Q2 2019 Earnings Call
Please standby we're about to begin.
Good morning, everyone and welcome to the Delta Airlines June quarter Financial results Conference call. My name is Jake 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.
Thanks, Jay Good morning, and thanks to everyone for joining us on our June quarter earnings call joining us from Atlanta today are CEO , Ed Bastian, our president Glen Hauenstein, and our CFO Paul Jacobson, our entire leadership team is here in the room for the <unk> session.
And we'll open the call and give an overview of Delta's performance Glen 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 <unk>. 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 deltas SEC filing.
Well also discuss non-GAAP financial measures all results exclude special items, unless otherwise noted you can find a reconciliation of our non-GAAP measures on the IR page at IR Dot Delta Dot com.
And with that.
Thanks, Joel good morning, everyone. Thanks for joining us today.
Our record June quarter financial and operating results demonstrate the delta difference in action.
We're translating our powerful brands unmatched competitive advantages and pipeline of initiatives to drive earnings growth margin expansion and solid returns for our owners.
Earlier today, we reported the June quarter pretax profit of $2 billion with earnings increasing 32% to $2.35 per share.
We expanded operating margins by more than two points and generated $1.8 billion and free cash flow.
We continue to run the best operation in the gold industry by far.
To date, we've achieved 82 days without a single cancellation across the Delta system, a 26% improvement over last year's record performance in four main line product. We've already reached 153 days without a cancellation. This reliability combined with the great service. Our people provide is translating to more customers than ever choosing delta.
As a result, we ran the highest load factors in our history.
Then flew a record 53.9 million passengers in the June quarter, and even with these record volumes. This was the first time in our history. The Delta had zero involuntary denied boardings for an entire quarter.
The strong demand drove an 8.7% improvement in our top line and total revenue of $12.5 billion, which marked the highest quarterly result in our history.
And our momentum continues to build.
Experienced five of the top 10 revenue days in our history just over the last 30 days.
With our people consistently delivering best in class travel experiences for our customers. We are seeing are net promoter scores reached new heights, and our brand affinity growth.
We have the world's most valuable airline brands. One that's mentioned not just among the best Global Airlines, but also alongside top consumer brands. The ascent of our brand as a sign of the trust and preference were earning from our customers through operational excellence and unmatched service. Our people are the very best in the business and they are adults the strongest competitive advantage they keep climbing improving year after year, because our customers count on us to connect them to moments that matter around the world every day.
And not only do they serve our customers, but they continue to get back to the communities, where they live work and serve earlier. This week Delta was recognized by the American Red Cross as the number one corporate blood owner in the country for the second year in a row. This is a fantastic accomplishment.
And I want to say congratulations and thank them for their service. So far this year, we have accrued $739 million towards next Valentine's day profit sharing.
Across the business, we are harnessing delta strength in quality and innovation to drive improvements in the customer experience stronger customer loyalty and profitable global growth.
Deltas financial Foundation, and cash generation are allowing us to sustainably invest across the business at a level no competitor can match.
During the first half of the year, we generated $2.5 billion and free cash flow more than what we produced in all of 2018 positioning us to achieve $4 billion in free cash flow in 2019.
We are investing for the future to ensure that our customer experience and brand continue to elevate while ensuring our employees have the right tools to continue to provide best in class customer service.
One example is the transformation of our domestic narrow body fleet, which is exciting and Glenn will cover the substantial benefits. We expect this to deliver to our customers as well as to our owners.
On the airport front, we will invest over $12 billion and terminal facilities that are key hubs over the next five years. This fall we achieved a major milestone in New York as we open concourse GE. The first of four new Delta Concourses included in our 3.9 billion dollar project at Laguardia.
By taking control of the construction process, we've been able to build a more efficient facility focused on meeting the needs of our customers and by utilizing our investment grade balance sheet that facility will have a long term competitive cost advantage.
We're also making meaningful investments in our customer facing technology Delta Dot Com is one of the top e-commerce sites in the US and we continue to add functionality not only to our site, but also to our fly Delta App.
These are our fastest growing distribution channels with the highest customer satisfaction as more customers are choosing to interact directly with us.
Our technology investments are helping us deliver more customized offers and enabling our employees to further differentiate our level of service.
Through our single view of the customer technology stream, we are increasingly personalizing interactions celebrating milestones and engaging with our customers through their preferred channels as we deepen our customer relationships.
We're also continuing to enhance our onboard experience, we just announced that starting in November we'll launch in industry, leading reinvented International main cabin experience that will make every customer feel even more value. We are also taking steps to provide more options for spending time in flight.
During the quarter, we took the first steps towards bringing free Wi Fi to life by completing a two week test and we will conduct more testing in the months ahead to create an experience customers prefer we are committed to providing the best inflight entertainment in the Sky.
Another point of differentiation.
And finally as part of the foundation for a global franchise, we have built a $2 billion equity portfolio of strategic partners. The most recent addition was our 4.3% investment in Hanjin KL the largest shareholder of Korean air.
We intend to increase our stake to 10% pending regulatory approval. This investment supports the stability and growth of our joint venture with Korea, an important piece of our long term Pacific strategy.
So in summary, we are executing well and we have confidence in our continued momentum.
As a result, we are raising our full year earnings guide to $6.75 to $7 and 25% or $7.25 per share.
Which is a 25% improvement over last year's GPS.
We also announced the board's decision to raise our quarterly dividend by 15% to 40.25 cents per share. This is the sixth year in a row that weve increased the dividend.
And this increase represents a 2.7% yield at yesterdays price.
Importantly, it demonstrates the sustainability of that Delta business model and our shareholder friendly capital allocation strategy.
We've also raised our total shareholder return expectations for 2000 $19 billion to $3 billion on the strength of our free cash flow results and our expectations for the rest of this year.
The business has positive momentum with significant opportunity ahead.
We have a durable foundation of strategic advantages, our culture, leading operational reliability and unrivaled network, our loyalty program and relationship with American Express and an investment grade balance sheet.
