Q2 2024 Earnings Summary
- Delta's U.S.-Japan business is quite strong, benefiting from the favorable exchange rate of JPY 160, which makes Japan a more attractive destination for U.S. travelers. "Business continues to remain strong."
- The Delta Premium Select program has exceeded internal expectations, with load factors in the mid- to high 80s and fare structures more than 2x what coach fares are, leading to great margins. The expansion to transcontinental routes like JFK-LA, the largest revenue market in the country, is expected to be very accretive with advances already looking very strong.
- Delta's focus on operational reliability and service delivers a true premium experience, differentiating it from competitors. This has made Delta the preferred choice for business travelers and strengthened partnerships like with American Express, choosing Delta as their exclusive partner. "The operations we've run this year are the best in the industry across every measure, every month, month in and month out."
- Delta's margins are not yet at their target levels, indicating potential profitability challenges ahead.
- Increased competition in the premium segment from other airlines could erode Delta's competitive advantage and affect revenue growth.
- Seasonal swings in air traffic liability may negatively impact cash flows in the back half of the year, presenting financial risks.
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Industry Capacity and Structural Changes
Q: Will there be structural changes to reduce industry oversupply?
A: Management believes the industry is reacting quickly to oversupply, with capacity already being reduced after only a few months. Ed Bastian is confident that economic pressures will force lower-performing carriers to adjust operations, benefiting Delta as capacity becomes more disciplined. -
Delta's Capacity Growth Plans
Q: Any color on capacity plans entering 2025?
A: Delta is not ready to give 2025 capacity growth but emphasizes the importance of focusing on seat count rather than ASMs. While capacity grew 8% in ASMs, seats only grew about 5% or less due to longer stage lengths. Delta remains the least restored in terms of seats versus 2019. -
Supply Chain Challenges Impacting Fleet Growth
Q: How is Delta managing Airbus and Boeing supply issues?
A: Delta is largely insulated from Airbus delivery challenges and expects to take its anticipated deliveries, with only minor delays. Ed Bastian doesn't anticipate problems with aircraft needed for 2025 capacity and notes that Boeing's recovery will take time. -
Premium Cabin Trends and Strategies
Q: Can you discuss premium cabin trends and outlook?
A: Delta Premium Select is exceeding expectations, with load factors in the mid to high 80%s and fares more than 2x coach fares. Management is excited about rolling out DPS in the transcontinental markets, expecting accretive results. Premium products continue to have the highest margins, reinforcing Delta's focus on premium offerings. -
Free Cash Flow and Deleveraging Plans
Q: How is Delta improving margins and reducing debt?
A: Delta expects to generate between $3 billion and $4 billion in free cash flow this year and at least as much next year. This cash flow enables continued deleveraging of the balance sheet, differentiating Delta within the industry. Management will discuss proper debt levels at Investor Day. -
International Demand Trends
Q: Are you seeing acceleration in international demand?
A: The international season is extending into September and October, with strong demand for Europe. U.S. travelers are visiting Japan in record numbers due to a favorable exchange rate, with the yen at JPY 160. Delta anticipates robust fall demand for transatlantic flights, potentially inflecting to positive revenue growth. -
Headcount and Efficiency Improvements
Q: Can you discuss headcount trends and efficiencies?
A: Headcount will grow just under 2% while the network grows mid-single digits, indicating improved productivity. Delta continues to see efficiencies as it restores core hubs and grows into resources and capabilities. -
September Domestic Bookings Outlook
Q: Is September domestic booking outlook improving?
A: Delta is confident about September bookings, with about one-third of domestic bookings already on hand. This is substantially better than July and August at minus 60 days. Management expects uplift from business travel increasing from August to September and capacity reductions in the industry. -
Fourth Quarter Earnings Dynamics
Q: How should we think about fourth-quarter earnings?
A: Last year's fourth quarter was the only quarter down year-over-year due to high fuel costs at $3 per gallon. This year, benefits from lower fuel prices and positive unit revenue inflection are expected to improve fourth-quarter earnings. Management remains confident in ending within the full-year guidance range. -
Headwind from Strikes Last Year
Q: What was the headwind from strikes last year?
A: Strikes in the auto and entertainment industries last year presented about a $100 million headwind. This is expected to be a tailwind this year as those industries recover. -
Air Traffic Liability Trends
Q: How should we consider swings in air traffic liability?
A: Air traffic liability is up $2.4 billion, supporting the revenue forecast for the third quarter. The extension of the travel season and strong corporate demand help balance the liability into the third and fourth quarters. -
Debt Levels and PSP Loans Resetting
Q: Thoughts on PSP loans resetting to variable rates?
A: Delta will assess market conditions as the PSP loan tranches come due in 2025 and 2026. The company focuses on deleveraging and may consider refinancing or other debt options depending on conditions. -
Competition in Premium Offerings
Q: Are you concerned about competitors moving into premium?
A: Management is not overly concerned as premium is more than extra legroom; it's about overall experience and reliability. Delta specializes in providing true premium experiences, and industry differentiation rewards those offering real value. -
Premiumization of the Industry
Q: Is there more opportunity as others premiumize?
A: Delta continues to have opportunities to grow premium, with premium revenues growing double-digit. As competitors upgrade products and raise price points, it benefits Delta's Main Cabin revenues as well. -
Gaining Gate Space from Competitors
Q: Is there opportunity to gain gate space as others cut back?
A: Delta is always interested in serving underserved communities. Management did not elaborate further on specific gate opportunities. -
Wi-Fi Rollout and Enhancements
Q: When will the entire fleet have fast and free Wi-Fi?
A: Delta is rolling out fast and free Wi-Fi, expecting the transatlantic fleet to be equipped by the end of summer. Remaining domestic aircraft and regional jets will be equipped over the next 12 to 18 months. -
Update on Refinery Partnership or Sale
Q: Any update on developing a partnership or selling the refinery?
A: Delta is not in discussions to sell or partner on the refinery; it is running very well and remains a key part of the company. -
Unbundling the Front Cabin
Q: Thoughts on unbundling front cabin products?
A: Management will provide more details at Investor Day but is not ready to discuss specifics at this time. -
Details on Japan Demand
Q: Can you provide more detail on Japan demand?
A: U.S.-Japan business is strong, with U.S. travelers taking advantage of favorable exchange rates due to the yen at JPY 160. Japan has become a key destination market for U.S. travelers. -
Other Levers to Improve Margins
Q: What other levers are you pulling to drive improvement?
A: Delta is investing in premium offerings, rolling out free and fast Wi-Fi, and maintaining good cost performance. The company continues to grow into its larger headcount and sees opportunities to further reduce costs.