Delta Air Lines, Inc.

Good morning, everyone, and welcome to the Delta Airlines December quarter and full year 2019 financial results conference call. My name is Shannon, and I will be your coordinator. At this time, all participants are in a listen-only mode until we conduct a question and answer session following the presentation. As a reminder, today's call is being recorded. I would now like to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead, ma'am.

Thanks, Shannon. Good morning, everyone, and thanks for joining us on our December quarter and full year call. Joining us from Atlanta today are our CEO, Ed Bastian, our President, Glenn Hauenstein, and our CFO, Paul Jacobson. Our entire leadership team is here in the room with us for the Q&A. 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 does contain 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 our 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 ir.delta.com. And with that, Ed.

Thanks, Jill. Good morning, everyone. We appreciate you joining us today. Earlier, Delta reported our full-year results, including a December quarter pre-tax profit of $1.4 billion, which is up $240 million compared to last year. Our EPS in the quarter increased 31% to $1.70, with pre-tax margins expanding 140 basis points to 12.4%. The December quarter performance was a great finish to what was truly an outstanding year on all fronts. Strategically, with the American Express renewal and the announcement of LATAM and Wheels of Partnerships. Operationally, with best-in-class completion factor and on-time performance. And financially, with industry-leading revenue, profits, and cash flow. 2019 was the best year in our history. The top line grew 7.5% to $47 billion. positioning Delta as the largest carrier by revenue in the world. We delivered $6.2 billion in pre-tax income, an improvement of more than $1 billion over 2018, setting a new record for Delta and the U.S. airline industry. Full-year earnings per share improved 30% over the prior year, and we generated $4.2 billion of free cash flow, with $3 billion returned to owners. These results simply would not be possible without the incredible work of our Delta team. I am pleased we'll recognize our employees' performance in 2019 with $1.6 billion in profit sharing. This marks the highest profit sharing in Delta's history and is the sixth consecutive year of $1 billion or more in profit sharing. We could not be happier for our people. For our customers, we continue to run the world's most reliable airlines. We ended the year with 165 cancel-free days across the entire Delta branded system, with 281 zero cancel days on our mainline operations, representing an entire month's worth of improvement over the record performance that we set in 2018. Recently, Delta was named 2019's most on-time North American airline by Flight Global for the third year in a row. Exceptional operational performance, along with unmatched customer service is why more people than ever are choosing to fly Delta. In 2019, we flew 204 million customers, a 6% increase over 2018. And over the last decade, we've significantly improved the quality and reliability of Delta's operations. And as a result, our customer satisfaction scores have more than tripled. Domestic net promoter score is now regularly in the 50s, with nearly five-point improvements over the course of 2019. Delta's continued investment in our operations, products, service, airports, and technology are reshaping customers' perception of our brand. And our journey to improve continues daily. And we plan to keep climbing by powering our culture of service through technology. Last week, I had the honor of delivering the opening keynote address at the Consumer Electronics Show, where we outlined Delta's vision for the future of travel. unveiling innovative technologies to better serve customers and give our employees the best tools to use in the world. Delta is leading the industry in every dimension. In five short years, Delta will celebrate its 100th anniversary. It's amazing to think how far we've come, but even more exciting to look ahead. 2020 is off to a good start. The U.S. consumer and travel demand remain healthy. Our brand has strong momentum, and we have a pipeline of commercial initiatives that support another year of revenue growth in excess of GDP. Consistent with our plan that we outlined at Investor Day last month, we expect to grow 2020 revenue by 4% to 6%. This is on top of the 15% growth that we've delivered over the last two years. Our full-year earnings outlook of $6.75 to $7.75 per share positions Delta for the sixth straight year of pre-tax profits in excess of $5 billion. Free cash flow is also expected to remain strong at $4 billion in 2020. This would bring Delta's three-year cumulative free cash flows over $10 billion by the end of this year. By leveraging a solid financial foundation with increasingly diverse revenue streams and building brand momentum, we are demonstrating an unprecedented level of earnings, and free cash flow consistency for this industry. This is enabling us to reinvest in our business at a level that others cannot match. This reinvestment is extending our competitive advantages, and when combined with a great brand powered by the very best people in the business, we have the engine to drive meaningful long-term value for our customers, our employees, and our owners. With that, I'd like to turn the call over to Glenn and to Paul to go through the details of the quarter. Thanks, Ed, and good morning. First, I'd like to thank the entire Delta team for delivering a record year in 2019. It's their hard work that enabled $47 billion in revenue, an increase of more than $3 billion over prior year. The 7.5% growth was broad-based, with strength in both business and leisure, improvements in domestic and international, and double-digit growth in loyalty and MROs. Total unit revenues improved 2.8%, sustaining our revenue premium to the industry of more than 110% and outpacing non-fuel unit cost growth of 2%. We continue to diversify the top line with 53% of our revenue generated by premium products, loyalty, and other non-ticket revenue sources. Premium product revenue grew 9% in the year to $15 billion. We've continued to improve and invest in the premium experience, and we are seeing increasing product affinity. On average, 70% of customers that fly in premium products purchase an equal or better product