These advantages combined with a great brand powered by the very best people in the business provide the engine to drive meaningful long term value for our customers our employees and our owners and now I'll turn it over to Glen and Paul to discuss the details of the quarter.
Thanks, Ed and good morning, everyone I'd like to start by thanking the Delta team.
That's in all operational performance and unmatched service of our people provide are the reason more and more customers are choosing to fly delta.
Their hard work and able to record revenue quarter with a 1 billion increase over the prior year.
The 8.7% growth in the June quarter is the seventh consecutive quarter of top line growth of 7% or more a level that is more than two times GDP.
Demand for Delta remains strong.
Both our onboard products and our Skymiles currency.
Our investment in products Airport service and reliability are reshaping customer perception and driving record satisfaction scores.
This increasing brand affinity supports our revenue premium to the industry, which remains at more than a 110%.
Premium product revenues were up 10% to more than $4 billion on a 7% increase in premium capacity.
With more customers choosing these products and improved distribution premium paid load factors increased by three points year over year.
The loyalty revenues grew 19% to 1.2 billion, including a roughly 100 million benefit from the American Express contract renewal announced in April .
Our loyalty program and relationship with American Express are key drivers of our business and remain sources of true long term competitive advantage.
New acquisitions of Skymiles members. This year are on track to increase at a rate double that of just three years ago.
And more and more of our members are signing up for the Skymiles American Express cards.
But most importantly customer satisfaction is among our loyalty members is at record levels.
During the quarter spend on our co brand cards and mileage uses both increased double digits.
More customers are using miles as currency to upgrade their experience post purchase.
This new functionality has been very well received and is exceeding our expectations with over half a million members using this option since launch earlier this year.
Both leisure and business travel demand remain robust and have improved relative to the March quarter. The shifted Easter to April and peak summer travel season contributed to strong leisure volumes and record load factors.
Corporate revenues remained healthy increasing 6% for the quarter. This was driven by domestic up 8% versus prior year.
In our most recent corporate travel survey, 83% of travel managers expect to maintain or increase their air travel spend this quarter.
This is consistent with last year as pockets of international softness in the automotive and manufacturing industries are being offset by strength in healthcare technology and financial service sectors.
Cargo revenues declined 17% on both lower volumes and yields as industry capacity continues to outstrip demand.
We are actively implementing strategies to mitigate this impact but are very cautious on the cargo outlook for the remainder of the year.
Turning to specifics on unit revenues in the quarter.
Total unit revenues were up 3.8% above our guidance on 4.7% higher capacity.
Passenger unit revenues were up 2.9% over prior year sequentially, improving two points compared to the March quarter, driven by strong demand.
Domestic revenues grew 8.8% were 3.6% higher PRASM. This is the best domestic performance in nearly five years with unit revenue growth in every hub.
Austin led the system with revenues up 25% over prior year on a 10% improvement in unit revenues.
Now with over 140 departures a day Delta is increasingly the airline of choice for Boston travelers.
Internationally revenues grew by 5.3% as we offset a 1.5 point currency headwind to increase our unit revenues by 1.1%.
Well Pacific revenue performance was softer than our initial forecast, we were able to maintain our margin performance versus prior year.
We see opportunity for profitability to improve as we continue to execute on our multiyear Pacific restructuring.
Additional commentary on the entity performance for the June quarter may be found in this mornings press release.
Looking forward to the September quarter total revenue is expected to increase 6% to 7% on a 1.5% to 3.5% improvement in unit revenues.
July is off to a great start with a new number one system revenue day.
Last Sunday or this summer.
This fund okay.
Well the underlying passenger demand remained strong sequentially, we expect TRASM to see about a one point pressure from the Easter holiday timing and a slight deceleration in the transatlantic.
Domestic corporate and leisure demand remained strong premium product growth should continue to lead to main cabin as we monetize the investments we have made in improving the customer experience.
In international currency headwinds are beginning to moderate in the back half of the year as we lap U.S. dollar strength.
Atlantic unit revenue is expected to be roughly flat over prior year as strong us point of origin demand and stable corporate trends are offset by some softer European leisure demand.
In the Pacific We expect unit revenue declines will be similar to the June quarter, but should begin to moderate later this year as we lapped foreign exchange headwinds and as our comps fees.
Latin is positioned to remain our best performing international entity as strength continues in both Brazil and Mexico.
And we expect system capacity to grow by 4% in the September quarter, a modest decline from our first half run rate.
Full year capacity is trending slightly above 4%, including additional capacity from higher completion factor incremental joint venture flying to assist our partners with rounded airplanes and increased charter flying.
I'd like to congratulate our charter team on an outstanding quarter and strong year to date performance.
As we think longer term, our opportunities lie and leveraging both our brand and our scale to grow our revenues expand dealt us competitive advantages and differentiate the perception of delta in the minds of our consumers.
We are targeting our capacity in markets with the best growth potential improving the efficiency and profitability of our core hubs through up gauging.
Well the last 10 years were spent fundamentally transforming our domestic hub structure. We are currently in the midst of the most significant fleet evolution in Delta's history.
We are focused on getting the right aircraft on the right roots, allowing us to deliver really leading customer service focused products and services and expanding our margins.
With over 200 narrow bodies set to deliver over the next four years. We are building a more efficient fleet that best serves the scale of our network. These are larger gauge aircraft with a higher percentage of premium seats, which helped drive deltas margin profile.
Our fleet transformation extends to the international entities as well not only will our fleet become more efficient with new deliveries our entire international fleet will have upgraded interiors, including premium select and comfort plus by the end of 2021.
The improved international product combined with efforts to create a more seamless experience for our customers flying within our partner network gives us confidence in our global ability to continue to drive profitable growth.
The scale of our global network product investments and Delta is best in class service are the foundation for our revenue premium and underlie the improved economics of our recent American Express agreement.
That agreement alone should drive a nearly $7 billion contribution by 2023 double to what we saw in 2018.
