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

Delta Air Lines, Inc. (NYSE:DAL) Q4 2023 Earnings Call Transcript January 12, 2024

Delta Air Lines, Inc. beats earnings expectations. Reported EPS is $1.28, expectations were $1.17. FDS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] I would now like to turn the conference over to Julie Stewart, Vice President of Investor Relations. Please go ahead.

Julie Stewart: Thank you, Matthew, and good morning. Thanks for joining us for our December quarter and full year 2023 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Dan Janki. Ed will open the call with an overview of Delta’s performance and strategy. Glen will provide an update on the revenue environment, and Dan will discuss costs and our balance sheet. After the prepared remarks, we’ll take analyst questions. We ask that you please limit yourself to one question and a brief follow-up so that we can get to as many of you as possible. After the analyst Q&A, we’ll move to our media questions. As a reminder, 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’ll also discuss non-GAAP financial measures, and all results exclude special items, unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page, ir.delta.com. And with that, I’ll turn the call over to Ed.

Ed Bastian: 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 fourth quarter earnings of $1.1 billion, 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. To put that in context, we carried 9 million customers, a record 9 million 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 two of our three-year plan. For the full year, we reported earnings of $6.25 per share, the second highest EPS result in our history on revenue that was 20% higher than the prior year. We delivered an 11.6% operating margin and pre-tax income of $5.2 billion, a near doubling over 2022. We generate free cash flow of $2 billion while investing $5.3 billion back into the business, and we improved our leverage by two full turns and reinstated our quarterly dividend. Return on invested capital was 13.4%, a five-point improvement from 2022, a tremendous amount of progress, especially if you consider where we sat the short three years ago, and I’m so proud of our team across the board. Sharing our financial success is a long-standing pillar of Delta’s culture, and I’m thrilled to announce that we’ll be rewarding our employees with $1.4 billion 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 three largest competitors combined. 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 pay for industry-leading performance. In the operation, the investments that we made supported the best-in-class operational performance that Delta has long been known for. Our operational excellence was recognized by Cirium 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. Today, we also announced an order for 20 Airbus 350-1000 aircraft, with options for 20 more, for delivery 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 Wi-Fi and Delta Sync, 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. 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 we’ll 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 with a more seamless experience. Customers visited the Fly Delta app over 1 billion times last year, using our self-service tools almost 10x more often than 2019, with much higher overall satisfaction. 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. 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 Investor Day as we’ve refined our plan. Domestically, supply and demand are coming into better balance as the industry adjusts to rising costs of production, and we are seeing a positive inflection in domestic unit revenue growth. 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 billion to $4 billion. Free cash guidance is up to $2 billion higher than 2023, driven by growth and profitability, lower CapEx, and an 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. Glen 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. 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 that 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 Glen.

Glen Hauenstein: 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 billion, about 20% higher than pre-pandemic. Strong execution on our commercial strategy resulted in significant outperformance against the industry 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% of revenue, reflecting Delta’s differentiated strategy. Premium led all year with record paid load factors and yield growth outpacing Main Cabin.

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 five product strategy, we have structurally improved the international margins. 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 one in Business Travel 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. Technology and Financial Services led this momentum for the December quarter with Media and Auto sectors seeing notable traction following the strike resolutions. December quarter revenue was a record $13.7 billion, 11% higher than 2022. While unit revenues were 3% lower than last year, we are entering the year with momentum in our highest and had experienced our highest cash sales day in history this week. 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 two point sequential improvement on a year-over-year basis from the December quarter.

Our March quarter faces headwinds from three dynamics when compared to last year. These include higher international mix, the normalization of travel credit utilization and lapping a competitor’s operational challenges. Looking through these headwinds, the core fundamentals of the business are improving faster than the headline numbers suggest. With encouraging developments in the domestic 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. 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 strengths in core hubs and JV partner hubs and reflect evolving travel trends.

This is the first time we’ve been able to optimize since pre-pandemic, as we now have a good set of demand to optimize from. Second, growing revenue diversification through high margin sources remains an important differentiator for Delta. 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 experience through our next-gen fleet, generational airport builds and digital transformation. With continued investment, Delta’s brand strength and leadership position will 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. I am 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.

