Delta Air Lines, Inc.

Good morning, everyone, and welcome to the Delta Airlines December quarter and full year 2020 financial results conference call. My name is Kathy, 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, and I now would like to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead.

Thanks, Kathy. Thank you. Good morning, everyone, and thanks for joining us for our December quarter and full year 2020 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian, our President, Glenn Hauenstein, and our Interim Co-CFO, Gary Chase. Our entire leadership team is available for the Q&A session. Ed will open the call with an overview of Delta's performance and strategy. Glenn will provide an update on the revenue environment, and Gary will discuss cost and liquidity in our balance sheet. We've extended our call today to 90 minutes total to make sure we have plenty of time for questions. For analysts, we ask you to please limit yourself to one question and a brief follow-up so we can get to as many of you as possible. After the analyst Q&A, we'll move to our media questions, after which Ed will provide some closing remarks. Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the investor relations page at ir.delta.com. And with that, I'll turn the call to Ed.

Thanks, Jill. Good morning, everyone. This morning we reported pre-tax losses of $2.1 billion for the December quarter and $9 billion for the full year. capping the toughest year in Delta's history. We've been saying all along that this recovery wouldn't follow a straight line, that demand choppiness as COVID infections rose across the country, and government and public health officials issued travel advisories on revenues of $3.5 billion for the fourth quarter, which is 30% of last year's levels. And although we still have a tough winter ahead of us, we're encouraged by the progress that's been made on the vaccine front, and are confident that Delta is positioned to successfully lead our industry into recovery as the year unfolds. While 2020 was a challenging year, we delivered results for all of our stakeholders. For our employees, we prioritized protecting their health and safety and preserving our culture. For example, throughout the past year, we have offered and continue to offer an extensive employee testing program and pay protection programs for employees diagnosed, exposed, or at high risk of COVID-19. We have had remarkable volunteerism, up to 40,000 employees taking unpaid leaves throughout the summer to protect jobs and preserve cash. And in fact, we still have over 10,000 employees in the month of January out on unpaid leaves. And we have made it through this year without furloughing any employees. Our emphasis on taking care of our people is reflected in Delta's recognition this week by Glassdoor as one of the best places to work for the fifth year in a row, coming in seventh overall on a list of 100 large companies, the highest rank Delta has ever received, all in the face of a pandemic. Really incredible work by our team. For our customers, we're keeping them at the center of our recovery. Our health and safety efforts from being the only major U.S. airline that continues to block middle seats to partnering with with leading names like the Mayo Clinic, Emory Healthcare, Lysol, and Purell in developing the DeltaCare standard, to launching the industry's first COVID-tested transatlantic flights with no quarantine on arrival, are all targeted at restoring consumer confidence in travel and reopening borders, which will be an important driver of revenue growth in the future. Our customers recognize the outstanding service our people provide with an all-time high December net promoter score of 71, up 20 points year over year, and by Business Travel News, naming Delta the top airline for corporate travelers for the 10th year in a row, and once again coming in first place on all 12 metrics that they measure in the survey. That customer preference and loyalty is what underlies our revenue premium and has never been stronger. And finally, for our shareholders, We secured our liquidity position and rescaled our cost structure. We reduced liquidity risk by raising over $25 billion in capital since the pandemic began. With approximately $17 billion of liquidity, our adjusted net debt, however, only increased $8 billion year over year, and we don't expect that net debt will increase going forward. We've swiftly removed costs from the business, with three consecutive quarters of operating expenses declining by nearly 50% or more, increasing the variable nature of our cost structure. In fact, in the December quarter, our all-in unit costs were down 4.5% year-over-year, despite flown capacity being down 44%. That is a remarkable achievement and credit to all Delta employees for making that happen. And by keeping our costs under control, We leveraged the modest increase in net sales to reduce our average daily cash burns $12 million a day for the December quarter, half of what it was in the September quarter, and a decrease of 90% since the early days of the pandemic in late March. Turning to 2021, we expect the March quarter to look similar to the December quarter, with the March quarter revenues at 35% to 40% of March quarter 2019 levels, and our cash burn for the quarter holding at $10 to $15 million per day. We