In closing, we expect strong demand to continue throughout the rest of the year. Our first half results on pipeline of initiatives give us strong confidence to again raise our revenue growth target to 6% to 7% for the full year.
As pleased as we are with the record June quarter result, we are even more excited about our free runway opportunity.
And with that I'll turn it over to my good friend Paul.
Thanks, Glenn Good morning, everyone and thank you again for joining us this morning.
Our results through the first half of the year show that were delivering against our Investor day plan to drive both topline growth.
Margin expansion and continue to return consistently to our owners.
In the first half of the year revenue has grown by 8% our operating margins have expanded by 200 basis points and we've grown earnings per share by 30%.
We've also generated two and a half billion dollar as a free cash flow more than all of 2018 with $2 billion of that going back to shareholders.
Our after tax ROI see on a trailing 12 month basis is 15.3% as the investments. We have made are driving strong returns.
These results give us confidence to raise full year revenue earnings per share and free cash flow guidance for the full year. We are on track to deliver 6% to 7% topline growth at least 150 basis points of margin expansion and 25% EPS growth.
With results to date and the updated expectations for the full year. We now expect to return $3 billion to shareholders. In 2019. This is a $500 million increase above our initial plan outlined at Investor day.
Turning to June quarter results, we said a June quarter record with pre tax income of $2 billion.
Our operating margin of 17.1% was 2.3 points higher than last year, our pre tax margin of 16% was the highest we've achieved in two years.
We are firmly on track to exceed our target for full year margin expansion and now expect at least a 150 basis points of improvement versus 2018.
We continue to deliver solid cost performance with efficiency gains throughout our operations fleet transformation and one delta initiatives all contributing.
For the June quarter, Nonfuel unit costs were up 1.4% in line with our guidance of 1% to 2%.
This included approximately $60 million of pressure due to higher depreciation expense associated with our decision to accelerate the retirement of the MD 90 fleet by two years to the end of 2022.
This impact is largely limited to the June quarter 31 aircraft were permanently retired.
We will retire another nine of these aircraft by year end and expect MD 90, depreciation to moderate in future periods.
One delta is enabling a more efficient approach to our ongoing fleet transformation as well.
The team has identified a number of opportunities to drive incremental efficiency gains as we transition aircraft into and out of the fleet.
Minimizing friction costs from operating small sub fleets.
We will continue to realize fleet simplification benefits as we reduce an exit another fleet type and the MD 90.
And as with new aircraft such as the Athree hundred 3900, Neo we're streamlining entry into service to minimize unproductive time. This enables crew efficiencies through better training and scheduling management and drives incrementally higher ROI see through less idle time on the asset.
Non fuel unit costs increased 0.6% in the first half of the year, giving us confidence in our full year CASM ex guide of approximately 1%.
In the back half of 2019, we faced tougher cost comparisons from last year's performance as well as decelerating capacity growth.
While fuel is volatile during the June quarter, Brent prices remain below prior year levels total fuel expense decreased $35 million on 4% lower market fuel prices refinery profits of roughly $40 million were flat to last year.
Our re fleeting and one delta initiatives drove a 1.6% improvement in fuel efficiency in the June quarter, and we expect a 2% fuel efficiency gain for the full year.
Non operating expenses for the quarter were $60 million higher than prior year due to lower pension income and a decline in our equity partner earnings.
For the full year, we now expect non operating expense to be in the range of 525 million to $575 million. This is above prior expectations due primarily to these lower partner earnings.
For the September quarter, we expect earnings per share to be in the range of $2.10 to do dollars and 40 cents per share up 25% versus prior year at the midpoint.
This equates to a pre tax margin of 14.5% to 16.5% comparing favorably to last year's 13.6% result.
This includes an expectation for non fuel unit cost growth of 1% to 2% and all in fuel price of 195 to $2.15 per gallon.
This is down from last year and similar to the June quarter.
Our guidance includes an approximately $40 million contribution from the refinery this quarter, which is expected to benefit the September quarter fuel price per gallon by roughly four cents.
Turning to the balance sheet and cash flow our balance sheet remains strong adjusted debt to EBITDA of 1.7 times is at the low end of our target leverage ratio of one and a half to two and a half times.
Consistent with our capital allocation strategy, we continued to proactively address our pension obligation with a voluntary $500 million contribution in the June quarter.
We generated $3.3 billion of operating cash flow and reinvested $1.4 billion into the business. During the June quarter. This produced free cash flow of $1.8 billion, bringing our first half free cash flow to $2.5 billion.
This represented conversion of more than 100% of net income nicely ahead of last year benefited by both topline growth and margin expansion.
Our strong first half performance sets us up to achieve $4 billion in free cash flow for the full year and we expect the net income conversion of nearly 90%.
This includes our expectation for full year Capex of $4.5 billion, which is unchanged from initial guidance provided at Investor day.
Our healthy balance sheet and cash generation enabled us to consistently returning cash back to our owners, while also investing in the future growth of the company.
During the quarter, we returned $497 million to shareholders, including the accelerated buyback earlier. This year total shareholder returns are just over $2 billion through the first six months of the year.
We funded our accelerated buyback in the first quarter with a $1 billion short term loan with cash flow running ahead of plan. We completed repayment of this short term facility earlier than anticipated.
Since first announcing our capital allocation strategy in 2013, we have returned more than $14 billion to owners, we've reduced our fully diluted share count by approximately 25% and increased our dividend for six consecutive years.
But importantly.
We've done that while also investing in our business and our people.
Additionally, we're maintaining low debt levels and improving the funded status of our pension plans as part of our commitment to maintain our investment grade credit ratings.
Our consistent repurchase activity and 15% dividend increase in the third quarter demonstrate our continued strong conviction on the durability and sustainability of our business model.
These results are a validation of our unrivaled network, our dedicated people and our powerful brand.
Our competitive advantages 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 and a.
Hi, Jake we're ready for questions from the analysts if you could give the instructions.
