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Jake Kennedy
Coordinator
Good morning everyone and welcome to the Delta Airlines September quarter financial results conference call. My name is Jake and I will be your coordinator. 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 will be recorded. I would now like to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead.
Jill Larkin
Vice President of Investor Relations
Thanks Jake. Good morning everyone and thanks for joining us for our September quarter call. Joining us from Atlanta today are Delta CEO Ed Basten, our President Glenn Hauenstein and our CFO Paul Jacobson. Our entire leadership team is here in the room for the Q&A session. Ed will open the call and give an overview of Delta's financial performance. Glenn will then address the revenue environment and Paul will conclude with a review of our 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 and you can find a reconciliation of our non-GAAP measures on the Investor Relations page at .Delta.com. And with that,
Ed Basten
CEO
Ed. Good morning everyone. We appreciate you joining us today. Demand for the Delta product is as strong as ever and our powerful brand, unmatched competitive strengths and pipeline of initiatives are driving earnings growth, margin expansion and solid returns for our owners. Earlier today, Delta reported a September quarter pre-tax profit of $2 billion, which is up $350 million from last year. Our EPS increased 30% to $2.32 per share with operating margins expanding by 2.5 points. Importantly, we've already generated $4 billion in free cash flow year to date. Our employees continue to deliver the very best operational reliability and service for our customers, even against the summer's backdrop of record passenger volumes, airport construction projects and difficult weather. We've now had 123 days without a single cancellation across the entire Delta system this year, a 23% improvement over last year's record performance. This unprecedented level of reliability combined with great service from our team continue to drive higher customer satisfaction and growing brand affinity for Delta. Year to date, our domestic net promoter score has improved more than five points over the prior year. And we're also seeing positive momentum in international net promoter scores with opportunity for further improvement as we continue to upgrade cabin interiors and enhance our customer experience. Stronger customer satisfaction is translating into higher revenues. Revenues grew .5% to a record $12.6 billion in the quarter, and we now expect to achieve approximately 7% top line growth for the full year. I want to thank the entire Delta team for producing one of the best quarters in our history. You are the force behind the Delta brand. And to recognize your efforts through a challenging summer, we have accrued another $517 million towards next February's profit sharing. This brings the total for the year to nearly $1.3 billion. In addition, we're making important investments in our people, including improvements to benefits and a 4% base pay increase that went into effect last week for ground employees and flight attendants. Beyond investments in our people, we are continuing to improve the customer experience through a record number of new aircraft deliveries, airport terminal projects, and technology innovations. These investments support long-term growth, industry leading profitability, and strong cash flow. In many ways, 2019 has been a transformational year for our company. We firmly established Delta as the largest airline in the world, both on revenues and profits, and are solidly on track to produce our fifth straight year with free tax profits in excess of $5 billion. We have the world's most valuable airline brand, one that is mentioned not just among the best global airlines, but alongside top consumer brands. And we're building out our portfolio of industry leading partners across our business. Just two weeks ago, we announced a new strategic partnership with Lutam Airlines. The agreement adds geographic diversity and a fast growing continent, adding 100 new destinations to our map and significantly improving our position in South America. Once approved, our proposed JV will move Delta from a current number four position in South America to a combined number one position. We expect this partnership to translate to $1 billion in new annual revenue over the next five years and improve returns in the Latin entity. Along with our existing partnerships with Aeromexico and WestJet, we're creating a true carrier of the Americas, where the ability to connect travelers is never before. American Express is another important long-term partner, and the combination of our two brands has created an industry leading co-brand credit card portfolio. Our recent contract renewal provides a diverse high margin revenue stream that we expect to grow to nearly $7 billion by 2023, with further growth through the end of the decade. Last week, we announced a major relaunch of our Delta SkyMiles American Express card portfolio. We are providing our customers with more ways to earn miles and new benefits that deliver an even better travel experience. The investments we're making in our people, product, service, and partnerships are diversifying our revenues and will grow the earnings power of our business for years to come, important steps on our path to being the world's leading airline. Demand for our product has never been higher. We have grown our revenues by 15% over the last two years, and to ensure that we continue to deliver the very best product and returns in this industry, we need to continue to invest in our people and our service. This volume growth, coupled with challenging weather patterns, has added cost in the back half of the year and will add about one point to our Chasm Ex-Fuel run rate in 2020. I am confident that these are the right investments for the health of our brand, and with the productivity still to come from our fleet, facility, and technology investments, we have the right platform to mitigate this cost inflation over the long term. With that said, it is important to note our overall fourth quarter unit costs all in are expected to be down 1% due to the drop in fuel prices, and our margins should expand once again in Q4. In closing, we are on track to deliver a very strong result in 2019. Demand trends remain healthy, and our full year earnings guidance is for a more than 20% improvement over last year's earnings per share. We have built a durable foundation through our culture, leading operational reliability, unrivaled network, our loyalty program, and relationship with American Express, and an investment grade balance sheet. These strengths, combined with a great brand powered by the very best professionals in the business, provide the engine to drive long-term value for owners. I look forward to sharing more details on our strategic outlook and 2020 business plan at our upcoming investor day in December. Now with that, I would like to turn the call over to Glenn and Paul to go through the details of the quarter.
