Delta Air Lines, Inc. (NYSE:DAL) Q4 2022 Earnings Call Transcript

Delta Air Lines, Inc. (NYSE:DAL) Q4 2022 Earnings Call Transcript January 13, 2023

Operator: Good morning everyone. And welcome to the Delta Air Lines December Quarter and Full Year 2022 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. Please go ahead.

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Julie Stewart: Thank you, Matthew, and good morning, everyone. And thanks for joining us for our December quarter and full year 2022 earnings call. Joining us from Atlanta today, our CEO, Ed Bastian; our President, Glen Hauenstein; our CFO, Dan Janki. Ed will open the call with an overview of Delta’s performance and strategy, Glen will provide an update on the revenue environment and Dan will discuss costs in our balance sheet. After the prepared remarks, we will take analyst questions. We ask that you please limit yourself to one question and a follow-up, so we can get to as many as possible. After the analyst Q&A, we will move to our media questions. Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events.

All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta’s SEC filings. We will also discuss non-GAAP financial measures and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I will turn the call over to Ed.

Ed Bastian: Thank you, Julie. Good morning, everyone. We appreciate you joining us today. Earlier Delta reported our full year results including our December quarter earnings per share of $1.48 on record revenue that was 8% above 2019 levels. We generated a 12% operating margin, our third consecutive quarter of double-digit operating margins pointing to the strength of our recovery. I want to sincerely thank the 90,000 strong Delta team for their outstanding work in delivering these results and serving our customers during a very busy holiday travel season. In my opinion, 2022 was the most difficult operational year in our history and was capped off by severe winter storms over the holidays. I am grateful to our employees for their great work to recover the operation, while keeping our customers and each other safe.

They are the reason our brand and customer loyalty is at the top of the industry. Our December quarter earnings per share and margins exceeded guidance, marking a strong close to a year where we made significant progress regarding restoration of our financial foundation. For the full year, we reported earnings of $3.20 per share on $46 billion of revenue. We delivered pre-tax income of $2.7 billion, an improvement of more than $6 billion over 2021. Delta’s profitability led the industry and in our nearly 100-year history, 2022 was our seventh highest result even with a $1 billion loss in the first quarter. We are pleased to report positive free cash flow for the year, which funded $6 billion of capital invested back into the business and we repaid close to $5 billion in gross debt.

Sharing our success is a longstanding pillar of Delta’s culture and I am proud to announce that we will be paying our employees $550 million in well earned profit sharing come Valentine’s Day. 2022 came in ahead of our plan on revenue, earnings and cash flow, demonstrating strong execution in the first year of the three-year plan we laid out at the 2021 Capital Markets Day. I am incredibly proud of the team for rebuilding the world’s best performing airline, and importantly, we are not just building back, we are continuing to improve and extend our competitive advantages. Delta’s brand continued to strengthen in 2022, with record performance from our loyalty and co-brand card programs, and customer satisfaction scores consistently perform above pre-pandemic levels.

Through the year, we have hired and trained 25,000 new employees, now representing over a quarter of the total company. Our team showed their operating talent and resilience as we retained our number one position in completion factor and on time arrivals amongst our peer set, despite having so many new team members. The Delta brand is centered on our safe, reliable and exceptional service, and our operational excellence was recognized by Cirium last week, which named us yet again the most on time airline in North America. We fortified our international partnerships in 2022, position — positioning us for profitable international growth in the years ahead. As detailed last month, expanding our international margins to domestic levels is an important opportunity for Delta in the years to come.

We have invested in the customer experience at every stage of the travel journey, from the continued refresh of our fleet with next-generation far more fuel efficient aircraft to generational airport rebuilds and technology investments that are providing our employees better tools and our customers a more seamless experience. And we continue to attract and partner with leading brands to grow our SkyMiles ecosystem and further enable customers to use their SkyMiles during travel and beyond. Heading into 2023, our momentum continues. At the Consumer Electronics Show in Las Vegas just last week, we unveiled the next phase in our vision to connect the Sky. Starting February 1st, Delta will be the first major U.S. airline to provide fast, free, unlimited WiFi to all through a free SkyMiles account.