Yes.
Ladies and gentlemen, if youre, an analyst and would like to ask a question. Please press star one on your telephone keypad. As a reminder, please limit yourself to one question and one follow up question. Once again for analysts if you'd like to ask a question press star one.
We will begin with Mike Linenberg with Deutsche Bank.
Yeah, Hey, good morning, everyone, Yes, I have one and one follow up just I guess the first one Glenn you you called out.
Strength in Boston and I think over this last quarter I think Boston was maybe officially entered into the hub I think.
It was also.
Some press out about maybe some other focus cities like Nashville, and Austin as we think about your domestic capacity growth in 2019, Glenn will will more of it be allocated to.
These focus cities or newer hubs or how should we think about the split across your system.
Great question, Mike I think Boston as a true focus city for us that we have commitments over the next year year and a half to take our departure levels up towards 200.
Those of you who are familiar with our Boston operation, we have shared our terminal with various carriers over the year.
Years, and we will take over the entire terminal starting late this summer, which will allow us to continue to grow in Boston and what we've been focused on is making our hubs more efficient. So we can drive higher earnings and targeting those cities that are high growth and Boston, Seattle, Austin, Nashville, Raleigh, all fit the profile of.
Cities were growth and growth through her trial.
Significantly higher than they are across the system in general So that's really been our.
Our thoughts are to continue to grow where markets are growing and to continue to make our existing hubs more efficient.
Okay.
Great and then just jumping over to Paul on the pension the 500 million contribution is there any more required.
Choir to contribute more this year it sounds like maybe you're.
You went above and beyond what you are required to and where is that what's the funded status of the pension pension at this point if you could thanks.
Hey, good morning, Mike. Thanks for the question. So the all of the contributions that we've made our voluntary as Weve talked about at Investor day with airline relief. We have fully completed all of our required funding through 2024, but we remain committed to try to achieve an 80% funded status by the end of 2020 right now we're in the low to mid Seventys. The plan is performing very well in line with equity markets globally, and we expect to be a good year on the return front.
Great. Thank you.
We will now move to the next question and that will come from Jamie Baker with Jpmorgan.
Hey, Good morning, everybody first question either for Glenn for for Gail It's hypothetical.
If you had a substantive portion of your fleet grounded right now from an operational perspective.
What would be the most intelligent and profitable way for Delta to re introduce aircraft in a manner that wouldn't prove detrimental to RASM simply hypothetical how would delta phase grounded aircraft back into its operation hopefully I'm asking in a way you're comfortable answering.
Hey, Jamie this is that actually I'm going to jump the line I'm going to answer.
We know what you're asking and it's really not not appropriate for us to be speculating as to what the other carriers ought to do.
It's clear the Max has been a real is that's had a dramatic impact on our industry I think the reintroduction. When the time comes is going to have to be carefully managed no question.
But in the interim.
We're going to continue to watch and see the developments there, but I don't think we should be.
Looking to second guess or call out the current or the expected actions of our competitors.
Fair enough.
Can't blame me for asking second probably for Paul.
So you continue Delta continues to demonstrate that it's possible to grow revenue at a rate nicely ahead of that of capacity, which.
Of course, ladies waste to the long held view that that wasnt possible similar to my question last quarter could you rank order what drives this I assume loyalty is probably the biggest driver but.
Ooh, we've had significant consolidation there is the phenomenon of segmentation. There is consumer shift from goods to services I'm, just I'm just trying to understand the drivers and better hopes of predicting the sustainability of this trend given that it is a new trend right.
Jamie its Glen I think all of those things that you just mentioned are contributors to it. It is not one thing and it is while we are really excited about the American express transaction that is not the key driver within the quarter for the excellent performance I think.
Is as much.
Being able to charge for products being able to understand where people want to fly being able to put the right products and services in those markets and being able to charge.
Customers for what they are willing to passport and I think it's a combination of everything you just mentioned.
Okay perfect.
Jamie This is Ed I'll, just chime in on Glens response as well.
This is a growing business and I think for years people wondered whether it was mature business, but when you think about what where consumers are looking to go and whether as you say, it's the millennial.
Impact of wanting experience versus ownership, whether it's the baby Baby Boomer segment, that's looking to explore I think technologies had had a huge impact here.
People are more aware of the world than ever before people more interested in seeing the world and connecting with the world than ever before.
And as the best performing airline in a market that's growing at a multiple of GDP, we're really well positioned to see this continue to grow into the future and all the other actions that you talk to other more tactics in terms of how we continue to drive greater value back to consumers, but I think the fundamental demand for this product in this business is very very strong and we're capitalizing on it.
And if I could just squeeze in a third question since you deflected understandably deflected the first just getting back to Mike's question about Boston and reiterating a question I asked about 11 years ago, how do you define hub.
You know I think a hub is a place that we connect traffic and a an endpoint clearly is the opposite of a hub and so to the extent that we are beginning to connect traffic and more and more traffic over Boston.
We would consider it a hub this year, we're connecting almost a thousand people a day from the U.S. to Europe over Boston for example, with our partners started a new service from Boston to Asia, and I think when you think about our ability to connect people through a city, that's what we define it as a hobby.
Okay. Thank you very much gentlemen take care.
Okay.
Well now hear from regime Lalwani with Morgan Stanley .
Good morning, Thanks for the time.
Well I don't want to come back to it so I hear your comments and I guess, just well but.
In particular, when you think about the divergence you're seeing in cargo and passenger or is that something you've seen before as cargo maybe a leading indicator of a potential roll over I'm, just trying to get more and more comfortable with what the demand outlook is as well looking forward.
Well.
Well, we anybody could take the regime, yeah, why you'll cargo is is not.
You know, it's certainly not a big contributor to the total revenues, it's probably less than 2% of our total revenue base you know they the impact we're seeing in in air freight has been across the industry not just the airline industry, but.
You know the major.
Freight and express companies, we're seeing those same impacts I think a lot of the reduction currently is due to the big inventory build last year in advance of.
