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Delta Air Lines (DAL) Earnings Report: Q1 2016 Conference Call Transcript

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The following Delta Air Lines (DAL - Get Report) conference call took place on April 14, 2016, 10:00 AM ET. This is a transcript of that earnings call:

Company Participants

  • Jill Greer; Delta Air Lines Inc; VP of IR
  • Ed Bastian; Delta Air Lines Inc; CEO
  • Glen Hauenstein; Delta Air Lines Inc; President
  • Gil West; Delta Air Lines Inc; EVP & COO
  • Kevin Shinkle; Delta Air Lines Inc; Chief Communications Officer
  • Peter Carter; Delta Air Lines Inc; EVP & Chief Legal Officer
  • Paul Jacobson; Delta Air Lines Inc; CFO

Other Participants

  • Duane Pfennigwerth; Evercore ISI; Analyst
  • Savi Syth; Raymond James & Associates Inc.; Analyst
  • Helane Becker; Cowen and Company; Analyst
  • Joseph DeNardi; Stifel Nicolaus; Analyst
  • Jamie Baker; JPMorgan; Analyst
  • Hunter Keay; Wolfe Research; Analyst
  • Darryl Genovesi; UBS Securities LLC; Analyst
  • Dan McKenzie; Buckingham Research Group; Analyst
  • Jack Atkins; Stephens Inc.; Analyst
  • Rajeev Lalwani; Morgan Stanley; Analyst
  • Richa Talwar; Deutsche Bank; Analyst
  • Julie Yates; Credit Suisse; Analyst
  • Dennis Schaal; Skift; Analyst
  • Susan Carey; Wall Street Journal; Analyst
  • David Koenig; The Associated Press; Analyst
  • Michael Sasso; Bloomberg News; Analyst
  • Ted Reed; TheStreet; Analyst
  • Kelly Yamanouchi; The Atlanta Journal-Constitution; Analyst
  • Jeffrey Dastin; Reuters; Analyst
  • Edward Russell; Flightglobal; Analyst

MANAGEMENT DISCUSSION SECTION Operator: Welcome to the Delta Air Lines March quarter 2016 financial results conference. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the conference over to Miss Jill Sullivan Greer, Vice President of Investor Relations. Please go ahead, Jill. Jill Greer (VP of IR): Thanks, Operator. Good morning, everyone. Thanks for joining us for our March quarter call. Joining us from Atlanta today are Ed Bastian, our incoming CEO; Glen Hauenstein, our incoming President; and Paul Jacobson, our CFO. We also have the entire leadership team with us in the room with us for Q&A. Ed will open the call, Glen will then address our revenue performance and Paul will follow and discuss cost performance and cash flow. To get in as many questions as possible during the Q&A, please limit yourself to one question and a brief follow up. 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. All results exclude special items, unless otherwise noted. You can find the reconciliation of our non-GAAP measures on the Investor Relations page at IR.delta.com. With that, I'll turn it over to Ed. Ed Bastian (CEO): Thanks, Jill. Good morning. Thanks to everyone for joining us. This morning, we reported a $1.56 billion pre-tax profit, our 12th consecutive record quarterly result, as the business continues to benefit from low fuel prices and solid demand. We held our top line roughly flat and realized substantial fuel savings, which allowed us to expand operating margins by nearly 10 points to 18.5% and generate $1.4 billion in operating cash flows. These are nothing short of outstanding results in what is typically our seasonally weakest quarter of the year, where we also saw additional pressure from the tragic events that occurred in Brussels in late March. Operationally, we again led the global industry with a 99.4% completion factor and an on-time arrival rate of 86.5%. We had 49 perfect main line completion days, and six additional days where the only canceled flights in our network were to Brussels. It's now more rare to have a day with a cancellation than not on our main line product. We also had eight days of no cancellations across the entire delta system, both main line and regional carriers, what we call brand perfect days, and we are focusing more and more on the system level performance and working hard to improve on this basis. With these results, the Delta team proved yet again they are the very best in the industry. I'm proud to announce we accrued $272 million in profit sharing this quarter on top of the $23 million in shared rewards they earned. I want to thank the Delta team for a terrific quarter. It's an honor to be able to lead this great company and serve all of you. I would like to take a moment to thank Richard for his leadership and vision in transforming Delta. Richard has been a great partner and mentor for me for the past decade. And while he'll be enjoying a well-earned retirement, he will always be a trusted friend and advisor and we all benefit from his leadership as the Executive Chairman of our Board.


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Our strategy is working, and our team is fully in place. We've got Gil West, our Chief Operating Officer, who leads the best team of operators in the industry. Glen Hauenstein, our new President, has led our network in revenue transformation over the last decade.