expect that will be followed by an inflection point this spring as vaccine distribution continues, travel restrictions start to ease, and consumer confidence begins to grow, hopefully resulting in cash burn reaching break-even or better by the second quarter. And as the year progresses, we expect demand will start to accelerate, as vaccinations become more widespread and the virus is in a contained state, and customers gain greater confidence to make future travel commitments. This should enable a sustained recovery to begin in the second half of 2021 with a return to profitability this summer. So as we work through this environment, we're focused on five things. First, as always, we're committed to keeping our culture intact and our employees engaged. The Delta people are our most strategic assets. They have done a tremendous job this year, and together we'll lead our airline through the recovery. Second, we'll continue to prioritize the customer with a focus on health and safety and the maintenance of the industry's strongest network, thereby increasing loyalty and preference for our brand. Customers have shown they're willing to pay more for the quality of our network, product, and our service. The gains we've achieved in customer satisfaction position as well to drive sustainable revenue growth in the future. Third, we'll maintain our focus on innovation, which will enable our employees to improve the customer experience and drive efficiency through the business. And innovative thinking will power our ability to tackle big challenges in front of us, like our goal of achieving carbon neutrality in the next decade. Fourth, we'll drive a competitive cost structure. Given the changes we've made over the last year, Our goal is to sustain our non-fuel unit costs at or below 2019 levels by the December quarter of this year on roughly 75% of 2019 capacity levels, displaying continued agility in managing our costs. And finally, we're committed to debt reduction and creating long-term shareholder value, including continuing to protect our owners so that they can participate in future upside without dilution. Because for investors, While the near-term demand path is murky, industry fundamentals remain intact. Following almost a year of subdued travel, customers are beginning to exhibit behavior that is indicative of pent-up demand. Shopping visits across Delta's digital channels are significantly outpacing the passenger volumes we're carrying. In our most recent corporate survey, 40% of respondents expect full recovery by 2022. Our partners at American Express are also seeing encouraging signs, whether it's cardholders holding on to their points in anticipation of redeeming them for air travel. For a recent survey that suggested approximately 70% of respondents expect to take a trip in 2021 after not traveling in 2020. Although it will take time, customers want to travel again when they feel it's safe. They feel they've had a year of their life taken from them, and they're starting to get ready to reclaim it. Until then, We're fortunate to have the support of the U.S. government, which recognizes the importance of the airline industry, and we thank Congress and the administration for passing the COVID relief bill last month. As a result of that bill, we anticipate receiving approximately $3 billion in additional payroll support funds, largely on terms similar to the initial CARES Act program. These funds have been critical in saving thousands of industry jobs during an unprecedented level of demand decline. And it's why the U.S. airline industry is in the best position to recover from the pandemic over any other international market. So while 2020 was a difficult year and challenges will continue in 2021, I'm encouraged at some of the data that we're seeing. And I'm proud of the foundation that we've built at Delta. This company is well positioned to emerge in a stronger competitive position from this crisis and will continue to lead our industry in the years ahead. And with that, I'll turn the call over to Glenn. Thanks, Ed, and good morning, everyone. As Ed mentioned, we started the December quarter seeing encouraging demand trends, but with rising COVID cases and travel advisories, we began to see some weakness around Thanksgiving and into December. Despite that softness, the peak periods continue to outperform non-peak periods, and we've seen sequential improvement in total revenues, which recovered from being down 80% in the September quarter, to down 70% in the December quarter on sellable capacity that was down 62%. On January 3rd, we had a $50 million ticket revenue day and carried more than 250,000 customers. Both of these were the highest since the onset of the pandemic. And despite having meaningfully less inventory for sale, given our middle seat block, we outperformed on passenger revenue generation in the first nine months of the year. This is a testament to customers' willingness to pay a premium for the Delta difference. Leisure markets and some destinations are the best performers in our network. With our approach of targeting sellable capacity to match demand, we are biasing restoring capacity to leisure markets. As a result, roughly one-third of our domestic capacity is currently deployed into leisure destinations. Our coastal hubs, especially New York and Boston, are