The terrorists and all the geopolitical trade tension that existed and as a result, you know, there's there's not as much demand for them.
Here in airfreight, so shipping and other forms of transportation are probably getting a higher amount of volumes. So you know, it's it's something that we that's important to us but at the same time I don't think it has really any any direct correlation to what we see our passenger business.
That's helpful and then Paul a question for you on that on the cost side, we've obviously seen.
Capacity tick up.
<unk> for for this year is that not creating a tailwind on the on the cabinet side or is it simply offset by some of the DNA items, you talked about and just generally how do you feel about keeping.
Try and steady I eat inflationary it sort of cost growth going forward given that we're looking at potential labor step ups for you guys for the industry and so on.
Sure. Thanks regime, you know, we obviously have enjoyed in the first half some of the benefit we've seen that in our results with our our non fuel CASM benefiting alongside higher completion factor and more consistent and better operational performance.
Contributing to that that has helped we've been pressured a little bit by some of the revenue index. So with revenue growing at you know more than Ah almost twice the rate of capacity, we see some revenue index pressure around commissions and around a merchant fees et cetera, but all that is good money to span from that perspective, you know last the last half of a 2018, we had negative CASM. So we've got a little bit of tougher comps going in but we feel very comfortable about holding the line on between 1% to 2% in delivering that 1% for the full year, obviously, the additional DNA from the MD 90 fleet, which we absorbed into our regular earnings has pressured that somewhat but we do feel confident you know looking forward. We continue to see really good progress from one Delta you know what's contributed almost $200 million incrementally in the first half of this year over 2018, and we're on track to exceed $500 million.
As a total.
From the one Delta program through the first two years on track to our $1 billion number we're going to need to continue to do that obviously, there's there's there's potential pressures on the horizon, but were constantly diligent about it and we feel good about holding that below that 2% goal long term.
Yes.
Well now hear from Hunter Kay with Wolfe Research.
Hi, good morning.
Good morning couple of questions on Hey, a couple of questions on loyalty.
Hi can you hear me by the way sorry. Thanks.
Yeah, we can hear area.
Alright.
Is there a point where you feel like your loyalty is so strong that you can fully remove yourself from the aggregators that commoditize, the look and feel of air travel airfare.
You know our strategy has been to build something that consumers want to buy and let them choose how they buy it.
And that's led to a continuation of a migration towards delta direct channels.
And Delta loyal customers and I think that's how we see the landscape continuing to evolve. The question is do you want to do a more aggressive and saying no to customers who might want to buy a product a certain way or distributors and the answer is we would never want to do that we would just want to continue to focus on.
Buying directly from Delta and and Delta sites as the better way to buy a delta ticket.
[noise] well why not I mean.
Southwest customers a lot of those guys go straight there without price comparing and I would argue that.
A lot of Delta customers now by Delta Air fare without price comparison, because they feel like its a good value. So maybe this is a 510 year question, but why not maybe say if you're in if you're gonna commoditize, our product and sell it in a way that's not representative of the value. We're getting we're just not going into business with you.
Hunter.
Let me let me offer my my thoughts here, you know, we're going down that direction, obviously I'd say.
10 years ago about one third of our tickets were sold over the online agencies, you know today, we're down to somewhere around 10% to 15% and probably as you look forward you're right Delta Dot com is going to take more and more of that traffic. So.
I don't think we need to put a stake in the ground and say that we won't sell over channels, but at the same time. The online agencies are aware that they need to provide a differentiated experience to our customers in order for us to continue to invest in them and together have our content on their sites.
Okay. Thanks, and then just one more quick one just related to do you happen to know maybe through survey work or whatever how many customers booked directly with you guys without price comparison.
And we have no idea.
Okay. Thank you.
And our next question will come from Savi sets with Raymond James.
Hi, Good morning, I'm, just a question on the cost side, you know with that Paris, I'm wondering if a you know that's having an impact on airport project cost and you know what the implication for just airport costs in general and the Laguardia project project, you're working on in particular, and just tied to that I think they're seeing a lot of just airport project in general and a lot of funding related to that and wondering if forget you know if you're going to start to see funding pressure and if you have these if that just mean translates to higher airport costs or for the industry in general or if we might see some of these kinds of projects getting pushed out.
Good morning, Savi. Thanks for that you know certainly we or we've seen some inflationary and tariff related pressure on structural steel and other elements.
I would say actually a a little bit of a bigger piece has been just general inflation in the areas of New York in L.A. where were constructed.
There's obviously a lot of infrastructure work going on.
And competition for labor is tight that being said both of those projects remain on target on schedule and on budget or the work that the team is doing a has been a phenomenal on the ground in both places and this is one of the strong benefits that we feel we have by controlling the financing and controlling the construction of these projects being able to manage.
Through these things and the team is that the teams have done an amazing job.
So any thoughts and then <unk> and <unk> as you can look at other airports as well as the follow on if we are going to kind of continue to see this kind of.
Increasing clip of the airport inflation or if some of these projects get curtailed, especially as economy, it kind of slows down here.
Well I I think you're going to continue to see airport cost inflation across the board. There was a lot of infrastructure improvement happening not just in our hubs, but across the board, but all of these are customer enhancing and going to make the customer experience better more streamlined with more features and more modern so we actually feel good about it and and those projects are all moving ahead, we feel comfortable absorbing that rate of inflation as we can deliver those products and in line with our general Costco.
Sorry, if I might take a stab at what I think you're getting to is.
When you think about.
The trends in the U.S. aviation industry, the big cities tend to be getting bigger in the small cities tend to be getting a bit smaller and so if you look at Kennedy when we made the initial investment.
During the first year or two RCP. He went up slightly but sitting where we are today by driving them more efficient larger airplanes through those facilities, which you couldn't have done through the previous facilities or C. P is now significantly below where we were just a few years ago and even before the construction. So really these are the enabling projects for the airlines to become more efficient as well.