Glenn Hauenstein
President
Thanks, Ed, and good morning. First, I would like to thank the entire Delta team for their hard work during our busiest summer ever. In the quarter, we ran record load factors and carried 3.3 million more passengers than last year, up 6%. The exceptional operational performance and unmatched service our people provide are the foundation for improving customer satisfaction and the reason why more customers than ever are choosing to fly Delta. When combined with a solid demand backdrop and progress against our commercial initiatives, we delivered a record quarterly revenue of 12.6 billion, up .5% over last year. This marks the ninth consecutive quarter of top line growth at a level more than two times GDP. We also continue to diversify our business with 52% of our revenue generated by premium products, loyalty, and other non-ticket revenue sources. Premium product revenue grew 9% in the quarter to 4 billion, on top of last year's growth of 13%. Momentum is expected to continue from the modernization of our fleet and improved ability to sell these products. Total loyalty revenues grew 16% to 1.2 billion, driven by double digit increases in mileage redemptions, no brand spend, new card acquisitions, and roughly 100 million benefit from the new contract with American Express. Enhancing our customer loyalty and trust is at the heart of our business and together with American Express, we are finding new and innovative ways to reward our customers for their loyalty. We are on track to achieve another record year of card acquisitions in 2019. Our redesigned card offerings will deliver rich rewards and support continued growth in our leadership base in the years ahead. We are making Sky Miles more valuable by offering members more ways to use Miles on Delta. Miles' currency launched last December and customer response has been strong. By the end of the year, we expect nearly 1 million customers will have used Miles to upgrade their experience. This revenue stream is projected to deliver over 100 million this year ahead of our initial expectations. We expect this to continue to grow as we give our Sky Miles members more options to use Miles anywhere they can use cash with Delta. Corporate revenue was solid, improving 5% in the September quarter on top of the 12% improvement the same period of the last year. Domestic led with 8% revenue growth, offsetting a modest decline in international corporate revenue. In our most recent corporate travel survey, 86% of travel managers expect to maintain or increase their travel spend in 2020. Leisure revenues remained healthy, growing 7% for the quarter with very strong demand during the peak summer travel season. Our MRO grew 9% in the quarter and we are confident in our goal of roughly 20% improvement for the full year. Similar to the freight operators, we are seeing pressure on cargo revenues which declined 17% on both lower volumes and yields. This is consistent with last quarter's decline. Turning to some specifics on unit revenues in the quarter, total unit revenues were up .5% at the midpoint of our guidance on .9% higher capacity. Passenger unit revenues were up .7% over prior year as strength in domestic and Latin more than offset headwinds from FX and pockets of non-US point of sale softness along with the impact of lower fuel costs. We continue to optimize our leading domestic network with revenues growing .8% on .2% higher and a sustained unit revenue premium to the industry of nearly 120%. Revenue and margins grew in every domestic hub with revenue improvements of 10% in our coastal hubs and 6% in our core hubs. Boston performance led the system again with 24% increase in revenue and a five-point improvement in margin. Internationally, revenues grew by .1% as .1% capacity growth offset a .9% decline in Prasm, including more than one point of currency headwind. Latin was our best performing entity with .6% Prasm improvement. In the Atlantic, we saw strong US point of sale continuing to offset weakness in European point of sale as currency was the major factor during the quarter driving nearly all of the .6% Prasm decline. Pacific is the only entity where revenue was down over prior year. This was due to a decline in corporate travel driven by tariff impacts on the automotive and manufacturing sectors and lower leisure demand to and from China. While Pacific is facing some near-term headwinds, we continue to see long-term opportunity for growth and profitability improvement. Looking forward, December quarter total revenue is expected to increase more than 5% on unit revenue growth from revenues of flat to up 2%. We are seeing solid corporate and leisure demand with revenue growth driven by premium products, loyalty, and MRO. Sequentially, December quarter Prasm is negatively impacted by the timing of JB settlements and Jewish holiday calendarships. Excluding these items, underlying Prasm growth remains consistent at approximately .5% in both 3Q and 4Q. For the full year, we now expect to achieve approximately 7% revenue growth on full year capacity growth of .5% while sustaining our 110% unit revenue premium to the industry. While still in the planning stages for 2020, the strong demand environment and our commercial initiatives and our relaunch to service to India support our expectations for another year revenue growth in excess of GDP. As always, we remain mindful of the economic backdrop, changes in fuel price, and the industry landscape. Our initial planning assumptions for 2020 call for three to four points of capacity with a point of that capacity related to our relaunch of service to India. Generally, capacity growth will be focused in areas of strength that support our long-term plans. This includes further optimization of our domestic network and growing our global presence in conjunction with our partners. Our premium products and non-ticket sources like American Express and our MRO business are expected to continue to outpace our main cabin revenue growth into next year as we build on our strong 2019 results. We will provide more details of our capacity growth and commercial initiatives for 2020 and beyond in our upcoming investor day in December. In closing, a more diversified revenue base along with our pipeline of Delta-specific initiatives give us confidence in our ability to achieve the high end of our plan for 6% to 7% revenue growth in 2019 and sets us up nicely for another year of revenue growth in excess of GDP in 2020. And now I'll turn it over to my good friend Paul.
