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Highlights From Delta Investor's Day 2015

Highlights From Delta Investor's Day 2015

Delta Air Lines held its annual investor day this Thursday. The company has had a very good year in 2015. And so far, 2016 looks even better.

» Airlines - W | Thursday, December 17, 2015 • Air News Times

For the eighth year in a row, Delta Air Lines held its annual Investor’s Day Conference in New York City. Richard Anderson, Delta’s CEO, started off by explaining that he appreciates the investors’ confidence, and he wants the confidence to grow even over the next few years.

“I think we are the best run airline in the world, and you can pick your measure,” Anderson said. He continued by explaining that Delta is at the top of the global airline industry, and “we intend to stay there.” Earlier this week, Delta took the top spot in the Business Travel News survey for the fifth year in a row, and Anderson, Ed Bastian, and the other executives that spoke all credit the operational flexibilty and the Delta people for winning this award.

Key Points 0-2% domestic capacity growth expected for next year -2%-0% international capacity expected for 2016 Delta signed a letter of intent for used 777 for $7.7 million Delta plans to retire 747s over next 12-18 months Other aircraft such as 777s will undergo modifications to increase seats within the next four years More plans to up-gauge aircraft over next five years 173 days of no mainline controllable cancellations for 2015, so far Up-selling to continue in both first class and Comfort+ 10% more first class and 30% more Comfort+ seats coming over next three years Delta expects to close on joint-venture with AeroMexico in second quarter of 2016 Pacific restructuring is off to a strong start Delta sees lots of room to grow in China China is now outperforming Japan for Delta in trans-pacific Fleet Strategy

Anderson explained that one of the most important facets of ensuring sustainability is the fleet strategy.

“We have a different fleet strategy, and we are happy with it,” as he chuckled. “Since we have strong reliability, low capital costs, and the best product, there is a lot of variability,” Anderson said, and he also explained that the “variability” (i.e., operational flexibility in aircraft type use) helps the revenue management team better match capacity with demand. Further, Anderson also mentioned that Delta likes to keep its planes for 30 years because it allows the company to truly maximize its assets.

Delta is in the middle of retrofitting its A319, A320, and 757-200 aircraft with more seats and some upgrades to the passenger experience. Delta expects to complete its 757 retrofits/density modifications sometime after 2016, and these 199 seat 757 high density retrofits are Delta’s best performing plane in a revenue sense. On another note, all of Delta’s widebody aircraft will have WiFi by the end of next year.

Several other aircraft types such as the 777 will undergo density modifications over the next three to four years, but Anderson did not divulge any details.

Anderson did announce that Delta has signed a letter of intent to purchase one used Boeing 777 for just $7.7 million; now, the aircraft will need the Delta paint job, the Delta interior, and potentially a heavy maintenance check which would make the true cost of the plane a lot higher.

Meanwhile, Delta plans to retire its Boeing 747-400s over the next 12-18 months; additionally, it will retire older 757-200s and 767-300s which will help save the airline close to $350 million dollars.

The topic of up-gauging was also brought up; Anderson explained that Delta has been helping lead this trend which we have seen other U.S. airlines start to do more and more. Now if this was a ball game, Anderson says we are “only in the bottom half of the second inning.” He then referenced the order Delta just placed for 20 E190 aircraft from Boeing as well as the addition of the 717s as playing a key role in helping Delta up-gauge flights. Even though there is a lot of up-gauging, Delta does plan to keep phasing out the 50 seaters and is on track to only have 125 in the fleet as they slowly exit the fleet.

One of the last topics that was fleet that was discussed was how Delta purchases aircraft to part them out; this allows Delta to save millions of dollars in aircraft parts and adds more value to the airplane at the end of its life.

Fuel

Anderson explained that “everyone asks about fuel.” He went on to explain that Delta has predicted and planned for fuel to be about 25 cents higher than the current curve.

Anderson explained that he believes the business is good when “it runs with oil at $100.” So for planning purposes, Delta is building its business plan to be profitable when oil is $100, and when it drops, “we will take advantage when it drops, and we will reinvest some of it back into the business,” explained Anderson. 75% of the current fuel savings has been going to the bottom line.

Ed Bastian, Delta’s President, explained that Delta expects a $500 million in fuel hedge losses which is spread evenly throughout 2016 so there should not be much of an impact. $300 million of the losses is partly due to some restructuring that occurred earlier this year on fuel hedging.

Operational Performance

Gil West, the Chief Operating Officer of Delta, explains that this was the fifth year in a row that Delta set a new record operationally.