Okay. That's helpful. Thank you.
And now we will take a question from Brandon Oglenski with Barclays.
Hey, good morning, everyone. So glitter and I want to circle back to this idea of sustainably growing revenue above GDP and I know, we've kind of hit on it at this call like the de Commoditization of the products, but.
Can you talk to have you seen like repeat purchases of these different branded fares are segmented products or is it just like a novelty that could potentially where office consumers. Just go back I think in his seat as a seat.
I think it's become more and more sticky and that's why I think we pointed out the every year the paid load factors in the premium products get higher and higher and higher and we continue to drive loyalty into those products and services. So I think.
Our ability to continue to grow those sectors I think when you look back and say what was wrong with this industry five or 10 years ago as we all thought that it was a race to the bottom and the only thing that matter to consumers was having the lowest fare well, we really figured out when we did a lot of survey in results was that for most customers for 60% of customers. They were choosing on something other than the lowest fare and then when we dissect it that even more with 60% of customers, but really 80% of revenue.
And we weren't really geared towards being able to provide value and that's the.
Whole Genesis of this transformation of Delta and its premium products and services, it's been about providing people what they want to buy.
And Brent and the other the other thing I'd add to that is that you know we've been growing our top line revenues for easily the last two years in the high single digit doubled year on year.
Again multiple of where GDP has been.
And and the diversity of those revenue streams is is powerful whether its loyalty and other other components of that but the other thing is our net promoter scores are at their highest in all in record. So not only are they purchasing these new products are even more satisfied than ever in the services that delta is providing so I think it's quite sustainable and I think it's going to continue to grow at a pretty accelerated pace.
Okay makes sense, because we've always had travel options on hotels and car so.
If I can I want to ask one nerdy analyst question here as you guys are guiding to 6% to 7% top line growth for the year lets say capacity is around 3% gets you close to four for the fourth quarter I think thats, implying t. RASM that would be close to flat is there anything in the guidance that is suggestive of like a slowdown in industry yields or maybe a bit more caution on the economy.
As I said, so you're right. That's a nerdy analyst question no. We're not we're not expecting to see any trend shifts in the numbers, which are probably just being a little conservative in or our long term topline guide.
All right I appreciate it.
And now we'll hear from Andrew Didora with Bank of America.
Hi, good morning, everyone.
Paul actually wanted to get your thoughts here as we head into the back half on.
Just on IMO, 2020, and how you're thinking about that and the impact to jet fuel.
Are there any ways to hedge this is as what we see futures contract show kind of a meaningful step up.
From the end of the year and to to 2020 and does this maybe change your thoughts at all on the refinery.
Well, Andrew good morning, Thanks for that.
At the at the end of the day as we've said the refinery.
Given its diesel and jet production will.
Effectively serve as about a 35% hedge against that so we feel like we're well positioned going into that.
Certainly we've seen a little bit of pressure on the futures curve, but it hasn't been near what the market.
Hello.
Expected or at least.
Thought in extreme cases that it would be so we're continuing to watch it and keep it close the refinery is is performing well we've seen some upward pressure on gasoline and other products on the profitability of that given the.
Recent announcement by PS to shut down their refinery.
And we feel like we're well positioned to be able to continue to deliver those results.
Got it that's helpful on the.
The diesel diesel and jet jet hedge, but and then I guess my follow up question here just on the free cash flow execution. Obviously has been been excellent. This year can you maybe talk a little bit on how sustainable you see this $4 billion going forward.
Particularly in the face of maybe some some rising jet fuel, possibly slowing economy and can you remind us of what levers you have to pull in case.
Any of these scenarios play out.
Thanks.
Well sure we always we always have the flexibility levers on voluntary spending and capital et cetera to be able to manage that which is why.
Our balanced capital allocation strategy is the right one because it can be flexible and respond to changes, but if you look at our our cash flow conversion rates theyve been going up pretty steadily in a huge contributor to that as the American Express deals we've talked about the loyalty program the cash turn versus the deferral that we see some of that to the balance sheet is very strong and thats expected to continue to grow which will enhance our operating cash generation going forward. This year in particular, we've lapped a couple of sizable increases in non cash related expenses.
Principally the pension.
As well as depreciation and amortization. So you see the cash efficiency of the earnings.
Stream, increasing and that should continue as well so the trajectory. We're on we're confident about and and we feel good about being able to continue that performance into the future.
Great. Thank you.
Thanks.
Next question will come from.
David Vernon one moment please.
Hi.
Hello.
Okay, sorry, the moderator wishful thinking there.
Coming back to that theme of infrastructure infrastructure for a second Paul if you think about the amount of money. They are adults and putting into airport projects. The last several years is there a point over the next several years, where you start to get some some some free cash flow leverage off of that investment because were starting from a pretty low base in terms of airport quality around the network I'm just wondering if there if there is a point and investable horizon, where.
On that non aircraft capex could start to fall off a little bit.
Well thanks for that David we also for the for the large projects that we are doing because we finance those in the tax exempt markets or through general airport funds are excluding those from investing activities because they are on a standalone and we repay those over time.
So I think there is theres going to be a steady stream of investment across the airports, whether it's driven by the airports themselves or by US Weve put significant investment into our Sky Club and Lounge program.
For customer satisfaction, and clearly those are paying dividends in the product scores and the revenue performance of the company as well so I don't I don't see the non large infrastructure changing significantly.
As we go forward, but those large infrastructure projects will be here for a little bit little bit of time and.
They will be great for the cost.
And Glenn talked about they create some significant operational efficiencies and scale benefits for us to be able to amortize those costs over higher load.
And maybe just as a follow up.
Glenn that tie in as far as kind of the cost advantage. This creates for you is as as a bigger airline.
As we kind of finish the development of the airport at Laguardia for example, how does that change sort of the competitive dynamics against the lower cost carrier in that market.