Paul Haney
CFO
Thanks, Clint. Good morning, everyone, and thank you all for joining us. We're delivering against our investor day plan to drive top line growth, margin expansion, and consistent returns to our owners. Year to date, our top line has grown 8%. Operating margins have expanded by over 200 basis points, and we've grown earnings per share by 30%, driven by strong core fundamentals in our extended Amex agreement. We've also generated $4 billion of free cash flow, meeting our full year target in the first three quarters of the year while also reinvesting in the business. Our investments continue to drive strong returns, supporting the long-term growth potential of the business. Our after-tax return on invested capital on a trailing 12-month basis is 15.9%. This represents more than 300 basis points of improvement since 2017, while our invested capital base has increased by nearly $2 billion. Turning to September quarter results, we delivered solid performance in the quarter with pre-tax income of $2 billion and a pre-tax margin of 15.7%, two points higher than last year. Fuel was volatile during the quarter, but average prices remained below prior year levels. Total fuel expense decreased $249 million on 18% lower market fuel prices, including a $49 million benefit from the refinery during the quarter. Our refleeting initiatives drove a .1% improvement in fuel efficiency during the quarter, keeping us on track to deliver a 2% fuel efficiency gain for the full year. While non-fuel unit costs in the quarter were up 2.4%, total unit costs were down 2% as a result of those fuel prices. During the September quarter, we announced a pay increase for eligible ground and flight attendant employees effective October 1st. This had a modest impact on the September quarter and has about a one-point impact on CASIMX in the December quarter. In addition to the pay increase, we are making investments in staffing and resources to ensure that our people can continue to deliver an industry-leading product for our customers in light of the strong demand. We expect these investments, which provide the foundation for sustainable growth, will add about one point to non-fuel costs in 2020. Our current plan assumption for 2020 is non-fuel unit cost growth of 2% to 3%. We'll provide more detail on that at our December investor day. In the December quarter, we are also seeing an approximate one and a half impact to unit costs from the markup of liabilities related to long-term disability and retirement benefits. We do not expect there to be any impact from these adjustments on 2020 costs. Our investments combined with these accruals are adding approximately three points of CASIMX pressure in the December quarter and resulting in expected non-fuel unit cost growth of 4% to 5%. Non-operating expenses for the quarter were $65 million higher than prior year, primarily due to higher pension expense consistent with our 2019 guidance. For the full year, we continue to expect non-operating expense in the range of $525 to $575 million. Looking forward, we expect December quarter earnings to be in the range of $1.20 to $1.50 per share. This equates to a pre-tax margin of .5% to 11.5%, which is down from prior year as we saw in the previous year. We expect the non-operating gain to be $1.5 million of one-time gains, including the sale of Delta Global Services last year. Excluding this non-operating gain, our pre-tax margin is expected to improve over prior year, and we expect our operating margin will expand by more than 150 basis points. For the December quarter, we are forecasting fuel to remain below prior year levels, with all-in fuel price of $2 to $2.20 per gallon. We expect total unit costs to decline again in the December quarter as a result of this. With a solid fourth quarter outlook, we are on track to grow full year earnings per share by more than 20%. Turning to the balance sheet and cash flow, at the end of the September quarter, adjusted debt to EBITDA was 1.7 times at the low end of our target leverage ratio of 1.5 to 2.5 times. During the September quarter, we generated near $2.4 billion of operating cash flow, reinvested $800 million into the business, and invested $150 million to support our new strategic partnership with Latam. This produced free cash flow of $1.4 billion, meeting our full year free cash flow target of $4 billion in just nine months. Our full year core capex guidance of $4.5 billion is unchanged, including $100 million as part of Latam agreement to acquire 14 A350 aircraft. This recent transaction with Latam is an exciting opportunity for Delta and is an example of how our balance sheet enables strategic moves that expand our competitive strengths. We continue to consistently return cash to our owners, in addition to investing in the future growth of the company. During the September quarter, we returned $468 million to shareholders. For the year, we remain on track to return approximately $3 billion, in line with our commitment to return at least 70% of free cash flow to shareholders. Our consistent repurchase activity and 15% dividend increase in the third quarter demonstrates our continued conviction on the durability and sustainability of our business model. We've been able to invest in the business and return cash to shareholders while maintaining low debt levels and improving the funded status of our pension as part of our commitment to maintain our investment grade ratings. These financials are a validation of our strengths, which continue to deliver industry leading results and drive long-term value for all of our stakeholders. And with that, I'll turn the call back over to Jill to begin the Q&A.
Jill Larkin
Vice President of Investor Relations
Jill Larkin Thanks. And before we go to the Q&A, if we can just, that time of year when we announce our December Investor Day this year, please mark your calendars for December 11th and 12th. We'll be back here in our hometown of Atlanta. For now, just mark your calendars. We'll send out more information as the date gets closer. So with that, Jake, if we can have the instructions for the analysts on how to join the queue.
Jake Kennedy
Coordinator
Jake Kennedy Of course. If you are an analyst and would like to ask a question, please press star one on your telephone keypad. Keep in mind, if you're using your speakerphone, make sure the mute function is released so that signal can reach our equipment. Once again, star one for questions. We'll hear first from Michael Lindenberg with Deutsche Bank.
Michael Lindenberg
Analyst, Deutsche Bank
Michael Lindenberg Oh, hey, thanks. Hey, good morning, everybody. I guess maybe this is a question to Ed. If you can just give us an update on kind of where things, to the best of your knowledge, stand with respect to the tariff situation and, you know, the potential impact to Delta and, you know, is it new aircraft orders? Is it ordered aircraft as they deliver? Any color around this topic would be great.
Ed Basten
CEO
Thanks. Ed Hoffman Thanks, Mike. It's aircraft as they are being delivered, which we have expressed our concerns that this is kind of a retrospective tariff on decisions taken in the past. That said, we're evaluating all of our options. We do not expect the cost to incur any cost of tariffs through the end of this year. We are expecting some deliveries out of mobile in terms of 321s, and those do not carry a tariff. And looking forward, we're examining our options next year to make sure that we mitigate any increase to the prices that we've already negotiated with Airbus. So at this point, you know, we're looking at our options. I'm not going to get into any details around the options since it's still pretty fluid at the moment. But we do not expect this is going to be a material cost to Delta, certainly not in the near term.
Michael Lindenberg
Analyst, Deutsche Bank
Ed Hoffman Okay, great. And then just a quick follow up to Paul. I just, I'm not sure if I heard it right. You talked about the CAPEX associated with the LATAM A350s, and maybe that was just the amount that hits in 2019. Did you say 100 million or did I hear that right?
Paul Haney
CFO
Paul Haney Mike, you heard that correct. That's expected in the fourth quarter of 2019.
Michael Lindenberg
Analyst, Deutsche Bank
Ed Hoffman Okay, great. Thanks, everyone.
Jake Kennedy
Coordinator
Paul Haney And once again, Starwin, if you have a question, and as a reminder, please limit yourself to one question and one follow up question. Moving on to Dwayne Finningworth with Evercore.
