Q3 2019 Earnings Call
And ladies and gentlemen, please standby.
Good morning, everyone and welcome to the Delta Airlines September quarter Financial results Conference call. My name is Jason I will be your coordinator. There's time all participants are in listen only mode until we conduct a question and answer session. Following the presentation.
As a reminder, todays call will be recorded.
Oh wait to turn the conference over to Jill Greer, Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thanks for joining us for September quarter call.
Joining us from Atlanta today, or Delta CEO , Ed Bastian are present, it Glen Hauenstein, and our CFO Paul Jacobson, our entire leadership team is here in the room for the keep an eye session Ed will open the call and give an overview of deltas financial performance.
Addressed the revenue environment, and Paul will conclude with a review of our cost performance in cash flow.
To get in as many questions as possible during the Q1 day. Please limit yourself to one question 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.
The factors that may cause such differences are described in deltas FCC filings.
We'll also discuss non-GAAP financial measures.
Excluding special items, unless otherwise noted and you can find a reconciliation of our non-GAAP measures on the Investor Relations page IR Delta Dot com.
[laughter].
Thanks, Joe Good morning, everyone. We appreciate you joining us today.
Demand for the Delta product is as strong as ever in our powerful brand unmatched competitive strengths and pipeline of initiatives are driving earnings gross margin expansion and sold returns for our owners.
Earlier today Delta reported in the September quarter pretax profit of $2 billion, which is up $350 million from last year.
S increased 30% to $2.32 per share.
Operating margins expanding by two and a half points importantly, we've already generated $4 billion and free cash flow year to date.
Our employees continue to deliver the very best operational reliability in service for customers even against this summer's backdrop of record passenger volumes here for construction projects and difficult weather.
Now had 123 days without a single cancellation across the entire Delta system. This year, a 23% improvement over last year's record performance.
Unprecedented level reliability combined with Great service more team continues is rise higher customer satisfaction and growing brand affinity for Delta.
Year to date or domestic net promoter score has improved more than five points over the prior year.
We're also seeing positive momentum in international net promoter scores with opportunity for further improvement as we continue to upgrade cabin interiors and enhance our customer experience.
Stronger customer satisfaction is translating into higher revenues.
Revenues grew 6.5% to a record 12.
Billion dollars in the quarter.
Now expect to achieve Approx, approximately 7% topline growth for the full year want to thank the entire delta team for producing one of the best quarters in our history, you or the force behind the Delta brand.
That's a recognize your efforts through a challenging summer we've recruited another $517 million towards next February profit sharing this brings the total for the year to nearly $1.3 billion.
In addition, we're making important investments in our people, including improvements to benefits and a 4% based pay increase that went into effect last week for ground employees in flight attendants beyond investments in our people, we're continuing to improve the customer experience to a record number of new aircraft deliveries airport.
Were minimal projects in technology innovations these investments support long term growth industry industry, leading profitability and strong cash flow.
In many ways 2019 has been a transformational year for a company.
We firmly established Delta is the largest airline in the world both on revenues and profits in are solidly on track to produce our fifth straight year with pre tax profits in excess of $5 billion. We have the world's most valuable airline brand. When there's mentioned not just among the best Global Airlines, but alongside top consumer.
Brands, and we're building out our portfolio of industry, leading partners across our business.
Just two weeks ago, we announced a new strategic partnership with Little town Airlines. The agreement adds geographic diversity in a fast growing content, adding 100, new destinations to warm up and significantly improving our position in South America.
Once approved or propose JV will move Delta from current number four position in South America to a combined number one position.
We expect this partnership to translate to $1 billion in new annual revenue over the next five years and improve returns in the Latin entity.
Along with our existing partnerships with aeromexico Westjet, we're creating a true carrier the Americas the ability to connect travelers as never before.
[noise] American Express is another important long term partner and the combination of our two brands has created an industry leading co brand credit card portfolio. Our recent contract renewal provides a diverse high margin revenue stream that we expect to grow to nearly $7 billion by 2023 with further growth through the end of the decade.
Last week, we announced a major relaunch of our Delta Skymiles American Express card portfolio.
Providing our customers more ways to earn miles and new benefits that deliver an even better travel experience.
Customers were making in our people product service and partnerships or diversifying our revenues and will grow the earnings power of our business for years to come important steps on our path to being the world's leading airline.
Demand for product has never been higher we've grown or revenues by 15% over the last two years and to ensure that we continue to deliver the very best product in returns in this industry, we need to continue to invest in our people and our service.
This volume growth coupled with challenging weather patterns has added costs in the back half of the year will add about 1.2, our CASM ex fuel run rate in 2020.
I am confident that these are the right investments for the health of our brand and with the productivity still to come from our fleet facility in technology investments, we have the right platform to mitigate this cost inflation over the long term.
With that said it is important to note. Our overall fourth quarter unit costs. All then are expected to be down 1% due to the drop in fuel prices in our margins should expand once again in Q4.
In closing we're on track to deliver a very strong result in 2019 demand trends remain healthy and our full year earnings guidance is for more than 20% improvement over last years earnings per share.
We have built a durable foundation through our culture, leading operational reliability unrivaled network or loyalty program and relationship with American Express and an investment grade balance sheet. These strengths combined with a great brand powered by the very best professionals in the business provide the engine to drive long term value for our owners although.