still some of the weakest areas in our network, with demand in those hubs only 20 to 25% recovered. International demand remains weak and is limited to essential travel. That said, we continue to work towards opening additional COVID-tested lanes of travel with no quarantine on arrival, similar to our Atlanta to Rome and Atlanta to Amsterdam flights. This will be important in restoring confidence in long-haul international travel as vaccine rollouts continue. Our premium seat strategy is holding up well. Domestic premium revenues performed in line with main cabin in the quarter. A good outcome considering that we're continuing to operate a largely leisure-driven environment with a higher proportion of premium seats held back due to our middle seat blocks. As all of you are aware, corporate demand continues to be depressed and was only 10% to 15% restored for the quarter. Corporate revenue was about three points higher than the September quarter, with small and medium accounts, which make up half of our corporate revenues, recovering five points faster than large corporates. While the passenger revenue environment remains challenging, we're encouraged that efforts to diversify our revenue streams have paid off. Our American Express remuneration in 2020 with nearly $3 billion, down only 30% on a year-over-year basis. In fact, American Express has shared that spending on our co-brand car portfolio has performed in line to slightly better than their overall car portfolio spend in 2020. In the December quarter, MRO revenue was down almost 30% relative to the same period last year, while cargo revenue was up 10% on a year-over-year basis. This marks the first quarter of cargo revenue growth since the December 2018 quarter. Our December quarter results reflect the challenges that the pandemic has brought, not just to Delta, but to the entire airline industry. I am incredibly grateful for the efforts of the entire Delta team in managing through the challenging year that we faced. Now that we think about 2021, we see three distinct phases to the year. And for each phase, we have levers to help us react to the emerging demand environment. In the first phase, we expect demand shopping to continue, the booking curve to remain more compressed, and the results to be similar to the December quarter. In response, we'll focus on making sure that our sellable capacity largely aligns with the emerging demand environment. For example, our January and February domestic schedule seats will be down 3% to 6%, versus the non-holiday period in November. That will result in our March quarter sellable capacity being approximately 55% lower relative to the same period in 2019, consistent with the expected 60 to 65% revenue decline. We'll also continue to leverage our non-ticket revenue streams like cargo, loyalty, and MRO that we believe should continue to outperform passenger revenues. In the second phase, vaccination distribution continues, travel restrictions and advisories begin to ease, and customer confidence begins to grow. As that happens, we expect to see an extension of the booking curve, resulting in a cash-led recovery with revenue recovery to follow. We anticipate this will happen in the spring and will result in us achieving our cash firm break-even target. In response to the second phase, our middle seats will be a very powerful tool for us, one we can use to add capacity in a very cost-efficient way, generating a meaningful margin tailwind. In the final phase, vaccinations become more widespread and offices begin to reopen. We expect that to occur in the second half of 21 and as a result in a sustained improvement in demand and yield, with progression in cash generation as the booking curve normalizes. With the recovery initially fueled by leisure demand, Delta's success will be driven by our superior connecting economics to our core hubs domestically and our partner hubs internationally. With 34 new aircraft deliveries this year, we'll also leverage higher gauge and more efficient aircraft that produce lower seat costs, more premium seats, and a better customer experience. This will allow us to capitalize on our brand affinity and upsell opportunities, which are enabled by the elimination of change fees for U.S. customers and the redemption of e-credits. It will take longer for corporate demand to return, but we are encouraged by the results of our recent corporate survey. Our corporate accounts are telling us that they largely anticipate returning to their offices and travel in the June and September quarters. They are also telling us by the end of 21, half are expecting to return to 50% to 100% of pre-COVID domestic travel and up to 50% of pre-COVID international travel. To our corporate customers, our commitment to you remains unchanged. Delta is ready when you are. We will be ready to serve our corporate customers by leveraging the strongest domestic and international networks, rebuilding focused cities and point-to-point flying based on customer needs and by capitalizing on our efforts to always put the customer experience at the center of what we do. We're optimistic for the future, having built the right foundation and focusing on what we can control. We are confident in our ability to successfully navigate the post-pandemic recovery. And with that, I'll turn the call over to