Steve Sear has taken us to five consecutive Business Travel News victories as Head of our Sales Organization. Paul, Joanne, Peter, Kevin, the list goes on. Our bench is deep, and we're going to keep building on our momentum. While we continue to post record profits, we are very aware that fuel prices remain volatile and have increased nearly 60% from the lows earlier this year. For this reason, we are determined to get our business back on the path of positive unit revenues, because this is how we ensure that the margins and cash flows that we are producing are sustainable through good times and bad. Glen will be describing our actions along this course. As we look ahead at Delta, we have tremendous momentum in the business. While lower for longer fuel prices have added some painful uncertainty to our timeline on getting back to unit revenue growth, they are also driving roughly $3 billion of fuel savings this year. And we are committed to pushing as much of that fuel savings to the bottom line as possible. We estimate that we retained 50% of fuel savings in the first quarter on an ex-hedge basis. On a net hedge basis, our fuel savings retention was 75%. We're using the cash flow generated by these record earnings to invest in long-term profitable growth opportunities for the business, improving the balance sheet by paying down debt, and funding the pension, and continuing to return cash to owners. As we have done for the past several years, we plan to update you on our long-term plan and capital deployment strategy at our upcoming spring analyst meeting which will be held this year on May the 16. I've been asked many times over the last couple months as I take over as CEO as to what my priorities will be as we look to the future. Our goal as a team will be to continue to invest in the initiatives that are producing a durable, sustainable and industry-leading foundation at Delta. First, our top priority is running a safe, reliable and customer-focused operation. This is at the very core of what we do, and is producing meaningful improvements in customer satisfaction. It also translates into our industry-leading RASM premium and more efficient cost structure, both of which contribute to more sustainable margins over the long term. Second is enhancing our brand premium. We said before that our product is not a commodity. In order to earn a premium price from customers, we need to produce a premium product and a brand that drives loyalty. That starts with thoughtful service and reliable operations, but also includes consistent innovation across the entire travel experience. Third, you'll see us continue on the path towards globalization. Whether through initiatives like headquartering our trans-Atlantic operations in Amsterdam, or through our equity stakes in Virgin Atlantic, China, Eastern, Aeromexico and GOL we see the international marketplace as the source of long-term, profitable growth opportunities. Our goal is to be the best US global airline. And finally, we'll maintain the balanced approach for all of our stakeholders, our employees, our owners, and the customers and communities we serve share in Delta's success. This strategy has driven tremendous value for all our stakeholders, and is the foundation for sustainable performance over the long term. I'm excited about the future of Delta Air Lines, and honored to lead the very best team of airline professionals in the world. I thank our investors for the trust they place us in, and assure you we are working hard to be great stewards of your investment. With that, I'm happy to turn the call over to my good friend, Glen Hauenstein. Glen Hauenstein (President): Thank you, Ed. Good morning, everyone. I would like to start by expressing my deep gratitude to the Delta team for all of their hard work. Taking great care of our customers every day has resulted in another record quarterly performance. I am honored and humbled to be taking on the role of President at this very exciting time for our company. There are enormous opportunities ahead for our business, and I look forward to driving our continued success to get it. Our revenues for the quarter were roughly flat to last year. Including $125 million headwind from currency, a $5 million impact from the recent events in Brussels. We also maintain our top line performance, despite a 40% decline in market fuel prices.


Our corporate demand remains solid, with volume growth of 2% this quarter. We saw increases across most sectors, including healthcare, financial services and technology. However, the improvement in volumes is being more than offset by lower yields.

The outlook for corporate demand remains favorable. With 82% of respondents to our latest corporate travel manager survey projecting their overall travel spend will be maintained or increased for the rest of the year. This is consistent with outlooks from previous surveys. We continue to see good performance with our branded fare initiatives. Total merchandising revenues grew over 30% for the quarter, led by comfort plus growth of 45% and first class revenue growth of 12%. Basic economy drove roughly $20 million in incremental revenue, and we began our broad city-level expansion initiative during the quarter. Our partnership with American Express


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While we are not there yet, we understand the importance of getting back to positive RASMs. Volatility and closer yields and challenges in Europe may mean we achieve our goal a few months later than we previously had expected, but we continued to target reaching the inflection point this year. We have a good line of safety getting there in domestic, encouraged by the recent yield trends, which are now beginning to turn positive after being down for roughly a year.