Dan Janki: Thank you, Glen. And good morning to everyone. 2023 was another meaningful milestone in restoring our financial foundation. We delivered earnings of $6.25 per share and pretax income of $5.2 billion, nearly double our performance of last year. Operating margins of 11.6% was up four points from last year and expected to lead the industry. We generated operating cash flow of $7.2 billion, enabling reinvestment in our people, our fleet and technology. After gross CapEx of $5.3 billion, we generated free cash flow of $2 billion. During the year, we paid more than $4 billion of gross debt. This included accelerated repayment of $1.7 billion of higher cost debt. We ended the year with liquidity of $6.8 billion and grew our unencumbered assets to $26 billion.

Our leverage ratio improved two turns to finish the year at three times. Return on invested capital improved to 13.4%, up five points over 2022. S&P upgraded our credit rating in the second half of last year. We are investment grade rated at Moody’s and we are now only one notch away from investment grade with outlooks improving at both S&P and Fitch during the year. With this progress, we reinstated our dividend last summer, broadening our appeal to yield focused investors. We closed out the year strong, reporting a December quarter pretax profit of $1.1 billion, 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, 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 million 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%. The last two 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 investments in reliability are beginning to pay off with continued improvement in operational performance. 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. For the full year, we expect maintenance expense to be up $350 million over 2023, as we prioritize continued improvement in operational reliability and readying 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 for the March quarter levels as we deliver efficiency and lap investments we made in the second half of 2023. Now, onto cash flow. We expect cash flow of $3 billion to $4 billion of free cash flow, including CapEx of $5 billion. The improvement in free cash flow is driven by growth and 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 billion of 2024 debt maturities and for approximately 45 aircraft deliveries, growing our unencumbered asset base to $30 billion. We expect to reduce leverage to under three times, returning the balance sheet to investment grade metrics, while continued invest in the business remains our focus for capital allocation, 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 three-year plan to restore our financial foundation. We are continuing to prioritize the objectives we laid out at Investor Day with an emphasis on earnings durability, free cash flow and capital efficiency. Our industry-leading operational and financial performance is 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&A.

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

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Q&A Session

Operator: Certainly. At this time we’ll be conducting the analyst question-and-answer session. [Operator Instructions] Your first question is coming from Michael Linenberg from Deutsche Bank. Your line is live.

Michael Linenberg: Oh, 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 widebodies 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 is to be fully retired. I think it was going to be by 2025. 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?

Glen Hauenstein: As we move through 2025, 2024 through the back half of the decade, we expect to retire the 767-300s through that period of time on a pretty consistent basis as you step through while continuing to fly the 400s.

Michael Linenberg: So you’ll continue to fly the 400s beyond 2025, Dan?

Glen Hauenstein: Yes.

Dan Janki: Mike, I don’t think…

Glen Hauenstein: [Indiscernible] in 2025.

Dan Janki: It was never our intent to have that fleet grounded by 2025. It was our intent to have them out of international long haul by 2028 and retired by 2030.

Glen Hauenstein: 2030, yes.

Michael Linenberg: Okay. Okay, makes sense. They’re a bit younger. And then, Glen, just my second question, what was the headwind due to the cancellation of the Israel services in – the Israel services in the fourth quarter? And is that a good way to think about the March quarter impact if you don’t restart those services by the 31st? Thanks.

Glen Hauenstein: So, Mike, the initial hit was clearly the greatest because as we moved through the quarter, we redeployed the assets to other markets. So, I would say it was about a point of 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 safety first, safety of our customers and our crews, and that’s going to be our priority.

Michael Linenberg: Okay. Thank you.

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

Helane Becker: Thanks very much, operator. Hi, team. Thanks for the time. So, 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. So I’m kind of wondering if you or Glen can talk about what you’re seeing in corporate by sector and maybe by geographic region.

Ed Bastian: Well, I’ll start and Glen 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 the 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 is the auto and entertainment sectors have rebounded nicely. Entertainment clearly and the auto is starting to rebound following the strikes in the fourth quarter.

Helane Becker: 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 and February in International being seasonally lower. Are you seeing travel move into those months as well so that you would extend or add especially to your coastal hubs, more international service going east?

Ed Bastian: Absolutely. I think we’ve disclosed this previously, is that we’ve seen the seasons elongate for leisure travel to Europe really March through October now is pretty strong. Of course, the shoulder is 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.

Helane Becker: Okay. That’s really helpful. Thanks, team. Have a nice day.

Ed Bastian: Thank you.

Dan Janki: Thank you.

Helane Becker: Of course.

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

Jamie Baker: Good morning, everybody. Glen, 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?