Gary. Thanks, Glenn, and good morning, everyone. Let me touch on the fourth quarter in 2020, and then I'll turn to the outlook for costs in the balance sheet as we head into 21. Our December quarter pre-tax loss of $2.1 billion is about $500 million better than the September quarter, given the revenue improvement Glenn just discussed, combined with strong cost discipline. We reduced costs by approximately 50% from 2019 levels for the third consecutive quarter. More importantly, our costs were up just 6% from the third quarter on 30% capacity growth. And three-quarters of that increase came from higher fuel. Total unit cost, including fuel, was down 4.5% compared to 2019 on 44% lower-flown capacity. Our average daily cash burn for the December quarter was $12 million. Half of the third quarter is $24. We closed the year with $16.7 billion in liquidity. an adjusted net debt of $18.8 billion, up about $8 billion versus year-end 2019. Now, as we look into the year ahead, improving demand fundamentals will underpin a transition of our financial focus, from protecting our liquidity to positioning the company for a return to profitability and free cash flow. I'll explain our approach to costs on our balance sheet as we make this transition. Let's start with cost. We need to stay flexible and maintain our discipline in order to position the company for the return to profitability Ed mentioned, as we expect continued shoppiness and demand in the early part of the year. We've already taken structural steps to resize our business. Our two largest cost drivers, fleet and headcount, are both 15% to 20% smaller than they were in 2019. Headcount reductions were a difficult but necessary decision. It was hard to see 18,000 talented and dedicated coworkers leave, but it's a testament to the Delta culture that these reductions were achieved entirely through voluntary means. We accelerated our fleet transformation by retiring aircraft with relatively short remaining lives and simplified our fleet by eliminating two entire families while increasing our gauge. On a run rate basis, these changes will drive more than $400 million in annualized cost benefits. As we add capacity in 21, we will drive higher utilization of our system, and we have room to rebuild our network from current levels at low incremental costs, approximately 40% to 50% of our December quarter non-fuel chasm. Our goal is to produce and sustain non-fuel unit costs below 2019 levels by the fourth quarter. That cost focus will be a key driver of profitability later in the year when demand returns. Looking to the March quarter, we're preparing for stronger demand by reactivating aircraft and restoring our people to full hours, driving about $200 million in additional costs versus the December quarter. Our March quarter total operating expense will be 35% to 40% lower than March quarter 19, with a total unit cost including fuel down 5% to 10% on approximately 35% lower flown capacity. Let's move now to capital, the balance sheet, and liquidity. As we begin the year, conditions are similar to where we exited 2020. A modest uplift in net sales should offset the cost investments we're making in the quarter, and as a result, we expect average daily cash burn between $10 and $15 million, similar to the December quarter. With further improvements in net sales as customers gain confidence, we expect our cash burn to cease this spring. With that goal in sight, we're turning our focus to how we will balance reinvesting in the business while reducing our debt levels. Given our expectations for cash flow in 21 and proceeds from the PSP extension, we expect our current adjusted debt levels to be the high watermark for that important metric. For the full year, we're expecting $2.5 billion in gross capex, a significant reduction from the $4 to $5 billion that we were spending pre-COVID. We have $1.3 billion of aircraft purchase commitments for 34 new deliveries this year, which we have the option to fully finance, and about $1 billion in non-aircraft capex. Including retirements, we expect our fleet count at the end of 2021 will be 15% smaller than at year-end 19, with total fleet declining from about 1350 to about 1130. An equal priority is to work on our balance sheet by reducing our liquidity and paying down debt. We have approximately $1.8 billion of debt maturities in 21 and $2.1 billion in 22. our debt has an average interest rate of 4.6%, which will drive approximately $350 million in quarterly interest expense. However, we will begin reducing those expenses by paying down debt this year. We do not have mandatory pension contributions until 2025 under airline relief, but we expect to make at least $500 million in voluntary contributions this year. In terms of a quarter-end outlook with about $3 billion of PSP support expected from the government of March quarter, we project ending the period with $18 to $19 billion in liquidity and adjusted net debt of approximately $18 billion. Let me close by saying this. The Delta difference has never been more important, and I'd like to thank the Delta team for delivering for each other and for our customers amid the industry's most challenging environment ever. Because of your dedication, we will emerge from the crisis stronger and more resilient than ever. With that, turn the call back over to Jill to begin the Q&A.