Look forward to sharing more details on a strategic outlook and 2020 business plan at our upcoming Investor day in December .
With that I'd like to turn call over to Glenn and Paul to go through the details of the quarter.
Right and good morning, first I'd like to thank the entire delta team for their hard work during our busiest summer ever.
The quarter, we ran record load factors and carried three point threemillion more passengers than last year up 6%.
Exceptional operational performance and unmatched service or people provide or the foundation for improving customer satisfaction.
And the reason why more customers than ever are choosing to fly delta.
When combined with a solid demand backdrop.
Progress against our commercial initiatives, we delivered a record quarterly revenue of 12.6 billion up 6.5% over last year.
Marks the ninth consecutive quarter of topline growth or the liberal more than two times GDP.
We also continue to diversify our business with 52% of our revenue generated by premium products oil tea and other non ticket revenue sources.
[noise] premium product revenue grew 9% in the quarter to 4 billion on top of last year's growth of 13%.
Clinton is expected to continue or from the modernization of our fleet and improved ability to sell these products.
Total loyalty revenues grew 16% to 1.2 billion.
Driven by double digit increases and mileage redemptions co brand spend new card acquisitions, and roughly 100 million benefit from the new contract with American Express.
Enhancing our customer loyalty and trust is at the heart of our business and together with American Express, we are finding new and innovative ways to reward our customers for their loyalty.
We are on track to achieve another record year of card acquisitions in 2019.
Our redesign card offerings will deliver rich rewards and support continued growth in our membership fees in the years ahead.
We are making skymiles more valuable by offering members more ways to use miles on delta.
Miles as currency launched last December and customer response has been strong.
By the ended the year, we expect nearly 1 million customers will have use miles to upgrade their experience.
This revenue stream is projected to deliver over 100 million. This year ahead of our initial expectations.
[laughter] strictest or can you continue to grow as we give our skymiles members more options to use miles anywhere they can use cash with delta.
Corporate revenue with solid improving 5% in the September quarter on top of a 12% improvement the same period last year.
Domestic led with 8% revenue growth offsetting a modest decline in international corporate revenue.
In our most recent corporate travel survey, 86% of travel managers expect to maintain or increase their travel spend and 2020.
Leisure revenues remained healthy growing 7% for the quarter with very strong demand during the peak summer travel season.
Our MSR ROE grew 9% in the quarter and we're confident in our goal of roughly 20% improvement for the full year.
Similar to the free operators, we are seeing pressure on cargo revenues, which declined 17% on both lower volumes and deals. This is consistent with last quarter's decline.
Turning to some specifics on unit revenues in the quarter total unit revenues were up 2.5% at the midpoint of our guidance on 3.9% higher capacity.
Passenger unit revenues were up 1.7% over prior year has strengthened domestic in Latin more than offset headwinds from FX and pockets of non U.S. point of sale softness along with the impact of lower fuel costs.
We continue to optimize our leading domestic network with revenues growing 7.8% on 3.2% higher RASM and a sustained unit revenue premium to the industry nearly 120%.
Revenue and margins grew in every domestic hub with revenue improvements up 10% in our coastal hubs and 6% in our core hubs.
Boston performance led the system again with 24% increase in revenue and a five point improvement in margin.
Internationally revenues grew by 1.1% has 3.1% capacity growth offset a 1.9% decline in PRASM, including more than one point of currency headwind.
Latin was our best performing entity with 3.6% PRASM improvement.
In the Atlantic we saw strong U.S. point of sale continuing to offset weakness in European point of sale as currency was the major factor during the quarter driving nearly all of the 1.6% PRASM decline.
Specific is the only entity where revenue was down over prior year. This was due to a decline in corporate travel driven by tariff impacts on the automotive and manufacturing sector and lower leisure demand to and from China.
Well Pacific is facing some near term headwinds, we continued to see long term opportunity for growth and profitability improvement.
Looking forward December quarter total revenue is expected to increase more than 5% on unit revenues are flat to up 2%.
We are seeing solid corporate and leisure demand with revenue growth driven by premium products loyalty and our MRO.
Sequentially December corner TRASM is negatively impacted by the time, your JV settlements and Jewish holiday calendar shift.
Excluding these items underlying PRASM growth remains consistent at approximately 1.5% in both Threeq and Fourq you.
For the full year, we now expect to achieve approximately 7% revenue growth.
Full year capacity growth of 4.5%, while sustaining our 110% unit revenue premium to the industry.
Well, it's doing the planning stages for 2020, the strong demand environment and our commercial initiatives.
I know, we launched a service and support our expectations for another year of revenue growth in excess of GDP.
As always we remain mindful of the economic backdrop changes in fuel price.
The industry landscape.
Our initial planning assumptions for 2020 call for three to four points of capacity with a point of that capacity related to our relaunch of service to India.
Generally capacity growth will be focused in areas of strength that support our long term plans. This includes further optimization of our domestic network and go in growing our global presence in conjunction with our partners.
Our premium products and non ticket sources like American Express and our MRO business are expected to continue to outpace our main Kevin revenue growth into next year as we build on our strong 2019 results.
We will provide more details of our capacity growth in commercial initiatives for 2020 it'd be on in our upcoming Investor day in December .
Closing a more diversified revenue base, along with our pipeline of Delta specific initiatives give us confidence in our ability to achieve the high end of our plan for 6% to 7% revenue growth in 2019 and sets us up nicely for another year of revenue growth in excess of GDP in 2020.