Dwayne Finningworth
Analyst, Evercore
Dwayne Finningworth Hey, thanks. So just playing back to the summer, it feels like you tried to flex up and respond to the environment. And that has obviously driven some expense and overtime, some airport costs. Can you comment on the quality of the incremental traffic that you picked up? Was it high quality or was it low yielding? And is this something that you plan to repeat in 2020? If not, why isn't it a tailwind to the 2020 cost outlook?
Ed Basten
CEO
Ed Hoffman Hey, Dwayne, this is Ed. I've said a number of times, second quarter as well as the third quarter, we certainly were a beneficiary of the max not operating. That said, we don't believe we've got a significant amount of new incremental growth coming from that. The majority of the growth clearly was the strength of our own brand, strength of our product and the services which continues to outperform anything that we've seen historically. And the cost that we talk about are not just due to the high demand. Remember, we ran a load factor of 90% from April all the way through August, pretty much. But we also had an incredibly volatile weather pattern this summer that gave us very limited recovery options. So the heightened load factor expectations, the fact the max was not out, the weather all created an environment that we've got to reinvest to make certain that next year, because I expect the share, any share we picked up, we're going to retain going forward, we're better prepared to handle the volumes in 2020.
Dwayne Finningworth
Analyst, Evercore
Dwayne Johnson Maybe a longer term question about South Florida. How do you think about the growth prospects for that market longer term and potential connecting opportunities with the Latam partnership? Is this about getting a bigger presence in South Florida for Delta or is it about building out from Atlanta to Point South? Thanks for taking the questions.
Glenn Hauenstein
President
Dwayne Johnson Thanks for the questions, Dwayne. It's a little bit of both. I think if you think about improving the connectivity to the existing Latam infrastructure in South Florida, there's a little bit we probably have to add to replace some of the flow that's existing today on American. But it's not, we're not creating a new hub, we're not creating a new giant connecting complex. We're doing selective ads. So think of it, if you think about Miami as a hub and you think about our size in Dallas or Denver or Chicago, probably looks a lot more like that to make sure we have key feeds that will go over Miami. And then really work with Latam once we get ATI to continue to develop Atlanta and our other US gateways as the primary connecting points for the South America traffic. So I think we have a pretty good plan that takes the best of both, best connecting complexes in the US. And best service in the local markets. And I think that's going to be a great platform for growth moving forward.
Joseph Denardi
Analyst, Schieffel
Thank you.
Jake Kennedy
Coordinator
We will now move to the next question and that will come from Helene Becker with Cowen.
Helene Becker
Analyst, Cowen
Thanks, operator. Hi, everybody. And thank you very much for the time. So I think this might be a question for Paul. As I look at those actuarial assumptions you changed, you mentioned that it doesn't flow through to next year. But I think you were also spending some money to bring your pension plans into closer funded status. So I was wondering if it's possible for you to give us an update on that.
Paul Haney
CFO
Good morning, Helene. Those two issues are somewhat unrelated. The actuarial changes relate to the term disability program. And this is actuarial tables that are updated every few years. And we've seen a little bit of an increase in trends. So we have to mark up that liability one time. It hits that P&L and that's why it's not expected to repeat this year or next year. As to the pension, you know, we continue to strive to target 80% funded status by the end of 2020. And so far, the assets are on strong trajectory this year with strong returns. Our pension expense, as we cited in the prepared remarks, is really a function of last year's returns as that gets spread over a full year. So as we head into 2020 and we get those updates both on the funding, as well as the investment returns, we'll have more detail at Investor Day on 2020.
Helene Becker
Analyst, Cowen
Okay. Thanks very much. I don't have any other questions.
Jake Kennedy
Coordinator
We'll now move to the next caller. And that will come from Joe Cayado with Criticfees.
Joe Cayado
Analyst, Criticfees
Thanks very much. Good morning. Paul, maybe just picking off where Helene left off there. On 2020, I'm not asking for explicit cash flow guidance for 2020, obviously, but just hoping you could walk us through some of the puts and takes in operating cash flow for next year. Things like cash taxes, you just touched on the pension there. But any other moving pieces that we should be aware of?
Paul Haney
CFO
Good morning, Joe. Not materially. Obviously, we see growth in the business. We see growth in the Amex portfolio as we continue to work our way up to nearly $7 billion by 2023. Those are some good sides in the business. We have articulated a belief that we will be a cash taxpayer in 2020. That's not expected to be a huge headwind for us. So we see consistent cash flow generation in 2020 at this point, and we'll provide those details at Investor Day as well.
Joe Cayado
Analyst, Criticfees
Okay, I appreciate it. My second question on free Wi-Fi, whoever wants to take this, it's obviously something that your business travelers demand. So that's an important box for you to check. But it also feels like it's a consumer data play. I was hoping you could talk a little bit about maybe the second derivative commercial opportunity from that initiative, if you will, just perhaps in terms of what it can do for merchandising or just learning more about every passenger and every seat. In other words, how do you monetize free Wi-Fi over time?
Ed Basten
CEO
Hey, Joe, this is Ed. I've again been vocal on this. I think it's something that our customers not just demand but deserve. I think the main benefit to me is the connection that they will continue to have to the brand and the strength of the brand and our selling proposition. But then, you're right, there is a second derivative order with respect to any commercial opportunities that we could create around that service. We're not ready to talk into detail yet. We're still a ways off from announcing the exact start date. We're learning a lot on the technical capacity that we currently have and any additional changes we need to make. But we're on a path to getting there, and I'm excited by it. I think it's going to be a great new service to our customers when we get there.
Joe Cayado
Analyst, Criticfees
Thanks for the time, everyone.