In addition, our domestic capacity growth moderates with each successive quarter during the year. In Latin and the Pacific, our capacity actions and restructuring efforts will continue to benefit us, while currency headwinds are also easing. We continue to expect unit revenues to inflect in both entities in the summer timeframe. In the trans-Atlantic, which accounts for 15% to 20% of our revenues, is where we have the greatest challenge. Yields remain under pressure, as industry capacity growth continues to add strict demand. Peak season volumes from US to Europe remained very strong, and will drive record profits this summer, given the low fuel prices. and one positive is that we will get a big help from currency as it turns from a headwind into a tailwind beginning in the next quarter. In closing, I would like to reiterate that we are focused on taking the necessary actions to get to positive RASM in 2016 and ahead of our network competitors. If for no other reason than to get Ed off my back. We will have a line of site to achieving our goal in domestic, the Pacific and Latin America, and are addressing the headwinds we face in Europe. And we will act quickly to move all the levers in our business, including capacity if we do not see sufficient progress in the coming months. With that, I would like to turn it over to my good friend Paul. Paul Jacobson (CFO): Thanks, Glen. And good morning, everyone, and thank you for joining us today. While lower fuel costs are providing huge benefits for our business, there's a lot of uncertainty in the global environment and we know fuel won't stay low permanently. As a result, we remain focused on staying disciplined with our costs. Total operating expenses for the quarter, however, were down more than $1 billion as this decline in fuel costs offset wage increases, as well as higher profit sharing expense, which doubled versus last year at this quarter. Non-fuel CASM increased 4.5% including profit sharing, better than our initial expectation, with roughly half of that increase coming from higher profit sharing in the quarter. As you may recall, our cost growth is more weighted toward the front half of the year, given the timing of last year's wage increases, and this quarter is the peak. During the quarter, we retired ten older main line aircraft, including nine 757s and one 767-300. We removed six 50-seaters from our schedule also during the quarter. We continue to expect our refleeting efforts to drive another $350 million of savings in 2016. Our maintenance initiatives benefited us by $90 million in the quarter, and we continue to target a $400 million benefit for the full year. For the second quarter, we expect non-fuel CASM, including profit sharing, to increase roughly 2%, as our productivity and other cost initiatives help offset higher wages and product and service investments. CASM growth in the second quarter will be well below 1Q levels, as we lap last year's April 1 wage increase. We remain on track to keep non-fuel costs ex-profit sharing below 2% for the full year. Moving on to fuel, our total fuel expense declined by $1.5 billion, due to lower market fuel prices and lower year-over-year hedge losses. Our all-in fuel price was $1.33 per gallon, down 55% from the prior year. The refinery lost a modest $28 million in the quarter. While lower crack spreads are a headwind for the refinery, they are obviously a significant net benefit for Delta as a whole. Looking ahead, we expect an all-in June quarter fuel price of $1.48 to $1.53, which is down 40% from prior year. We continue to have no open hedges going forward, and anticipate hedge losses of approximately $200 million in each of the remaining quarters this year. With the combination of the fuel tailwind, our non-fuel cost discipline and the sequential improvement in RASM performance Glen discussed, we expect another record quarter in June. With an operating margin of 21% to 23%, a roughly 5-point improvement from the prior year.


to investment grade during the quarter. In closing, I would like to thank and congratulate the entire Delta team -- not only for another record quarter, but also for achieving our long-held goal of returning as an investment grade company. These accomplishments would not have been possible without your determination, dedication and hard work each and every day.

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Jill, back to you. Jill Greer (VP of IR): Operator, we are now ready for questions from the analysts, if you could give instructions. QUESTIONS & ANSWERS Operator: (Operator Instructions) Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth (Analyst - Evercore ISI): Hey, guys, good morning. Thanks for the time. Ed Bastian (CEO): Morning, Duane. Duane Pfennigwerth (Analyst - Evercore ISI): As we look towards the inflection to positive revenue later this year and you touched on some of this, can you just expand your thoughts on domestic versus international? And which international region you might expect that first? Specifically Latin America there's been a lot of capacity cuts. Are you any more instructive on getting back to positive unit revenue in that region? Glen Hauenstein (President): Duane, this is Glen. I think we are very constructive because not only do we have some positive chutes in Brazil, both first time and many years our close end bookings have actually provided positive momentum as opposed to negative momentum. So we're coming off a very low base in Brazil. And as we start to lapse the currency changes, I think we are positioned well with that capacity down towards an inflection point later this year. Duane Pfennigwerth (Analyst - Evercore ISI): And so would that be your guess in terms of getting back to positive RASM first? Glen Hauenstein (President): No. I think we are already in positive RASM territory in some of our entities, including Mexico, now in Japan, and domestic. I think we have a good line of sight for peak summer. So I think we have a...


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