And now I'll turn it over to my good friend Paul.
Thanks, Glenn Good morning, everyone and thank you all for joining us.
We're delivering against our Investor day planned to drive topline growth margin expansion and consistent returns to our owners year to date, our topline is growing 8% operating margins have expanded by over 200 basis points and we've grown earnings per share by 30% driven by strong core fundamentals in our extended Amex agreement.
We've also generated $4 billion of free cash flow meeting our full year target in the first three quarters of the year, while also reinvesting in the business.
Our investments continue to drive strong returns supporting a longtime growth long term growth potential of the business.
Our after tax return on invested capital on a trailing 12 month basis was 15.9% that's represents more than 300 basis points of improvements since 2017, while our invested capital base has increased by nearly $2 billion.
Turning to September quarter results, we delivered solid performance in the quarter with pretax income of $2 billion and a pre tax margin of 15.7% two points higher than last year.
Fuel was volatile during the quarter, but average prices remained below prior year levels total fuel expense decreased $249 million on 18% lower market fuel prices, including a 49 million dollar benefit from the refinery during the quarter.
Our refleeting initiatives drove a 2.1% improvement in fuel efficiency during the quarter, keeping us on track to deliver a 2% fuel efficiency gain for the full year.
Well Nonfuel unit costs in the quarter were up 2.4% total unit counts were down two as a result, those fuel prices.
During the September quarter, we announced a pay increase are eligible ground and flight attendant employees effective October Onest. This had a modest impact on the September quarter and has about a one point impact on CASM X and the December quarter.
In addition to the pay increase we're making investments in staffing and resources to ensure that our people can continue to deliver an industry leading product for our customers in light of the strong demand.
We expect these investments, which provide the foundation for sustainable growth will add about one point to nonfuel costs in 2020.
Our current plan assumption for 2020, as non fuel unit cost growth of 2% to 3%.
I'll provide more detail on that are at December Investor day.
In the December quarter, we're also seeing an approximate one and a half point impact a unit costs from the Mark up a lot of liabilities related to long term disability and retirement benefits. We do not expect there to be any impact from these adjustments on 2020 costs.
Our investments combined with these accruals are adding approximately three points of CASM ex pressure in the December quarter, and resulting in expected Nonfuel unit cost growth of 4% to 5%.
Non operating expenses for the quarter were $65 million higher than prior year, primarily due to higher pension expense consistent with our 2019 guidance.
For the full year, we continue to expect nonoperating expense in the range of $525 million to $575 million.
Looking forward, we expect December quarter earnings to be in the range of $1.20 to $1.50 per share. This equates to a pre tax margin of 9.5% to 11.5%, which is down from prior year as we lap more than $100 million of onetime gains, including the sell the sale of Delta Global services last year.
Excluding this non operating gain our pre tax margin is expected to improve over prior year, and we expect operating margin will expand by more than 150 basis points.
For the December quarter, we are forecasting fuel to remain below prior year levels with all in fuel price of $2 to $2.20 per gallon. We expect total unit costs to decline again in the December quarter as a result of this.
With a solid fourth quarter outlook, we are on track to grow full year earnings per share by more than 20%.
Turning to the balance sheet in cash flow at the end of the September quarter adjusted debt to EBITDA was 1.7 times at the low end of our target leverage ratio of one and a half to two and a half times.
During the September quarter, we generated nearly $2.4 billion of operating cash flow reinvested $800 million into the business and invested $150 million to support our new strategic partnership with the Tam.
This produced free cash flow of $1.4 billion meeting all our full year free cash flow target of $4 billion and just nine months.
Our full year core capex guidance of $4.5 billion is unchanged, including $100 million as part of our live Tim agreement to acquire 14, Athree hundred 50 aircraft.
This recent transaction with a Tam as an exciting opportunity for Delta as an end as an example of how our balance sheet enables strategic moves that expand our competitive strengths.
We continue to consistently returning cash to our owners. In addition in addition to investing in the future growth for the company during the September quarter, we returned $468 million to shareholders for the year. We remain on track to returned approximately $3 billion inline with our commitment to return at least 70% of free cash flow.
To shareholders.
Our consistent repurchase activity and 15% dividend increase in the third quarter demonstrates our continued conviction on the durability and sustainability of our business model.
We've been able to invest in the business and return cash to shareholders, while maintaining low debt levels and improving the funded status of our pension as part of our commitment to maintain our investment grade ratings. These financials are a validation of our strengths, which continued 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 queuing it.
We go to the key M&A, if we can just.
That time of year, when we announce our December Investor Day. This year. Please mark your calendars for December 11, and 12, we'll be back here in our hometown of Atlanta for now just Mark your calendars listen that more information as to date gets closer.
With that Jake if we can have the instructions for the analysts on how to join the queue.
Of course, if you are at the analyst and would like to ask a question. Please press star one on your telephone keypad keep in mind. If you are using your speaker phone make sure that meets functions released so that single couldn't reach our equipment.
It's against Star one for questions.
Your first from my goal Linenberg with Deutsche Bank.
Okay. Thanks, Yeah, Hey, good morning, everybody I guess, maybe it's just a question Andy you can just give us an update on kind of where things to the best of your knowledge scan with respect to the tariff situation and.
The potential impact to Delta and easy easy new aircraft orders.