Jake Kennedy
Coordinator
And now moving on to the next caller, and that will come from Savi Sitt with Raymond James. And Savi, you may be muted. Please unmute.
Savi Sitt
Analyst, Raymond James
Thanks. Hey, good morning. Sorry about that. I know it's early stages, but I was wondering if you could help me understand a little bit more on the 2020 cost outlook. It almost seems that you're indicating that you over earned this year because the cost is about catching up to your current market share, but you also had a lot of cost by paying overtime for all your crew suits to meet the capacity needs this time. So I was kind of wondering how it adds that incremental one point and how should we think about that cost outlook for next year?
Paul Haney
CFO
Good morning, Savi, and thanks for the question. You know, the pressure that you cited and certainly what we've called out going back to some conferences this fall was real. And as I articulated, we felt a little bit like bursting at the seams with all the passenger loads and some of the weather pressure that we saw. And undoubtedly some of the staffing investments that we'll make will help mitigate some of that. But it's really about arming our people with the tools and resources they need to serve our customers in an expanding base. Our total revenues are up 15% over the last couple of years. And there's investments in that process that we need to continue to make in order to drive the quality that our customers are used to, to continue to earn that revenue. So it goes beyond that. And as we said, we'll give more details at Investor Day.
Ed Basten
CEO
Savi, this is it. If I could add to that, you know, we've given a long-term trajectory on non-fuel cost of being around 2%. And when we can go below that, we do as we've been, I think, for the last couple of years. That means occasionally we might be above that, but I think our long-term trend line is that 2% is a good target for us. I would not say that we over-earned this year. We certainly have had costs both in Q3 and Q4 related to the high volumes that we had. I think this is about as infrastructure investments that continue to better serve the growth, whether it be in airports and technology and our people and our service providers as it is, you know, dealing with just the pure volumes of a very busy summer. So this is a long-term investment that I'm confident is going to have long-term returns.
Savi Sitt
Analyst, Raymond James
Does that make sense? And if I might just ask a smaller across question on 4Q, just on trainers, just expectations there for I might have missed it.
Paul Haney
CFO
Sorry, Sawi, on trainer?
Savi Sitt
Analyst, Raymond James
Yeah.
Paul Haney
CFO
Oh, trainer is expected to have a slight loss for the quarter that's built into our fuel price guidance. We have some scheduled maintenance on a couple of units that's going on now that's expected to be completed in early November. But overall, the refinery continues to operate well.
Savi Sitt
Analyst, Raymond James
All right, great. Thank you.
Jake Kennedy
Coordinator
And next we will hear from Hunter Kaye with Wolf Research.
Hunter Kaye
Analyst, Wolf Research
Hey, everybody. Good morning. Ed or Glenn, we'll be thinking back to Simple Affairs in 2005. I'm wondering why that failed. And as it's core, this is really a loyalty question. Is there a thought to maybe trying something like that again, given such clear product distinctions between their types and the segmentation era?
Glenn Hauenstein
President
No, Hunter. I think Simple Affairs might have been too simple. And maybe as an industry, we weren't ready for it. We didn't have the sophistication to really manage it well. And I think that's really the infrastructure we're putting in place now and how we see the evolution of pricing occurring over the next year. One of the things that you would have to admit about industry in general is it's transactional and it's not really trusted very well. And I think we've earned that because sometimes you go look and the flight you want to take on a Monday morning is $500 and sometimes it's $1,200 and sometimes it's yet another number. And I think what we're doing with all of the data that we're collecting is we're trying to bring more stability to that pricing model over time. And it's not really Simple Affairs, but it's more reliable affairs. And it's not a revolution, it's an evolution. So we're on a journey on this and we're trying to be less transactional and more customer driven. And we're not at our destination yet and it will take several more years for us to get there. But I love the question because I do think it's a sense of how do we become a better consumer brand? And I think one of the things we have to do is to have trust from our consumers.
Hunter Kaye
Analyst, Wolf Research
That's great. Thank you, Glenn. And then, Ed, maybe for you, the third runway, Heathrow, is that a done deal? And how can you leverage the airport work that you've been doing here in the US with your ownership stake in Virgin and maybe have a seat at the table for how that extension how that looks over there as it happens? Thanks.
Ed Basten
CEO
I don't believe it's a done deal. I think it's certainly something that's needed. I think there's a lot of work going into the determination of the cost, the long-term impact to the city. We're going to provide certainly through Virgin our perspective on a build there, but we are a relatively small share of overall Heathrow. So I'm not sure we're going to have much of a voice in that process.
Hunter Kaye
Analyst, Wolf Research
Okay, thanks.
Jake Kennedy
Coordinator
And now we'll go to a question from Jeannie Baker with JP Morgan.
Jeannie Baker
Analyst, JP Morgan
Hey, good morning, everybody. For Glenn, the 10% Razum premium, that's driven by about 20% domestically and basically flattish on the international, if I'm correct. Why don't you think you get a Razum premium on international?
Glenn Hauenstein
President
I think it depends on the entity. And of course, each international entity is different. We get a premium in the transatlantic. We have not gotten her premium historically in Latin America. And I think that's one of the reasons that we are so excited about the La Tom transaction is our offering really wasn't what it needed to be to drive revenue premiums being the number four carrier. So I think that was one of the things that we thought we needed to have a structural improvement in our offering in Latin America in order ultimately to drive significant premiums. And I think we achieved that in the long run, not today, but over the long run by securing La Tom. And then in the Pacific, there's a lot of different, it's a small entity for us. And we have made significant improvements there, but our stage length is really working against us. And I think as we transition through to Haneda next year, we've told our investors we're on a multi-year transformation. And one of the things we'll talk about at our investor day is we're arriving at our destination finally in Asia. And that'll give us the building blocks, I think, to drive premium with the products that will drive premium and with the introduction of the Delta One suites and the premium economy. I think we're well positioned to drive premiums in the Pacific as well over time.