on a future trip. We are providing SkyMiles members more options to use Miles anywhere they can use cash with Delta. Since launching Upsell with Miles a little over a year ago, 1.2 million customers have redeemed Miles. contributing $135 million of incremental revenue, and we continue to expand capabilities, most recently with the ability to pay for bag fees using miles. Brand preference for Delta is stronger than ever. We are seeing momentum in customer satisfaction scores, and in 2019, business travel news named Delta the world's best airline for business travel for the ninth year in a row. More customers are choosing to interact directly with us, with 52% of trips purchased directly from Delta during the year. Digital is our fastest growing distribution channel. Mobile revenues grew by 35% driven by an active user base of over 24 million customers. Total loyalty revenues grew 18%. We added the highest number of SkyMiles members in our history with over 6 million new enrollments. We also acquired 1.1 million new program cards setting a new record and marking the third consecutive year of more than 1 million pro-brand acquisitions. We deepened our customer engagement to drive 12% growth in mileage redemptions in pro-brand spend. This is the fifth year of double-digit growth for portfolio spend. In 2019, our renewed contract with American Express benefited revenue by approximately $500 million. Delta's close relationship with American Express is a strategic advantage that is truly unique. In 2019, total contributions grew by 20% to $4.1 billion. We expect this to reach $4.4 billion in 2020 and grow to nearly $7 billion by 2023 on a combination of improved rates, continued acquisition momentum, and spend growth. Enhancing customer loyalty and building trust is at the heart of our business and together with American Express, we are finding new and innovative ways to reward customers for their loyalty. Later this month, we will be launching our new portfolio of card offerings. The redesigned cards deliver new and richer rewards that will continue to increase customer benefits and drive future card acquisitions. Turning to the December quarter, we delivered a strong close to the year with top line revenue growth of 7.2%. Total unit revenue growth of 2.4% beat guidance and marked our 11th consecutive quarter of improvement over prior year. Passenger unit revenue was up 1.4% over prior year, led by strength in domestic and Latin. Holiday travel came in ahead of expectations driven by strong consumer sentiment and a condensed booking period between Thanksgiving and Christmas. Domestically, we saw strength in business and leisure demand with solid yield gains on peak travel days. Premium product revenue outpaced our expectations, growing 9% in the December quarter on top of last year's 10% growth. Domestically, revenue was up 7.7% on a 1.6% improvement in unit revenues. Corporate demand was strong at up 6%, and premium products remain a key contributor, up 11% year-over-year. Similar to the September quarter, we saw revenue and margin improvement in every domestic hub, with revenue up 10% in coastal hubs and 6% in core hubs. Internationally, revenue grew 2% on Platin. Platin was the best-performing entity with 6.3% PRISM improvement, a three-point improvement sequentially. Brazil and Mexico both delivered double-digit PRASM gains. In the Atlantic, PRASM declined 1.6%, almost entirely driven by FX. Pacific revenue stabilized on a three-point sequential PRASM improvement. While China remained soft, trends improved in Japan, and Delta Premium Select performed well as we continue our fleet and product transformations. With new and reconfigured aircraft now on 80% of our Pacific routes, we have the Delta I suites and premium select products in place. In the March quarter, we expect total unit revenues to increase by 5% to 7% on unit revenues up flat to up 2%. The sequential change in unit revenues from the December quarter is due to lapping last year's American Express contract benefits and MRO engine volume timings. Importantly, present growth remains consistent at approximately 1.5% in both 4Q19 and 1Q20. March quarter expected capacity growth includes approximately two points of leap year and the launch of service to India. In 2020, our plan of 4% to 6% revenue growth is driven by four areas. Strengthening brand preference, better selling and servicing of our products, continuing to win with business and corporate travelers and driving increased loyalty with more customers. Corporate and leisure demand trends remain healthy. The overall outlook for corporate travel is positive. In our most recent survey, 80% of travel managers expect to maintain or increase their spend in 2020. Momentum and premium product revenue is continuing in 2020 with the ongoing modernization of our wide-body fleet, and improvements in how we sell and distribute premium products. We also expect additional growth from American Express and MRO, albeit at a more moderate rate than in 2019. In our network, we are expanding service and coastal hubs, refocusing on opportunities in our core, and developing our partnerships with LATAM. We expect to begin our co-chair relationship in the March quarter. In December, we launched new service from JFK to Mumbai, and revenue trends are ahead of forecast. We expect approximately a one-point unit revenue pressure in the transatlantic as the route develops throughout the year. In the first half of the year, Delta will consolidate Tokyo operations at the preferred downtown Haneda Airport. We will also shift Beijing service to the new Beijing Daxing Airport. These moves are strategically important and are the final steps in our multi-year restructuring journey in the Pacific. Over the last decade, Delta has established a global scale advantage through an unprecedented network transformation and by building a leading portfolio of partnerships around the world. This evolution provides the foundation for an acceleration of returns over the next decade as we mature and grow investments in fleet, partners, facilities, and technology. Delta's continued investment ensures that we extend our competitive advantages, our culture, operational reliability, global network, customer loyalty, and an investment-grade balance sheet to retain our leadership position in the industry. In closing, we delivered an outstanding 2019 and are off to a very strong start in 2020. Now I'll turn it over to Paul.