Order aircraft as they deliver any any color around this topic would be great. Thanks.
Thanks, Mike It's aircraft as they are being delivered which we have expressed or or concerns that this is kind of a retrospective tariff on the.
Decisions taken in the past that said, we're evaluating all of our options.
We do not expect the cost to core any cost of terrorists through the end of this year.
We are.
Expecting some deliveries out of mobile or in terms of 320 ones and those do not carry a tariff and are looking forward, we're examining or options next year to make sure that we mitigate any increase to the prices that we'd already negotiated with Airbus. So at this point.
Yeah, we're looking at our options I'm not going to get into any details around the options, it's still pretty fluid at the moment, but we are we do not expect this is going to be material.
Cost of Delta certainly not in the near term.
Okay, Great and then just a quick follow up to Paul I, just I'm not sure if I heard it right you talked about Capex.
Associated with the let can eat threeq csds and I, maybe that was just denouncing ships in 2019 did you see 100 million or did I hear that right.
Mike you heard that correct that's expected in the fourth quarter of 19.
Okay, great. Thanks, everyone.
And once again start when if you have a question as a reminder, please limit yourself to one question and one follow up question moving onto Duane Pfennigwerth with Evercore.
Hey, thanks.
So just just playing back does the summer it feels like you tried to flex up.
And respond to the environment and that has obviously driven some expense them over time some airport costs.
Can you comment on the quality of the incremental traffic that you picked up.
Was it high quality or was it low yielding and is this something that you plan to repeat in 2020, if not why isn't it a tailwind to the 2020 cost outlook.
Hey, Duane this is Ed.
I've said a number of times a second quarters was the third quarter. We certainly were a beneficiary of the Max not operating that said, we don't believe we've got we got a significant amount of new incremental.
Growth coming from that the majority of the growth clearly was the strength of our own brand strength of our product and services, which continues to outperform anything that we've seen historically and the the cost that we talked about are not just due to the high demand remember we ran a load factor of 90% from.
April all the way through August pretty much but we also had an incredibly volatile weather pattern. This summer that gave us very limited recovery options. So that a heightened load factor expectations. The fact, the Max was not out the weather all created an environment that we've got to reinvest to make certain that next year because.
They expect the this year, we any sure we picked up we're going to retain going forward, we're better prepared to handle the volumes in a in 2020.
Okay. Thanks, and then just just for my follow up I wanted to ask it maybe longer term question about.
South, Florida, how do you think about the growth prospects for that market longer term and potential connecting opportunities with with the Latam partnership.
Is this about getting a bigger presence in south Florida for Delta or is it about building out from Atlanta to the point south thanks for taking the questions.
Thanks for the question Duane.
It's a little bit of both I think if you think about improving the connectivity to the existing what Tom.
Infrastructure in South, Florida, there's a little bit we probably have to add to replace some of the flows its existing today on American but.
It's not we're not creating a new hope, we're not creating a new giant connecting complex, we're doing selective ads.
So think of it if you think about Miami as a hub and you think about our size and Dallas or Denver, or Chicago, probably looks a lot more like that to make sure. We have key feeds that that will go over Miami and then really work with what Tom once we get a T.I. to continue to develop Atlanta and our other a U.S. gateways.
As the primary connecting points for the South America traffic. So I think we have a pretty good plan that that takes the best of both best connecting complexes in the U.S. and a best service Britain the local markets.
And I think that's going to be a great platform for growth moving forward.
Thank you.
We'll now move to the next question then that will come from Helane Becker with Cowen.
Thanks, Operator, hi, everybody and thank you very much for the time I'm sure I think this might be a question for Paul.
Look at this extra actuarial assumptions you changed you mentioned that it doesn't flow through to next year, but I think you were also spending some money to bring your pension plans into closer funded status I was wondering if it's possible for you to give us an update on that.
Hey, good morning Helane.
Those those two issues are somewhat unrelated the actuarial changes relate to the long term disability.
Program and this is a actuarial tables that are updated every few years and we'd seen a little bit of an increase in trend. So we have to markup that liability one time, it hits that PNM and that's why it's not expected to repeat.
Our next year as to the pension you know we continue to strive to.
Target, 80% funded status by the end of 2020, and so far the assets are on a strong trajectory. This year with strong returns our pension expense as we cited on.
In the prepared remarks is really a function of last year's returns as that gets spread over a full year. So as we head into 2020, and we get those update spoke on the funding as well as the investment returns, we'll have more detail at Investor day on 2020.
Okay. Thanks very much.
I don't have any other questions.
We'll now move to the next caller.
And that will come from Jos <unk> with credit Suisse.
Thanks, very much good morning.
Paul maybe just picking off where where helane left off there on.
On 2020, I'm not asking for explicit cash flow guidance for 2020, obviously, but just hoping you can walk us through some of the puts and takes an operating cash flow for next year I'm things like cash taxes, you just touched on the pension there, but any other moving pieces that we should be aware of.
Good morning, Joe.
Not materially and obviously, we see growth in the business, we see growth and the amex portfolio as we continue to work our way up to <unk> nearly $7 billion by 2023.
Those are some good size in the business, we have articulated a belief that will be a cash taxpayer in 2020, that's not expected to be a huge headwind for us. So we see consistent cash flow.
Generation in 2020 at this point and we'll provide those details at Investor day as well.