Jeannie Baker
Analyst, JP Morgan
Helpful. Thank you for that. Second on loyalty, maybe for Paul, maybe for Ed. I think everyone recognizes that loyalty represents a moat around the business. But it's not clear to me how some of your annex assumptions, the path towards that $7 billion figure, how that gets altered by a US recession. I've got all the data on what happens to air travel demand. But what are your recessionary assumptions in terms of quarterly mileage sales, card openings, consumer spending? I know loyalty is more durable than air travel, but I still don't know how durable.
Ed Basten
CEO
Well, Jamie, I'll take that. Obviously, we don't know what the economic outlook over the next five years and the $7 billion number that we have disclosed is our target together with Amex over this timeframe. It doesn't necessarily indicate that's recession proof. I mean, certainly it's sensitive to spend, probably the single biggest element that we have in there. But we also have modeled what happened in 2009 and how quickly spend did return. It's one of the reasons why we're creating not just greater loyalty through the card and the brand portfolio, but also giving avenues for currency to be used as dollars. I think it's actually been one of the real nice innovations we've brought to the market this year that we're giving alternative use for currency and people can spend and conserve cash. So I would say it's our target. Could there be bumps along that way? Certainly it's not a flat guarantee, but I think it's our best estimate together with Amex what we expect to see over the next five years. And at the same time, even through the process, this year while you have some economic concerns, I wouldn't say significant concerns in terms of consumer spending, we're still seeing growth on the card portfolio at double digits.
Jeannie Baker
Analyst, JP Morgan
Is there a quarterly minimum in terms of what Amex is obligated to purchase in terms of miles? Or is there a scenario where if spend was soft enough, they would have enough miles and it could just drop to zero for a period for Delta?
Ed Basten
CEO
We're not going to get into any details of the contract, Amis. You can appreciate it.
Jeannie Baker
Analyst, JP Morgan
Okay, fair enough. Thank you, everyone.
Jake Kennedy
Coordinator
Rajiv Lalwani with Morgan Stanley will have the next question.
Rajiv Lalwani
Analyst, Morgan Stanley
Hi, good morning, everyone. Ed, Paul, a question for you. You provided some good color on costs in the next year, but as we think about just over the next several years, how do we get comfortable with your ability to bring those costs back down to that target 2% or below level when you've got a pilot deal that's out there and you're likely going to be decelerating some of that capacity growth back to more normalized levels, if you will?
Ed Basten
CEO
Rajiv, I'll take that. The 2% number is what we've given you in the past and we continue to see that hold. We'll provide a lot more color when we get to investor day as to how we see the 2020 cost outlook, but one of the pressure points we're also facing in 2020 is that our gauge in 2020 is actually going to be relatively flat year over year. That's been certainly a source of productivity for us on unit cost. We expect to see that pick up again in 2021, so that's going to be another pressure that we're facing in the short term, but we'll give you our perspective on that when we give you the details. We have faced our labor pressures in the past. We expect whatever deal is cut with the pilot is going to be within the frame we've talked about.
Rajiv Lalwani
Analyst, Morgan Stanley
Okay, and then Glenn, actually a follow-up for you. You talked about a pretty strong demand environment. The supply backdrop seems pretty favorable, but from what we can tell, at the same time you're pointing to a resin that's nearly flattish once you take out the card benefit. I know there's some puts and takes there, but can you just reconcile those two dynamics? They seem to be at odds with one another.
Glenn Hauenstein
President
I think we were trying to get to that in the call, so I appreciate the question that our lift prasm, which is what's coming off the tickets, is really very flat between 3Q and 4Q at about one and a half percent. So the trazem decline between 3Q and 4Q is really previous year accounting adjustments, which didn't occur this year. And so that's what we were trying to say in the call. I'm sorry if we weren't clear enough, but thanks for the question because I do want everybody to understand that the revenue coming off the tickets themselves is positive. It's consistent at about one and a half up between 3Q and 4Q.
Jake Kennedy
Coordinator
I'll
Rajiv Lalwani
Analyst, Morgan Stanley
leave it there. Thanks.
Jake Kennedy
Coordinator
And now moving on to Joseph Denardi with Schieffel. Joseph, can we go ahead with your question?
Joseph Denardi
Analyst, Schieffel
A lot more about the MX Partnership than you used.
Jake Kennedy
Coordinator
Joseph, we are not hearing your question clearly.
Joseph Denardi
Analyst, Schieffel
Is that better?
Jake Kennedy
Coordinator
Yes, please continue.
Joseph Denardi
Analyst, Schieffel
Ed, you and Glenn could ask about the MX Partnership a lot more than you used to. Analysts asked about it a lot more. I still think investors don't know what to make for sure, except on the valuation of the company. So it suggests that more needs to be done. So I'm wondering when you think you'd be in a position to consider segmenting the business that so investors can see profitability from a financial standpoint. Thank you.
Ed Basten
CEO
Joe, you are still breaking up. If I understood your question, it's along the lines of are we prepared to increase the segment disclosure relative to the American Express loyalty component of our business? Is that right?
Joseph Denardi
Analyst, Schieffel
Yes, that's right.
Ed Basten
CEO
We're always evaluating how we provide the best insight for our investors and to the drivers of our opportunities for the future. We've improved some of the disclosure and certainly while we have to work within the confines of our contractual obligations to Amex, the confidentiality provisions. I think it's a valid question. It's a fair question. It's something we need to continue to think about how we get greater visibility. It's a very important source of revenue for us today. It's certainly a growing source, probably growing faster than most other revenue components we have in the business. And it's certainly margin accretive. We can debate how you want to cost those miles, but it's certainly highly accretive to us. So I think it's a fair question. Don't have an answer for you quite yet, but we're going to keep looking at it.
