, with premium revenue growth outpacing main cabin by 10 points.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta admitted the company had effectively priced out some customers by cutting supply and hiking fairs

Delta’s President said the company was aiming to reclaim customers who now “couldn’t get fares that were competitive on Delta because we didn’t have the seats to produce those.” “Glen Hauenstein — President: So if you think about our core being approximately 20 points less restored than the coastal gateways, which are now fully restored or actually growing, maintain your core hub share or actually increase it, there was a lot of focus on that through the revenue management systems. So we choked off what I would say is more of our traditional flow in very key markets where Delta has historically been the leading carrier, particularly in the Southeast. And so, as we head into — and these customers or our customers are in our loyalty program. But in a lot of cases, they couldn’t get fares that were competitive on Delta because we didn’t have the seats to produce those. And really, as we head into 2023, our task that we’ve assigned our team is to get those historical high-yield flow customers back on Delta. And that’s really our — what our rebuild phase for 2023 is all about.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta’s CEO admitted that thanks to tight capacity and higher prices, “a lot of our customers are priced out of our product““Ed Bastian — Chief Executive Officer: And Scott, if I could wrap that, is that when you think about next year, obviously, we’re going to be bringing a fair bit of capacity into the domestic system. That’s going to help with what Glen mentioned earlier, a lot of our customers are priced out of our products. And so, we’re going to be bringing more affordability, opening us up to additional buckets of demand. Yet at the same time, the incremental marginal cost of delivering that supply is substantially lower than any modest price adjustments we would see.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta criticized federal government regulations of fee transparency

A Delta executive told analysts the company opposed federal fee and pricing regulations because often the fees were “not relevant to the consumer.”“Peter Carter — Executive Vice President, Chief Legal Officer, and Corporate Secretary: Good morning, Dawn. It’s Peter Carter. What I would say in response to the proposal is we think that customers do have access to fee and pricing information. Today, on the Internet, we think our pricing is transparent. We will be providing formal comment to the DOT because one of the challenges with the rule as proposed is the way they’re viewing transparency, they’re expecting a carrier to provide a moment of making the search every single potential fee or price without regard to who’s actually searching. So it may be a fee that’s not relevant to the consumer, which, of course, could create quite a bit of confusion for consumers. So we’ll be providing that input to the DOT, and we hope that they obviously see that rule as something that’s unnecessary to impose.” (Delta Air Lines Q3 2022 Earnings Call, 10/13/2022)

Delta told analysts the airline was seeing higher revenues on lower capacity, and it planned to hold capacity for the year

Delta’s CEO apologized for cancelations and delays and said the company would “hold capacity at June level for the remainder of the year.” “Ed Bastian — Chief Executive Officer: While the demand and revenue landscape is the best we’ve seen, the operational environment for the entire industry remains uniquely challenged. I’d like to sincerely apologize to those who have been impacted by cancellations, delays, and long wait times over the last two months. This quarter’s operational performance has not been up to our industry-leading standards, and restoring operational excellence is our top priority. Steps we’ve taken include the strategic direction to hold capacity at the June month level for the remainder of this year as well as additional investments to restore operational integrity, including earlier boarding procedures and operational buffers.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s CEO boasted that “84% of our flights arrived on time” and told analysts the company only restored “less than 85% of our capacity.” “Ed Bastian — Chief Executive Officer: We are pleased with the progress and July is off to a very good start with a 99.2% completion factor through the first 11 days of the month, which is exactly on par with the same holiday period in 2019. In fact, over the last seven days of this period, we’ve had only 25 cancellations worldwide on over 30,000 departures. Over this period, 84% of our flights have arrived on time, as measured within 14 minutes of scheduled arrival. Since the start of 2021, we’ve hired 18,000 new employees and our active headcount is at 95% of 2019 levels, despite only restoring less than 85% of our capacity. (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s CEO: “we’ve been profitable over the last 12 months, with margins this summer beginning to approach 2019 levels despite meaningfully lower capacity and a doubling in fuel prices.” “Ed Bastian — Chief Executive Officer: We’ve recently made major customer enhancements that will strengthen our brand for years to come, including recent openings this quarter of world-class airport facilities at LAX and New York’s LaGuardia Airport, two largest markets for travel in the country as well as new Delta Sky Clubs in key markets. We spent over a decade building our reputation as the most reliable airline globally, but we’re not only determined to deliver that same standard of excellence but are investing to bring it to an even higher level. In the face of the pandemic, financially, we’ve been profitable over the last 12 months, with margins this summer beginning to approach 2019 levels despite meaningfully lower capacity and a doubling in fuel prices. In my opinion, a pretty remarkable turn in performance. With our results in the first half of the year, we remain confident in our 2024 targets for earnings per share of over $7, more than $4 billion in free cash flow, and a return to investment-grade metrics. Now I’ll turn it over to Glen to talk about the revenue environment.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s President: “For the September quarter, we expect revenue versus 2019 to be up 1% to 5% on capacity that is 15% to 17% lower, with total unit revenues versus 2019 improving sequentially. For the full year, we expect capacity to be 15% lower than 2019.” “Glen Hauenstein — President: This is 20 points above the June quarter volumes and over 90% by 2023. As the leading carrier for business travel with a best-in-class product in the air and on the ground, we will benefit disproportionately as the business community continues to reconnect in person. For the September quarter, we expect revenue versus 2019 to be up 1% to 5% on capacity that is 15% to 17% lower, with total unit revenues versus 2019 improving sequentially. For the full year, we expect capacity to be 15% lower than 2019. This is a 5% reduction from our initial guidance. As we move to the back half of the year, we expect stronger corporate and international trends to offset seasonally lower customer demand. With a strong brand and diversified revenue base, Delta is positioned to consistently deliver a revenue and profitability premium to the industry. We expect more than 60% of revenue will come from premium products and non-ticket revenue sources by 2024.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s executives credited their discipline in reducing capacity for their financial performance