Okay I appreciate it and my second question on free Wi Fi whoever wants to take this it's obviously something that your business travelers demand. So that's an important box for you to check but it also feels like it's a consumer data play I was hoping you could talk a little bit about maybe the second derivative.
<unk>.
From that initiatives. If you will just perhaps in terms of what it can do for merchandising or just learning more about every passenger and every seat.
In other words, how do you monetize free Wi Fi overtime.
Hey, Joe this is that.
And then vocal on this I think it's something that are there are customers are not just demand but deserve.
I think the main benefit to me is the connection that they will continue to have to the brand and the strength of the brand and the.
Or selling proposition, but then you're right. There is a second derivative order with respect to any commercial opportunities that we could create around the around that that service, we're not ready to talk into into detail yet we're still a still a ways off from announcing the exact start date, Oh, we're learning a lot on the technical.
Capacity a that we currently have and any additional changes we need to make but we're on that we're on a path to getting there and I'm excited by I think it's going to be is going to be great new service to our customers when we get there.
Thanks for the time everyone.
Sure.
And now moving onto the next caller and that will come from Savi said with Raymond James.
[noise].
And you may be immediately mute.
Hey, good morning, sorry about that I know, it's early stages that I was wondering if you could help me understand a little bit more on the 2020 cost out like it seems.
I'm looking for you're indicating they over and this year because the cost is about catching up to your current market share. But you also had a lot of cost by paying cannot time and a half over time for free and fair all your Christine to meet the capacity needs to this time. So it's kind of wondering how it adds that incremental one point and that.
How should we think about that that cost outlets for next year.
Good morning, Saudi and thanks to the question.
You know the pressure that you cited and certainly what we've called out I'm going back to some conferences. This fall was was real and a as I articulated we felt a little bit like a bursting at the seems with all the passenger loads and some of the weather pressure that we saw it and undoubtedly some of the staffing investments that will make will help mitigate some of that.
But it's really about arming our people with the tools and resources they need to serve our customers and then expanding base. Our total revenues are up 15% over the last couple of years and there's investments in that process that we need to continue to make in order to drive the quality that our customers are used to.
To continue to earn that revenue. So it goes beyond that and as we as we said, we'll we'll give more details at Investor day Savi. This is that if I could add to that.
We've given a long term trajectory on non fuel cost of being around 2%.
And when we can go below that we do as we've been I think for the last couple of years that means occasionally might be above that but I think our long term trend line is that 2% is a good a good target for us.
I would not say that we over earned a this year, we certainly I pad Clos both in Q3 in Q4 related to the high volumes that we guide I think this is about as much infrastructure investments to continue to to better serve the growth whether it be in airports and technology and our people and our service provider.
Leaders as it is dealing with the just the pure volumes of Oh, very a very busy summer. So this is this is a is a long term investment that I'm confident going to have long term returns.
That makes sense.
I, just ask <unk> and <unk>.
The cost question on Fourq, you just on trainers just expectations Anthony I might've missed that.
Oh, sorry, I saw the on trainer yeah.
Oh.
Trainer is expected to have a slight loss for the quarter.
Into our built into our fuel price guidance, we have some scheduled a maintenance on a couple of units that's going on now that's expected to be completed in early November but.
But overall the refinery continues to operate well.
Thank you.
And next we'll hear from Hunter K with Wolfe research.
[noise] everybody good morning.
<unk>.
Ed or Glenn when we think back to simple affairs in 2005, I'm wondering why that failed in and as its core. This is really a loyalty question is there a thought to may be trying something like that again, given such clear product distinctions between their types in the sort of India and the segmentation era.
Oh Hunter I think simple fares might have been too simple and maybe as an industry, we weren't ready for it we didn't have the sophistication to really manage it well and I think that's really the infrastructure, we're putting in place now and how we see the evolution of pricing occurring over the next year.
One other things that you would have to admit about the industry. In general is its transactional then it's not really trusted very well and I think we've earned that because sometimes you go look in the flight you want to take on a Monday morning is $500 and sometimes it's $1200 and sometimes it's a yet another number and I I think what.
We're doing with all of the data that we're collecting is we're trying to bring more stability to that pricing model over time, and it's not really simple affairs, but it's more reliable affairs and it's not a revolution. It's an evolution. So we're on a journey on this and we're trying to be less transactional and more customer driven and we're not at our destination yet and then.
We'll take several more years for us to get there, but I love. The question because I do think it's a sense of how do we become a better consumer brand and I think one other things we'd have to do is to have trust from our consumers.
That's great. Thank you Glenn and then.
Maybe for you the third one runway he froze the is that a done deal and how can you leverage your the airport work that you've been doing here in the U.S. with your ownership stake in Virgin and maybe had a seat at the table for how would that expansion problem.
Oh that looks over there if it happens thanks.
Sure I I don't believe it's a done deal I think it's certainly something that's needed I think there's there's a lot of work going into.
The determination of the cost.
Long term impact to the to the city.
Yeah, we're going to provide certainly through Virgin R perspective on a build there, but we are a relatively small share of overall heathrow. So I'm not sure. If we were gonna have much of a voice and that process.
Okay. Thanks.
Sure.
And I won't go to a question from Jimmy Baker with JP Morgan.
Hey, good morning, everybody for Glenn that 10% PRASM premium.
That's driven by about 20% domestically and.