This will be available on nearly 80% of our U.S. system to start and growing every week. By the end of next year, we expect to deliver this service seamlessly throughout the rest of our international and regional fleets. And we debut Delta Sync, which will create personalized experiences and engagement opportunities on the free WiFi portal. We are partnering with great brands like T-Mobile and Paramount+, as well as building on our longstanding relationship with American Express to bring to life our vision of a more connected and personalized travel experience. As a trusted consumer brand, Delta continues to differentiate the premium flying experience, building loyalty and supporting our ambition to transcend the industry. Moving to our outlook, at our Investor event last month, we provided full year 2023 guidance for revenue growth of 15% to 20% year-over-year, earnings of $5 per share to $6 per share and free cash flow of over $2 billion.

We are affirming that guidance today and introducing our March quarter outlook, which Glen and Dan will provide in detail. For the March quarter, we expect to deliver a 4% to 6% operating margin and improve our pre-tax income by more than $1 billion compared to the same period last year. Importantly, we are embedding the assumed impact of all labor cost increases throughout our guidance metrics. We are pleased to have reached an agreement in principle with our pilots, but out of respect for the process, we will not be discussing the details of the agreement on today’s call. As I outlined last month, I have never seen a more constructive backdrop for the industry. Demand remains strong as passengers return to the skies and industry returns to the long-term trend to GDP, all while supply constraints continue.

I believe our industry will see tens of billions of dollars of incremental demand in the next few years coming out of the pandemic. As the industry leader with a proven strategy and strong execution track record, Delta is well positioned to build on our momentum in the New Year. We are confident in our ability to deliver significant improvement in earnings and free cash flow in 2023, consistent with the plan we laid out last month and we are on track to deliver our 2024 targets of more than $7 of earnings per share and $4 billion of free cash flow. As always, we remain mindful of the macroeconomic trends and have demonstrated that we have the tools to effectively manage a changing economic climate. In closing, Delta delivered in 2022, outperforming our plan and leading the industry operationally and financially.

We are uniquely positioned to grow earnings and cash flow in 2023, 2024 and beyond. The power of our premium brand continues to grow, and with the very best people in the industry, I couldn’t be more excited about what’s ahead for Delta and our customers. Thank you again. With that, I will turn it over to Glen.

Glen Hauenstein: Thank you, Ed, and good morning, everyone. I couldn’t be prouder of what the Delta people accomplished throughout 2022 and I want to congratulate our teams on their much deserved profit sharing payout they will be receiving next month. For the full year, we generated revenue of $46 billion, a $19 billion improvement year-over-year. We delivered record December quarter and full year unit revenues, sustaining our revenue premium to the industry of more than 110%. For the 12th consecutive year, Delta was named the number one corporate airline in Business Travel News survey, as we continue to invest in our network and product offerings. And through the year, we made significant progress on our long-term commercial strategy to deepen our network advantages, expand premium revenues, grow our loyalty ecosystem and further diversify our revenues.

Starting with our network strategy, we focused on solidifying our positions in coastal gateways, while protecting our core hub shares. We secured the leading positions in both Boston and Los Angeles, while increasing local market share in our core hubs. Premium let all year with paid load factors higher than 2019 and yield growth outpacing Main Cabin, while basic economy made up less than 5% of revenue, half of the 2019 levels. We expanded our Delta Premium Select rollout during the year. Customer response has been positive and the cabin performed better than our initial expectations. Our rollout continues in 2023 and we will have this product on 84% of our international wide-body fleet by this summer. Our loyalty program continued to exceed our expectations with record SkyMiles acquisitions in 2022, 42% higher than 2019.

As Ed noted, we are partnering with leading companies to expand our loyalty ecosystem, increasing the value of our program for customers and deepening customer engagement with Delta. With an expanding ecosystem and free, fast WiFi, we expect continued growth in our loyalty base. Our partnership with American Express delivered record results, with full year remuneration of $5.5 billion, ahead of our initial target and positioning us to deliver over $6.5 billion in 2023 and over $7 billion in 2024. Cargo revenue was a record in 2022 and we expect to grow cargo revenues in 2023, as increased capacity offsets the cargo yield environment. With strong execution across our business lines, a record 55% of revenue was generated by premium products and diverse revenue streams.