Delta’s CEO boasted that “Delta has been the most disciplined in restoring capacity and will remain nimble depending on the environment while staying true to our core competitive advantages.” “Glen Hauenstein — President: We entered the second half of the year ahead of many of our commercial goals set at the Capital Markets Day. And we’re excited about the opportunities to elevate our performance by extending our advantages and leveraging the Delta platform. Delta has been the most disciplined in restoring capacity and will remain nimble depending on the environment while staying true to our core competitive advantages. With that, I’ll turn it over to Dan to talk about the financials.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s CFO told analysts that their financial performance was ahead of expectations, saying the “primary drivers are slower capacity restoration and additional investments that deliver the operational excellence.” “Dan Janki — Chief Financial Officer: Our first half financial performance puts us ahead of our initial expectations at the start of the year, supporting our outlook for meaningful profitability in 2022. The exception to this outperformance is our nonfuel unit cost. At Capital Markets Day in December, we laid out a progression to return our nonfuel unit cost structure to within a few points of 2019 by 2024. The actions that Ed spoke about have changed the pace of our unit cost progression but not the destination. The primary drivers are slower capacity restoration and additional investments that deliver the operational excellence.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta’s CFO said the airline was “largely carrying the full cost of the airline with only 85% of our flying restored. As a result, we are not fully utilizing our assets.”“Dan Janki — Chief Financial Officer: The biggest impact is in the third quarter, where we expect nonfuel CASM to be up approximately 22% versus 2019 on capacity that is 15% to 17% below 2019. For the full year, we now expect nonfuel unit costs to be approximately eight points higher than we initially guided. The level of capacity restoration accounts for the majority of this increase, as we are largely carrying the full cost of the airline with only 85% of our flying restored. As a result, we are not fully utilizing our assets. For example, third-quarter aircraft utilization is about 10% lower than 2019. And while we have over 95% of the employees needed to fully restore capacity, we have thousands in some phase of hiring and training process. The remainder of the increase is driven by investments to support the operation, along with smaller items like higher maintenance and inflation.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)

Delta told analysts that less than 20% of their capacity was for basic economy seats

Delta’s President said the company’s target was “to have less than 20% of our capacity available on basic economy” but “that’s come down to below 10% or right around 10% as the high demand through the summer has really displaced those customers.” “Glen Hauenstein — President: Well, I think you just described what’s happened is as spares came up and as inventory controls went into place, while the fares per basic economy were filed, they were not readily available as they were squeezed off by our higher-yielding customers. So our target has been, and really, these are soft targets, but to have less than 20% of our capacity available on basic economy. That’s our very soft kind of macro target that we have. And that’s come down to below 10% or right around 10% as the high demand through the summer has really displaced those customers. That’s a result, not an intent.” (Delta Air Lines Q2 2022 Earnings Call, 7/13/2022)