Basically flattish on the international are fine if I'm correct. Why don't you think you get a RASM premium on international.
I think it depends on the entity and of course, each international entity is different we get a premium and or the trans Atlantic we have not gotten or premium historically in Latin America and I think that's one of reasons that we are so excited about the Tom transaction is our offering really wasn't what it needed to.
<unk> to drive revenue premiums being the number for carrier.
I think that was one of the things that we thought we needed to have a structural.
Improvement in our offering in Latin American order ultimately to drive significant premiums and I think we achieved that in the long run not today, but over the long run by securing with Tom and then in the Pacific Theres a lot of different it's a small entity for us and we haven't made significant improvements there.
But our stage length is really working against us and I think as we transition through to Haneda next year, we've told our investors want a multiyear transformation and one other things we'll talk about.
At our Investor day as were arriving at our destination finally in Asia and that'll give us the building blocks I think to drive premium with the products that will drive premium and with the introduction of a delta one suites and the a premium.
Economy, I think we're well positioned to drive premiums in the Pacific is well over time.
Helpful. Thank you for that and second on loyalty maybe for Paul maybe for Ed.
You know I think everyone recognizes that loyalty represents a moat around the business.
But it's not clear to me how some of your Amex assumptions you know the path towards that 7 billion dollar figure how that gets altered by U.S. recession I've got all the data on what happens to air travel demand, but what are your recessionary assumption. So in terms of quarterly mileage sales card opening.
Consumer spending and I know loyalty is more durable than air travel, but I still don't know how durable.
Well, Jamie I'll take that obviously, we don't know what are what the economic outlook over the next five years and the 7 billion dollar number that we have we have disclosed as our target together with amex over this timeframe.
It doesn't necessarily a indicate that's recession proof I mean, certainly it's a it's sensitive to spend probably the single biggest element that we haven't yet, but we also have modeled what what happened in 2009 and how quickly spend did return.
It's one of the reasons why we're creating not show us greater greater loyalty through through the card and the brand portfolio, but also.
Getting avenues for currency to be use as dollars you know and the LNG work, we have and I think it's actually been one of the one is a real nice innovations we brought to the market. This year is that we're giving alternative use for currency and people can spend and conserve cash so I I would say, it's our it's our target could.
There will be bumps along the way certainly it's not it's not a flat guarantee but I think it's our best estimate together with Amex, what we expect to see over the next to the next five years and at the same time, you know even through through the process. This year, while you have.
Some economic.
Concerns I wouldn't say significant concerns in terms of consumer spend you know, we're still seeing a growth on the card portfolio at double digits.
Is there a quarterly minimum in terms of what amex's obligated to purchase in terms of miles or is there a scenario, where if you know spend was soft enough. They would have enough miles and it could just dropped a zero.
You know for a period for for Delta.
No we're not we're not going to get into any details of the contract NVS you can appreciate.
Okay fair enough. Thank you everyone.
Sure.
Rich evil Ahwahnee with Morgan Stanley will have the next question.
Hi, good morning, everyone.
Pat.
Paul a question for you you you've provided some good color on costs into next year, but as we think about just over the next several years, how do we get comfortable with their ability to bring those costs back down to that target, 2% or below the level when you've got a a pilot t. all that's out there in your you're likely going to be to sell.
Trading some of that capacity growth.
Back to more normalized levels, if you will.
Richard I'll take that where you know were the 2% number is what we've given you in the past and we continue to see that that hold one of the it will provide a lot more color when we get to Investor day as to how we see the 2020 cost outlook for one of the pressure points were also facing in 2020.
Is that or gauge in 2020 is actually going to be relatively flat year over year and that's been a certainly a source of productivity for us on unit cost, we expect to see that pick up again in 21, so that's going to be another pressure that we're facing into short term.
Well, we'll give you give you our perspective on that when we when you give you. The details but are we have faced or labor labor pressures in the past a week, we expect that.
Whatever deal is cover the pilots is gonna be within the frame we talked about.
Okay, and then going actually a follow up for you.
You talked about.
Pretty strong demand environment to supply backdrop teams pretty favorable but from what we can tell that's the same time, you're pointing to RASM. That's nearly flattish once you take out the card benefit I know there are some puts and takes there but can you just reconcile those two dynamics they seem to be at odds with one another.
Oh, I think we were trying to get to that end the call. So I. Appreciate the question that are lift PRASM, which is what's coming off the tickets is really a very flat between threeq and Fourq you were at about 1.5%. So I'm not the TRASM decline between Threeq and Fourq you is really.
Is your accounting adjustments, which didn't occur this year.
So.
So what we were trying to say in the call Im sorry, if we weren't clear enough, but thanks for the question because I do want everybody to understand that are the revenue coming off the tickets themselves is positive as a consistent at about one of the have up between Threeq and Fourq you.
I'll leave it there thanks.
Now moving on to Joseph Denardi with Stifel.
Yes.
And just how was your question.
A lot more Dennis ownership, then you use.
Sorry, Joseph we're not hearing your question clearly.
Does that better.
Yes. Please continue.
And you were going to ask at the MX partnership a lot more than you used to analyst asked about a lot or I still think investor doesn't know what to make.
Yes.
I don't need.
Calculation of the company so it suggests that more.
So I'm wondering landing.
In addition to.
In our segment the business that so.
Sure, it's consistent profitability, but from a financial standpoint, thank you.