We are confident in our path to exceed 60% by 2024. While not without challenges, 2022 was a strong year for Delta and we exited the year with momentum. During the December quarter, we generated revenue of $12.3 billion, 8% higher than 2019 on 9% less capacity. We saw revenue recapture at the end of December that offset the impact of weather disruptions in our system around Christmas. Fourth quarter unit revenues were 19% higher than 2019, with strength driven by consumer demand throughout the quarter. Corporate travel demand was steady through the quarter, with corporate domestic sales 80% recovered to 2019 levels. We expect March quarter revenue to be up 14% to 17% higher versus 2019. On capacity approaching full restoration, we expect March quarter unit revenues will be up 15% to 17% compared to 2019, including a 2-point impact from higher stage.

Based on how we are deploying our network, our stage length is expected to be up 5 points compared to 2019, resulting in a higher restoration of ASMs and seats. This is a temporary dynamic that is unique to Delta among major carriers. Stage will begin to normalize relative to 2019 and relative to the industry as we rebuild our core hubs later this year. For 2023, we expect to grow revenue 15% to 20% year-over-year as we fully restore our network and further diversify our revenue streams. Consumer demand remains healthy, with advanced bookings significantly ahead on both yield and load factor for each month of the March quarter compared to 2019. And in our recent corporate survey, results were positive with 96% of respondents expecting to travel as much or more in 1Q than 4Q led by financial services.

In the New Year, bookings reflect the survey optimism and are accelerating. International revenue continues to be led by the transatlantic. We are seeing robust demand across our expanded footprint in Europe and expect the spring and summer to set new record revenues. Latin America is performing very well, led by Mexico, the Caribbean and Central America, with a recovery in Deep South America now accelerating. And we are pleased with the early results from the launch of the LATAM JV and I am excited about the opportunities for us in 2023 and beyond. In the Pacific, we expected record first quarter profits in both Australia and Korea as our multiyear international transformation delivers on anticipated results. Japan is also building momentum and we expect a very strong summer there.

And lastly, with China, indicating its reopening, we expect to rebuild capacity in line with demand starting later this year. In closing, we delivered on our key commercial priorities in 2022, supporting a significant improvement in our revenue, while strengthening our competitive advantages. We have started the New Year with great momentum and are well positioned to extend our leadership position in the years ahead. And with that, I will turn it over to Dan to talk about the financials.

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Dan Janki: Great. Thank you, Glen. In 2022 we made significant progress restoring our financial foundation. We delivered earnings of $3.20 per share, with pre-tax income of $2.7 billion, ahead of our plan. Operating margins of 7.8% was driven by three quarters of double-digit margins. We improved profitability and the strong advanced bookings. We generated $6.2 billion of operating cash flow, enabling continued investment in our people, our fleet, our partners and technology. After gross CapEx of $6 billion, we generated $244 million of free cash flow. We ended the year with liquidity of $9.4 billion and adjusted net debt of $22.3 billion. Our adjusted net debt to EBITDAR was 5 times and our after-tax return on invested capital was 8.4%.

We finished the year strong, reporting a $1.4 billion operating profit on a margin of 11.6% for the December quarter. Our non-fuel costs were 13.4% higher than 2019, in line with guidance, excluding a 1-point impact from the severe winter weather in late December. Now moving to guidance, as Ed mentioned, we are including all expected labor rate increases in our guidance metrics, including non-fuel CASM. As it relates to our pilots, if they vote to ratify the proposed agreement by March 1st, pay rates would be retroactive to January 1st. This results in a 3-point impact on our non-fuel unit costs for the year and in each of the quarters. Including this in the full year guidance we gave last month brings our 2023 non-fuel unit decline to 2% to 4% on a year-over-year basis.

Delivering a competitive cost structure is a key financial priority. Delta has led the industry an investment in our people and our customers and this is embedded in our outlook, as is a full reset of regional costs and inflation. As we move through the year, scale and efficiency will drive a decline in 2023 non-fuel CASM versus 2022. While approaching 2019 capacity provides scale benefits, we are still bearing the cost to fully restore our network to the peak summer levels, with a continued emphasis on operational reliability during this ramp-up. We expect to complete our rebuild by the second half, with the majority of our flex fleet reactivated and training levels for our flies reverting to historical levels. This will allow a significant shift of resources from training to production, giving us the confidence in our ability to deliver a fully restored network during the peak summer period, while enabling our operating teams to drive efficiency in the back half of the year.