Joseph Denardi
Analyst, Schieffel
And then, Ed, given the value of the Amex agreement and how valuable you think it can be, why isn't Sondeep's role a C-level position? Thank you.
Ed Basten
CEO
Did Sondeep ask you to ask that question? Sondeep and the loyalty team are incredible contributors and highly valued. And I wouldn't go on title or definition. I've got great visibility to Sondeep and I see him just about every week on it. So he's a great asset to the company as well as his entire team.
Joseph Denardi
Analyst, Schieffel
Thank you.
Jake Kennedy
Coordinator
And now we'll move to a question from Catherine O'Brien with Golden Tracks.
Catherine O'Brien
Analyst, Golden Tracks
Good morning, everyone. Thank you so much for the time. So, you know, year to date, you've been seeing some nice growth in some of your non-ticket revenue categories like travel-related services and, of course, loyalty revenue with the new Amex deal. Can you maybe walk us through some of the puts and takes on these non-ticket revenue streams into next year? Is there still room to look at some more products or, you know, should we expect to see growth accelerate in some of your insular businesses? Thanks.
Glenn Hauenstein
President
Premium products. Well, I'll talk a little bit about premium products and maybe turn that over to Gil for some of the answers like the MRO. Clearly we see room for growth there and that's been on a different trajectory than base ticket fares. And as you saw, we grew premium products by 9% in the quarter, which was above the, of course, average total revenue growth at 6.5. So we continue to see that moving forward. And it's really, we think, our ability to, A, price those products given the increasing demand that we see from consumers on them, but, B, also continuing to increase the number of channels we distribute them through. And as you know, we've been working to do that more on our digital channels, but also through their travel management companies and our partnerships and through the OTAs. And we're seeing some great early results on that, but it's got a ways to go over the next years, months and years. So we continue to see that as being able to grow even through maybe a challenging economic environment. Yeah, this
Gil
Unknown
is Gil. I would just add first, just a shout out to our tech ops team for, I mean, they're the best in the business, but the MRO business for us here today, it's up about $120 million year over year, about 23%. So we're seeing strong growth in the current year. As you look forward, some of the investments that we've made in terms of capacity for new generation engines, in particular the Rolls Royce Trent engine and the Pratt-Witten gear turbofan, those volumes start to ramp next year as well, albeit
Tim Mates
Communications Officer
those
Gil
Unknown
will tour in three or four years, but we'll benefit from some of that tailwind as well in the MRO business as we move forward.
Catherine O'Brien
Analyst, Golden Tracks
That's great. Thanks. And then maybe just one quick follow up on cost. And I think you already alluded to this, Ed, but that's fine. I'm sure I've got it right. In your 2020 CASM outlook, the 2% to 3%, there's a potential new pilot deal is contemplated in that number, is that correct?
Ed Basten
CEO
Katie, I'll take that. We are not going to comment to a pilot deal or in any nature. 2% to 3% is our best estimate. What our cost will be next year, we're not going to get into the details relative to our negotiations.
Catherine O'Brien
Analyst, Golden Tracks
Okay, understood. Thank you very much.
Jill Larkin
Vice President of Investor Relations
And Jake, we're going to have time for one more question from the analyst.
Jake Kennedy
Coordinator
Great. And that last analyst question will come from David Vernon with Bernstein.
Ran Yao
Analyst, Bernstein
Hi, this is Ran Yao speaking on behalf of David Vernon. So just to clarify, don't go back to the CASMAC's guide into 2020. The one point step up, is that something that you can potentially offset with other cost initiatives like One Delta?
Paul Haney
CFO
This is Paul. Thanks for your question. Excuse me. One Delta continues to pay big dividends for us. And while we expect a level of investment back into the product and the infrastructure is unarticulated, we're always striving to find some of that productivity. And as we've said before, we'll detail more about the 2020 cost outlook at Investor Day in December.
Ran Yao
Analyst, Bernstein
Got it. Thank you.
Jill Larkin
Vice President of Investor Relations
That's going to wrap up the analyst portion of the phone call. I will now turn it over to Tim Mates, our communications officer for the analyst or the media portion.
Tim Mates
Communications Officer
Good morning, everybody. And thank you to the members of the media for holding on. We have a little bit under 10 minutes of time to take questions. I'll just remind everybody, as we said earlier with analysts, please, if you would limit your questions to one, and so we can get through as many of these as quickly as possible. Once again, press star
Jake Kennedy
Coordinator
one if you have a question. We'll hear first from Elliot Blackburn with Argus Media.
Dwayne Finningworth
Analyst, Evercore
Good morning. Thanks for taking the question. Curious how the trainer refinery is going to adjust to the higher renewable fuel blending requirements that the Trump administration is proposing begin next year.
Paul Haney
CFO
Good morning, Elliot. This is Paul. We are in full compliance with our RINS requirements under the RFS standard and have done a good job of managing through that volatility that we've seen over the last several years. And I'm confident that the team will be able to continue to address that. We continue to advocate on behalf of small and independent refiners that long-term solutions have to be identified, but we're managing through that in the short term.
Dwayne Finningworth
Analyst, Evercore
Do you think that this doesn't sound like you're concerned that this added cost is going to affect the refinery's kind of viability long term?
Paul Haney
CFO
We certainly think that it can result in added costs. We don't believe necessarily that it affects the full viability, but it does have economic impact to the region and our ability to continue to drive those results at the refinery.
Joseph Denardi
Analyst, Schieffel
Thank you.
Jake Kennedy
Coordinator
And now we'll move to the next question and that will come from David Koenig with Associated Press.
Unknown
Unknown
Good morning. This is Forehead. You gave a figure on TV for hiring this year and next year. Can you go over those targets and how many will be pilots, for example, and then overall how much of that hiring is just replacing people who retire or leave and how much of it is actually pure growth?