Joe you are still breaking up if I understood. Your question is along the lines or are we.
Repair to increase the segment disclosure relative to the American Express a loyalty component of our business.
Is that right, yes, yes, that's right.
Yeah, we're yeah, we're always evaluating how we provide the best a insight for our investors into the drivers of our a or opportunities for the future.
We are we've improved some of those disclosure and certainly while we have to work within the confines of our contractual obligations the MX the confidentiality provisions.
Yeah, I think it's a valid question. It's a fair question is something we need to can continue to think about how we get get greater visibility is in a very important source of revenue for us today. It's a it's a certainly have a growing source probably growing faster than most other revenue components, we have in the business and it's it's certainly a margin accretive.
Can debate, how you want to cost plus those miles, but it's certainly a you'll highly accretive to us. So I think it's fair question don't have an answer for you quite yet, but we're going to keep looking at.
And then Ed given given the value of the MX agreement and how valuable you think it can be why isn't sign deeps roll a C level position. Thank you.
[laughter] I just saw the vascular [laughter].
[laughter] Sunday the loyalty team are incredible contributors and a highly valued and I wouldn't go on title or a definition I've got great visibility the sandeep and I see on ER I see in just about every week on itself is a disease is a great asset to the company as well as his entire team.
[noise]. Thank you.
Yeah.
And that will move to a question from Katherine O'brien with Goldman Sachs.
Good morning, everyone. Thank you so much for the time.
So year to date, you can see some nice growth in your some of your non ticket revenue categories like travel agent services and of course royalty revenue with the new Amex deal.
Any walk us through some of the puts and takes on these non ticket revenue streams into next year, there's still room to at least that's more products or are you know should we expect to see growth accelerate some of your ancillary businesses. Thanks.
Okay.
Premium products.
I'll talk a little bit about premium products, maybe turn that over to Gil for some of the answer is like the year MRO clearly, we see room for growth there and.
That's been on a different trajectory than based ticket fares and Oh.
Well, we grew premium products by 9% in the quarter, which was above the of course everything.
Six and a half so we continue to see that moving forward and it's really we think our ability to a price those products given the increasing demand that we see from consumers on them, but be also continuing to increase the number of channels, we distribute them through and as you know we've been working to do that more on.
Our digital channels, but also through their travel management companies in our partnerships and through the OTI A's and we're seeing some great or early results on that but it's got a ways to go over the next years.
Munson years, so we continue to see that as a being able to grow even through maybe a challenging economic environment.
Yeah. This is Gil I would just add for a first just a shout out to our tech ops team for Ah I mean, they're the best in the business, but the MRO business force year to date.
Up about $120 million year over year about 23%. So we're seeing strong growth in the current current year.
As you look forward or some of the investments we've made in terms of capacity from new generation engines in particular, the rolls Royce trend engine and the Pratt Whitney geared turbofan those volumes start to start to ramp next year as well, albeit those will mature in three or four years.
Sure, but we'll benefit from some of that tailwind as well and the MRO business as we move forward.
That's great. Thanks, and then maybe just one quick follow up on cost and I and I think you already I'm pleased to this I bet findings have got it right in your and your 2020 CASM outlook that you had 3% there's a.
The potential new pilot deal is contemplated and that number sack Kraft.
Katy I'll take that we are not going to comment to pilot deal or in any nature or 2% to 3% our best estimate what our cost will be next year.
We're not going to get into the details relative to our negotiations.
Okay understood. Thank you very much.
And Jake we're going to have time for one more question from the analog.
Great and that last analyst question will come from David Vernon with Bernstein.
Hi, This is Randy I'm speaking on behalf of the David Vernon.
Just to clarify don't go back to that to that Cat snacks guide.
2021 point stand up if that's something that you can potentially offset with other cost initiatives like one delta.
Yeah, but says a this is paul thanks for your question.
Excuse me one one delta continues to pay big dividends for us and while we.
That the level of investment back into the product any infrastructure is that articulated we're always striving to find some of that productivity and as we've said before we'll we'll detail more about the 2020 <unk> cost outlook at a at Investor Day in December .
Got it thank you.
That's going to wrap up the analysts fortunate.
Now I'll turn it over to Tim.
Okay.
They are the media portion.
Good morning, everybody and thank you to the members of the media for a holding on we have a little bit under 10 minutes of time to take questions. I'll, just remind everybody as we said earlier with analysts. Please if you would limit your questions to one and so we can get through as many of these as quickly as possible.
And once again press star one if you have a question.
We'll hear first from Elliot Blackburn with Argus media.
Good morning, Thanks for taking my question curious how the trainer refinery is going to adjust to the higher renewable fuel blending requirements of the Trump administration is proposing began next year.
Good morning areas. This is Paul I'm, we are in full compliance was our with our rins requirements under the RFS standard and have done a good job of managing through that volatility that we've seen.
Over a over the last several years and I've confidence that the team will be able to continue to address that we continue to advocate on behalf of small and independent refiners a that a long term solutions have to be a identified but where we're managing through that in the short term.
So do you think that this he doesn't sound like you're concerned that this added cost there's going to affect the refineries kind of viability long term.
We certainly think that it can result in added costs. We don't we don't believe necessarily that it affects the full viability, but it does have an economic impact to to the region and our ability to.
Continue to drive a those results at the refinery.
Thank you.
[noise].