One unique item within the year is the pacing of our core maintenance, as we prepare to step up the network for summer flying with the first half year-over-year higher than the second — and then lower in the second half of the year. While these dynamics impacting early part of the year, we expect 1Q non-fuel unit cost to increase 3% to 4% on a year-over-year basis. We expect the year-over-year unit cost to progressively improve through 2023 as we complete our rebuild and elevated maintenance activity, while driving efficiency across our operating groups. This cadence is consistent with our full year outlook for non-fuel unit cost to decline 2% to 4% year-over-year. With our outlook for revenue, we expect the March quarter operating margins to be 4% to 6% and earnings of $0.15 per share to $0.40 per share.

For the full year, we are regulating our outlook for earnings of $5 per share to $6 per share and operating margins of 10% to 12%, delivering a 2-point to 4-point expansion of margins, including over 1-point impact from higher profit sharing. We expect the full year free cash flow to be more than $2 billion with gross CapEx of $5.5 billion. In 2023, non-operating expense is expected to be $470 million higher year-over-year. These results from non-cash pension expense increasing over $550 million year-over-year due to broad market declines, more than offsetting the reduction in interest expense from repaying debt. We plan to pay cash for our $2.4 billion in debt maturities, while opportunistically reducing debt with excess liquidity. This will bring our leverage to 3 to 3.5 target for 2023 and remaining on track for 2024 adjusted debt-to-EBITDAR to be 2 times to 3 times.

Returning to investment grade metrics by 2024, while continuing to reinvest in the business remains our focus for capital allocation. In closing, I want to thank — add my thanks to the Delta team and people for their hard work this year. We outperformed the first year of our three-year plan and we entered 2023 on track to generate a significant improvement in both earnings and cash flow. We remain confident in delivering on our 2024 target of $7 of earnings per share and generating over $4 billion of free cash flow. With that, I will turn it over back to Julie for our Q&A.

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

Q&A Session

Operator: Certainly. Your first question is coming from Catherine O’Brien from Goldman Sachs. Your line is live.

Catherine O’Brien: Good morning, everyone. So good to be back. So maybe I will start with a question on the capacity bottlenecks that you mentioned in your prepared remarks Ed. So I know Delta itself has made a lot of progress in hiring and getting through a large wave of training, but there are other constraints outside of the airline industry’s control with aircraft delivery slower than planned and aviation infrastructure still fairly strapped at airports, the FAA. Now I know the answer will be different for Delta than some of your peers were further behind in their pilot hiring, but how do you think about the time line to remove some of these bottlenecks across the industry that aren’t directly in airlines control and I guess really what I am asking is, do you expect there to be continued tension between supply and demand over the medium-term, just how do you think about those rolling off? Thanks so much.

Ed Bastian: Thanks, Catie, and welcome back. Yeah. I think you summed it up well and I mentioned at the Capital Markets Day last month that while we — at Delta and I think the industry broadly provides you, our capacity expectations. I think expectations have quotation marks around them and they do feel still a little bit more aspirational than because there are a number of things that are outside of our control. We are doing our very best to get our people in place. The hiring is strong. We have the team assembled. We need to get them through, principally our pilots to the training — the limited training devices and school house that we have available to us. We expect by the summer that we will be in position to have not just get through most of that bottleneck, but then the large resource drain that it takes with respect to all of the training that are existing team has to do to train our new employees, whether that’s pilots or flight attendants, mechanics, the airports, reservations.

It doesn’t matter where in the system you sit. That’s hard to see. I can appreciate that if you are sitting in your chair, but it’s very meaningful here on the airline. And then by summer, we hope at Delta that we will be able to be back 100%. I also use the term fragile last month when speaking about the aviation system as we continue to return to the skies, and I think we have seen just in the last few weeks a couple of illustrations of that fragility. So we are going to continue to do our best to make sure we don’t fly in excess of our capabilities so that we can deliver a great product for our customers and provide all the tools and support for our employees.

Catherine O’Brien: That’s great. Helpful, Ed. And if I could maybe just for my follow-up. Glen, I know 75% of this year’s growth by your core hubs. Can you help us think about RASM performance at your core hubs versus the rest of your network or even better since we know its lower cost capacity? Can you help us think about the margin differential of adding capacity in core hubs versus competitive coastal hubs? Thank you so much.

Glen Hauenstein: Sure. I think we outlined that at the Investor Day and core hub is about 10 points higher than coastal hubs and 10 points in margin.