Ed Basten
CEO
Sure, David. We haven't given out the specifics by job classification for next year, but we've been hiring at a rate of about 6,000 new employees coming into the company for the last couple of years, and we expect again going forward next year at a similar level. Pilots are going to be increasing in numbers due to retirements. The retirement age really starts to ramp up in the next two to three years, and so those numbers are going to grow as well as to accommodate some of the growth that we've seen in the business. And one of the things that we'll be doing a bit differently than we did this past year is we're going to be hiring earlier in the year and continue to keep the hiring going through the year rather than have it in more discreet periods. So we'll have all our new hires in position, hopefully ready to handle as much of the new volume that's going to be coming in next year and not be caught off guard. In total, I'd say probably at least half of the 6,000 we're talking about are retirement replacement of workers that are retiring, half to two-thirds, and then there's kind of some growth as well.
Unknown
Unknown
Okay, I'm a little unclear. Pilots, will you grow the overall number of pilots? Next summer you'll have more.
Ed Basten
CEO
Okay. We just haven't given the number, but we're going to be growing our pilot hiring too, yes.
Jake Kennedy
Coordinator
Okay,
Unknown
Unknown
got it. Thank you.
Jake Kennedy
Coordinator
And next we'll hear from Ted Reed with Forbes.
Ted Reed
Analyst, Forbes
Thank you. Thanks for taking the questions. I have two questions. First for Glenn, if I look at what you're doing this quarter, it seems like you're growing at southernmost major airport on the east coast in Miami and the northernmost in Boston. Is that a good way to look at it?
Glenn Hauenstein
President
I don't think we've announced any plans to grow Miami yet, but as I outlined in the earlier call, I think we will add some key spokes into Miami. It won't be giant, but I think we have had a successful growth in Boston. And as you know, this past quarter we just took back our terminal. That terminal was constructed almost 15 years ago and opened, and this is the first time that we've occupied the terminal that was built for Delta. And I would assume that we will be the leading carrier in Boston in terms of revenue in 2020. So yes, we've done a lot of growth in Boston.
Ted Reed
Analyst, Forbes
All right, thank you. Secondly for Ed, as you look at the impact of the tariffs, is your response and your ability to respond going to be based on mobile and taking more production from mobile? And do you have any priority in getting the production from mobile?
Ed Basten
CEO
Well, certainly mobile is going to be very important for us going forward. And yes, that's going to be the focus of our domestic strategy to be getting our 220s, our 321s via mobile as Airbus continues to ramp up that production capability. I'm not going to get into any longer term ideas we have because obviously it doesn't necessarily help you on the wide bodies, but we're evaluating options there. And as I said, our goal is to mitigate any potential tariff exposure.
Ted Reed
Analyst, Forbes
All right, thank you.
Jake Kennedy
Coordinator
Now, Leslie Joseph with CNBC will have the next question.
Leslie Joseph
Analyst, CNBC
Hi, good morning. Thanks for taking my question. This is about basic economy. I've been noticing that the fair differences between main cabin and basic seem to be going up. I mean, across various routes. When you guys started, I know you started a long time ago, but maybe a couple years ago it was like $30, $40. Now seeing sometimes $100. Is that kind of across the board? What kind of benefit are you seeing from that?
Glenn Hauenstein
President
Well, you know, a basic economy is not something that we want to grow. It's not really a premium product. And it's, as we've outlined before, a defensive product against ULCCs. We want to have best in class product, whatever people's needs are. And for people who only care about the lowest fare possible, I think we have by far the best offering. And the differential between that and the main cabin, it hasn't been an intentional shift in separating those out. But I think what we're testing in many cases is what are people willing to pay for that? And sometimes in business markets, it's a bigger differential. And I think maybe that's what you're looking at. A market basket level of all markets, the difference has only been a couple of dollars different. But I think at individual market levels, it may be greater.
Leslie Joseph
Analyst, CNBC
Okay. When did that start, that larger gap? It was about $30, $40 just a couple years ago.
Glenn Hauenstein
President
Yeah, I think you'd have to give us what markets you're looking at, because each one of the markets is managed individually.
Leslie Joseph
Analyst, CNBC
Okay. Like Transcon, for example.
Glenn Hauenstein
President
Right. Well, again, I think we could get back to you with some more details, but the intent has not been to move up the ladder significantly.
Leslie Joseph
Analyst, CNBC
Okay.
Jake Kennedy
Coordinator
Thanks. And looks like we'll take our final question today from John
John Byers
AFP
Byers with AFP. Hi. Thank you for taking my call. We've seen a fair bit of data showing that there's weakness in the manufacturing sector in the U.S. right now. There's a strike that's been going on for weeks now in Detroit, which is one of your hubs. Are you seeing any weakness right now in your demand forecast looking forward for the U.S. in general? Obviously, we've had more talk about a possible recession in the next couple years. Any shift at all, any weakness compared to the few months ago?
Ed Basten
CEO
John, this is Ed. No, not at all. We had a, as I mentioned a number of times on this call, we had record summer in terms of both volumes and revenues, all-time high revenues for us, and the domestic system is what produced those records. Our domestic revenues were up 8% in the third quarter, and we continue to see in advanced bookings the domestic consumer being quite strong. We expect the holiday period to be a strong period. Looking ahead, we don't have a great view into 2020 since it's pretty early for us on our booking curve, but our business is heavily levered to the U.S. consumer, and the U.S. consumer is doing quite well and is preferring to open.
Joseph Denardi
Analyst, Schieffel
Thank you.
Tim Mates
Communications Officer
With that, we'll conclude today's call. We, as has been mentioned earlier, we look forward to seeing everybody on December 11th and 12th here in Atlanta, and we're grateful for your time today. Thank you.
Jake Kennedy
Coordinator
And once again, ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation, and you may now disconnect.
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