And that will move to that question and that will come from David Koenig with associated press.
Hey, good morning. This is.
Forehead, you gave a figure on TV for hiring this year next year.
Can you go over those targets and how many will be pilots.
Example, and then overall how much you've got high reads, just replacing people, who retired or leave and how much of it is actually pure growth.
Sure David we we haven't given out the specifics.
By job classification for next year, but we've been hiring at a rate of about 6000, new employees coming into the company for the last couple of years and we expect again going.
Forward next year at a similar level pilots are going to be increasing in numbers due to retirements.
The retirement age really starts to ramp up in the next next two to three years and so those numbers are going to grow as well as to accommodate some of the growth that we've seen in the business and one of the things that we'll be doing a bit differently than we did this past years, we're gonna be hiring earlier in the year and a continued to keep the hiring going through the year.
Rather than having more discrete period. So we'll have the we'll have the all our new hires in physician hopefully to ready to handle as much as the new volume that's going to be coming in next year not not the be caught off guard in total or I'd say, the you know probably at least half of the 6000, we're talking about our.
Our retirement replacement of the workers that are retiring half to two thirds and then there's kind of some growth as well.
Okay, I'm little unclear pilots, you're doing well you grow the overall number I.
Well it's.
Next summer you'll have more okay. We just added we just haven't given the number of what we're going to be growing our pilot hiring to yes, okay got it. Thank you.
Next we'll hear from Ted Reed with Forbes [noise].
Thank you thanks for taking the questions I have two questions.
First for Glenn.
If I look at what you're doing this quarter. It seems like you're growing at a southern most major airport on the East coast in Miami and I know it didn't most in Boston is at a good way to look at it.
Oh, I don't think we've announced any plans to grow Miami, yet, but as I outlined on the earlier call I think we will add some keys folks into Miami it won't it won't be giant, but I think Q, we have had a successful growth in Boston.
This past quarter, we just took back our terminal terminals is constructed almost 15 years ago and open and this is the first time that weve occupied the terminal that was built for Delta and I would assume that we will be.
Leading carrier in Boston in terms of revenue in 2020, so yes, we've done a lot of growth in Boston.
Hi, Thank you secondly for Ed as you look at the impact of the terrorists.
Is your response and your ability to respond gonna be based automobile and taking more production from.
From Mobileye and do you have any priority and getting the production from mobile.
[laughter] well certainly imobile is going to be very important for us going forward and this yes that is gonna be though the focus of our of our domestic strategy to be getting or Twentys. Our 321. So the imobile as is Airbus can continues to ramp up that production.
Capability.
I'm not going to get into any longer term ideas, we have because obviously it doesn't necessarily help you on the wide bodies, but we're evaluating options there and.
So our goal is to mitigate any a any potential tariff exposure.
Alright, thank you.
[laughter].
Now, let's leave Joseph with CNBC will have the next question.
Hi, Good morning, Thanks for taking my question on this is about basic economy on the noticing that the fair differences between main cabin in basic seem to be going up I mean across various roots and you guys started any started a long time ago, but maybe a couple of years ago is like 30, $40 now seeing sometimes a $100 is that kind of across the board me what kind of.
If anything from that.
Well you know a basic economy is not something that we we want to grow its not a it's not really a premium product and it's a as we've outlined before a defensive product against you Lccs. We want to have best in class product whatever people's needs are and for people, who only care about the lowest fare.
Possible I think we have is by far the best offering and the differential between that and the main cabin.
It hasn't been an intentional shift in separating those out but I think what we're testing in many cases is water people willing to pay for that and sometimes a in business markets. It's a bigger differential.
I think maybe that's what you're looking at a market basket level of all markets. The differences only been a couple of dollars difference, but I think it at a at individual market levels. It may be greater.
Okay. When does that start that larger cap. It was about 30 $40 just a couple of years ago.
Yeah, I think you'd have to give us what markets, you're looking out because each one of the markets is managed individually.
Okay I like Transcon for example.
Right.
I think we could get back to was more details, but the intent coming up into some <unk> move up the the latter significantly.
Thanks.
[noise].
And looks like we'll take our final question today from John buyers with ASP.
Hi, Thank you for taking my call on we've seen.
A fair bit of data showing that there's weakness in the manufacturing sector in the U.S. right now there's a.
Strike that's been going on for weeks now in Detroit, which is one of your hubs are you seeing any weakness right now in your demand forecast looking forward for the U.S. and general there's obviously you've had more talk about possible recession in the next couple of years.
Any shift at all any weakness compared with a few months ago.
John This is that no not at all or you know we had a is it.
Kitchen and number of times on this call we had record summer in terms of both volumes and revenues all time high revenues for us and the domestic system is what produced a those records or domestic revenues were up 8% in the in the third quarter and we continue to see and advance bookings the domestic.
Consumer being a being quite strong we expect the holiday period to be a to be a strong period of looking ahead. We don't have a great view into 2020 since it's it's pretty early for us on our booking curve, but the our business is heavily levered to the U.S. consumer in the U.S. consumer is doing quite well and.
Referring dealt with.
Thank you.
With that will conclude todays call. We as has been mentioned earlier, we look forward to seeing everybody on December 11th and Twelveth here in Atlanta, and we're grateful for your time today. Thank you.
And once again, ladies and gentlemen, this does conclude your conference for today, We do think you for your participation and you may now disconnect.