No I don't think we want to speculate on how they are going to react to the new facilities, but I do think that we know that in order to accommodate the growth of air travel in New York City, we have to have a bigger facility as if you've used that you understand how constrained it isn't that constrains our ability to put larger airplanes in there that can drive significant cost efficiencies and accommodate growth over time I think we all realize particularly as it's summertime, how constrained New York city or spaces.
And so there's really no way to view.
To put more airplanes in there so we're going to have to put bigger airplanes in there that are more efficient and those facilities are the key enablers for that.
Given your scale benefit, though wouldn't you think that the that the higher cost per claim it might might be more relatively impactful for low cost carrier than it would be for you to absorb.
Or am I, not thinking about that right.
Clearly our business model would be favored in a higher CPM barb.
Okay. Thank you.
They do.
And now we will take a question from Helane Becker with Cowen.
Oh, thanks, very much operator, hi, everybody and thank you very much for your time.
One of the areas that you guys seem to be on the leading edge of the don't talk a lot about is what you're getting.
Regarding environmental and sustainability efforts and I think you are pretty big internationally and that seems to be where there is more focus rather than the U.S. no.
International investors more than domestic investors, but could you maybe talk a little bit about how we should think about your efforts in that regard and.
Whether you think they add to it.
Brandon Salon.
Thank you.
Sure Helane. Thanks, that's a very good question and you're absolutely right as GE is going to become an increasingly.
Important part of our our responsibilities in our governance of our brand and how we operate into the future.
You are right that is probably a bigger.
Point of emphasis in Europe today that it is in the U.S., but it's going to continue to grow here as well.
We've made a lot of commitments as a as an industry as well as the airline and I'm pleased to say that delta is continuing to to meet its commitments and that we've we've made a commitment as a company as well as an industry to reduce our footprint by 50% by the year 2050, which requires that we need to continue to reduce our footprint by up to 2% per year, and which is right in line with where we are today on on fuel and emissions. We've made a commitment as a company to eliminate single use plastics from onboard our aircraft as well as in our lounges in our airports and we continue to make new announcements I just saw the new amenity kits that we've got for international Thats eliminated the plastic we're going to be taken the rappers off the blankets here soon.
Every day there is there's a lot of small efforts all of which add up to a lot of big impact so.
SG is something that we are paying good attention to I think investors will increasingly pay more attention to and it's going to be a point of pride for us for Delta people as we bring forth the.
Lead is leading that effort as well.
And I'd just add this is gill that also sustainability goes hand in hand with the.
Efficiency because the waste is reduce right there was a cost savings associated with that so whether it's fuel as an example fuel efficiency, but everything else associated with waste, we save money when we eliminated.
That's great. Thanks for your help how they may stay everybody.
Retooling inkling.
Our next question comes from Duane Pfennigwerth with Evercore.
Hi, Thanks, and congrats on the strong results.
I wanted to ask you about the accelerated retirement of the MD Ninetys two years early was there a corresponding new order to facilitate that.
How far out does your current narrow body order book take you and have you considered any potentially opportunistic pricing on the Max.
Okay.
Hey, Duane it's Paul Thanks, Thanks for the question, yes, the the decision to retire the MD Ninetys is part of the continued move and fleet simplification driving that through we feel comfortable with our existing order book there were no new orders accompanying that decision as we thought about it and we feel good with that balance and the trajectory that we're on.
To be able to drive to the benefits of fleet simplification significantly reduce the complexity in the business, which is going to translate to better efficiency going forward.
And have you been tempted by any opportunistic pricing on on the Max.
Duane we are very focused on the narrow body transformation that Glen talked about in his comments. We've got a we've made the decision two years ago to invest under 321, and I think that we're going to stay that course.
Fair enough. Thank you and then just for my follow up.
Very strong Latin RASM comps actually get easier much easier in the back half can you just remind us.
What were the main drivers of weakness in the second half of last year was it more Mexico was it was it South America.
Thanks for taking the questions.
It was both Mexico, and Brazil last year, which Uh huh.
Turnarounds in both those marketplaces.
Really those are at the center is a a black turnaround.
Thank you.
Thank you.
Jake we're going to have time for one more question from the analysts.
Thank you and that question will come from.
Dan Mckenzie with Buckingham research.
Oh, Hey, good morning, Thanks for squeezing me in here both of my questions also tied a red and the sustainability.
On corporate revenue I'm, hoping you can elaborate on underlying volumes tied to these larger managed accounts and the smaller unmanaged accounts I'm wonder if there's been a change in velocity here you know one of your competitors has had some pretty substantial operational disruptions.
And I guess I'm wondering to what extent you know there are new revenue pipelines getting turned down from potentially new accounts or is just the corporate revenue story more about getting the existing accounts just to pay more.
Well it really isn't about a corporate accounts get are paying more it really though the yield trends have been very stable this year.
Both domestically and actually slightly down internationally, primarily driven by currency headwinds, but it's really been a volume story and volumes had been up.
Throughout the year, so we've seen very robust volumes, particularly domestically with many weeks being up double digits in terms of the volumes. So I think we're a relatively excited about the broadness of this and clearly there are industries that are growing in their industries that are scaling back but in general the trends have been overwhelmingly positive for volume.
Hmm and I am glad I think that actually ties to the second question I have here and that is just sort of helping to clarify some of the revenue outlook for later this year. It sounds like you know the outlook is factoring in some impact from the Max is coming back and potentially from some elevated macro risk and it sounds like you've got some strong offsets to those headwinds corporate volumes being one of those is should we think about the offsets to some of these risks later this year. It's also being on the international side of the revenue equation ex Europe .
Well I think as we go through the year are really more in the fourth quarter were starting to allow the higher dollar.
And as you know international has a longer sell at advanced cell than domestic so apparel into the fourth quarter should or the mitigation of a headwind should be better as we move through the year and we're also looking at starting to lap some of the weakness in some of the sectors. As you as we mentioned earlier in the call automotive had a has been down and as you might expect with a hub in Detroit and in a very big Midwest programs that had a pretty large impact on us.
So as we get to the fourth quarter were actually lapping those lower comps and so that should actually improve hopefully we can get back to a constructive environment in one of our biggest sectors and ER and so we're really looking forward to a very strong close to the year.
HM very good that's helpful. The job on the quarter, thanks very much.
Yeah, Thanks, Dan Thanks, Dan.
Take that's going to wrap up the analyst portion of the call we will hand, it over to Tom Mason. Our media team is Jack if you could give the instructions to the media for how to get in the queue.
Of course, if you're a member of the media who would like to ask a question. Please press star one on your telephone keypad. As a reminder, please limit yourself to one question and one follow up question. Once again, if you are a member of the media Press Star one at this time well pause for just a moment.
And we'll go first to Leslie Josephs with CNBC.
Hi, good morning, Thanks for taking the question.
Update us on the what's going on with why side and those types. You said you had a two week test in the last quarter, it where the test a this quarter and when do you expect it to be free throughout the network. Thanks.
Oh sure Leslie This is Ed we we did conduct a two weeks and test. It was on a limited scale, we learned a lot about the technical capacity or challenges that you face when you want to open a Wi Fi up free on with a with great a great broadband capabilities across our entire global network. We're now ready to announce when the next three tests will come but they will be coming certainly later this year and you know we're we're we're on a path here and we think it's important that our customers stay connected and entertainment. It's something I think that we will continue to distinguish delta in the sky.
Thanks, and then just one quick follow up on the interview the spring you had said that about 65% to 70% of first class is paid in cash that's first class purely or is that first then like delta one.
Business class.
Essentially our first class product, both domestic as well as as well as international paper factors in that 60% to 70% range, but it's not I wouldn't leave.
[laughter].
What's that.
Sorry, what was that last on your bed blank and give you some of the details importing U.S.
Importantly, it's not cash is cash and the frequent flyers using their mileage to upgrade into those cabins and I think that's one of the real.
When we talk about continuing to increase the diversity and the ability for people to sit up there we're trying to bring more and more ways to get there and that's increasing the distribution has been one of the keys.
Thanks.
[laughter].
And now we'll hear from Traci Rosinski with Reuters.
Hi, good morning.
I'm interested in hearing a little more context on your hedging Korean Air and last night and you mentioned, you're close personal relationship with his whole family did anyone would show family can you talk about pets to opt for a house and quoting the activist fine KCC eye and what role do you expect to have in Korea in their corporate governance.
Hi, Tracy this is Ed we do have a close relationship with the family as well as with the company. We are in contact on an almost daily basis across our our two companies and I'm not going to comment relative to investment how we develop our investment thesis, but you know the investment that we made in the Korean is consistent with the investments you've seen us make in many many of our main partners around the globe. So I don't think there should be anything considered unusual at all about it.
Okay. Thank you.
We will now take a question from Ted Reed with Forbes.
Thank you I have two questions. The first is about the Max when you guys decided not to buy them acts what was the reason your competitors had it.
Had ordered it was it just cost or was there a wait too long or something else.
Well, we listen the Max is a good product and that.
[noise] dismissing it.
Or a competitive tool that or or.
Oh, yes.
We look at all aspects of performance, we looked at the customer a view of product we looked at the cost or from the Oems who looked at the engine deal. We looked at what we were able to do with Pratt Whitney on the geared turbo fan and the commitments that we've we've received in in the the Neal. So it was a it was a comprehensive review it was a close call I'll admit we spent.
Quite a few months, so analyzing and going back and forth, but you know the 321 neo and in aggregate are carried the day for us.
All right. Thank you secondly, I would like to ask about.
Boston.
You said Ah Glenn you said you'd get to 200 is that gonna be it through you. Once you get to 200 and also you mentioned competitors are flying Boston Asia is that something you're interested in.
No I said, our partners were flying from Boston to Israel.
You know we are a partner Korean launch Korea to Boston This year on the 77 and it was an incredible success. So ER they they've been doing quite well.
I think they will expand that service as we move into next year. So we're we've been working with our partners we've been growing our own hub and I. I think you know 200 is kind of our medium term objective here and we think we'll get there in the next 18 to 24 months, but beyond that we'll see how the market grows we think of 200, its a very sustainable and very profitable franchise for us.
Is it important to be the number one carrier in market share in Boston.
No it's important to be the most profitable and most loved.
[laughter] alright, thank you Brian .
Jake we have time for one final question. Please.
And that final question will come from Elliot Blackburn with.
Argus media.
Good morning. Thanks, I wanted to ask you guys touched on this a bit and you bought the trainer refinery years back in part to ensure continued fuel production in the New York market. How does the planned closure of the Philadelphia refinery change deltas outlook for fuel supply and cost in that region.
Elliot This is Paul Jacobson. Thanks for the question you know that that trainer refinery was originally purchased for events just like this as we saw supply contracting.
In the region through various closures back in 2012, we saw this as an opportunity for us to take a little bit more control over production and we've done just that we've taken the refinery and used it in connection with our commercial operations to drive a on average five cent per gallon.
Benefit against our competitors are using the benefits of the refinery and all the logistics expertise that we have that that means that translates to about $200 million per year.
Certainly we would expect to see some rebalancing going on with the lost production from the P.S. facility and we believe the trainer refinery is well positioned to help us offset any increases in the region we might see.
Thanks, I mean, how do you guys continue to seek a partner at that facility or how is this also changing kind of your outlook for refining generally in that area.
You know, we're always looking for opportunities to enhance the Ah the return structure and the the overall structure of how we manage that refinery a we went through the process. We found a we've got multiple investors and and firms interested in talking to us ultimately, we weren't able to put a deal together that met all of our needs and have decided for the time being to remain and the status quo. So we expect no changes in that structure and we put our pencils down on that process.
Thanks very much.
That will conclude today's call. We're grateful for everyone's time and look forward to sharing the great results that we will be talking about in October . Thank you everybody.
And once again, ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation you may now disconnect.