In 2012, Delta had a mere 20 days of no mainline controlable cancelations, but in 2013, Delta increased the number of days to 72. In 2014, Delta reached 95 days, and to date, Delta has 173 days of no mainline controlable cancellations which is about six times that of the industry as a whole. Maintenance cancellations are also down quite a bit over the last few years which is thanks to the Delta TechOps and other operational teams.

When there is a cancellation, West explained that they will sit down and look into it to see what they can learn from it to hopefully avoid a similar cancellation in the future.

Since the airline industry is a very data driven industry, Delta is constantly comparing its stats with other airlines, and consistently, it ranks above the other airlines that are about the same size. Again, West credits the Delta people for working hard to run a very operationally sound airline.

Up-Selling

Delta has been known for up-selling to first class as well as Comfort+. Glen Hauenstein, Delta’s Chief Revenue Officer, pointed out that when it started up-selling that there was only 11% paid first class load factor. This year Delta is at 57%, and he recognizes that they are doing well when it comes to targeting customers. In 2018, Delta’s goal is to be at 70%, but Hauenstein says he does not know if that “is the right number.” It is important to note that the number of first class seats is expected to grow by about 10% over the next few years.

Comfort+ has been the newest up-selling trend at Delta effective this year, especially since it re-branded the product and made some changes during the first quarter. Comfort+ seats will be increased by 30% over the next three years, and so far this year, Delta has had about 36% paid Comfort+ load factor which is up from 34% in 2013. Looking towards 2018, Delta is hoping to achieve about a 50% paid Comfort+ load factor.

Hauenstein also explained that with Comfort+ that it is a harder product to sell since it is not part of the booking process and that customers have to purchase it for each leg. In May, Delta is rolling out as its own fare class which he believes will help Delta achieve the greater paid load factor.

When it comes to loyalty, Hauenstein explained that “we do a Medallion Pulse survey, and we just got out November results yesterday. The pulse has been the highest it has been in 2.5 years. We have increased paid upgrades from 13% to 54%, and we have not disturbed the happiness of the medallions, and there is a trick. We look at who is purchasing the seat which appears to be the [Medallion fliers] who are being rewarded with more loyalty points. What we would like people to do in the next few years is to pick the airline and the product that works best for them.”

Delta greatly expanded its Basic Economy offering to more than 450 markets and is pilot testing the fares in lots of international markets. Although it helps offer fares closer to what ULCC charge, Hauenstein says that 50-60% that select Basic Economy typically de-select it and move up to a higher fare classes, and Basic Economy bookings only make up about 1% of Delta;s bookings.

Capacity Growth

Delta expects most, if any growth this year, domestically to be in markets where it already has a strong presence or has been growing; some of these markets include Atlanta, Los Angeles, and Seattle. In Seattle, Delta will basically get the south side of the airfield as well as a new international arrivals facility and some other renovations. Delta will also be making some improvements at other airports such as Los Angeles, but no other details were mentioned. Hauenstein pointed out that the trend–big cities are getting bigger while smaller cities are getting smaller–is what Delta needs to follow when it looks at growing.

International capacity growth will be flat or two percent below when compared to 2015 mostly due to reductions in Brazil, Japan, and the Middle East. Though, Delta is seeing a strong demand internationally in the United Kingdom, Caribbean, and Mexico.

Joint-Ventures and Equity Investments

The joint-ventures with Air France/KLM, Virgin Atlantic, and Virgin Australia are paying off for Delta quite well; combined, the joint-ventures produce about $14.5 billion in annual revenues. Looking forward, Delta expects approval from the government to launch a $1.5 billion joint-venture with AeroMexico in 2016, and it expects an announcement on an Open Skies agreement between Brazil and the United States sometime next year.

Delta is very happy with the investment it already has made in AeroMexico, and it is looking forward to having a 49% stake in the airline, pending the government approves the anti-trust agreement, as the airline believes both will be able to benefit from the agreement. Richard Anderson explained that “AeroMexico is a true flag airline, and it holds most of the slots just like British Airways in London.” Bastian expects to close on the joint-venture deal with AeroMexico sometime during the second quarter of 2016.

Delta expects the Mexico market to grow even more once the Open Skies agreement between Mexico and the United States goes into affect next month, especially since US/Mexico trans-border is up by over 20% compared to the last two years.

Equity wise, Delta has investments in Virgin Atlantic, China Eastern, AeroMexico, and GOL which helps make it the only US airline to have ownership interests in just about every international region. While there has been some concern over GOL, Anderson pointed out that “GOL had higher margins than we did when we made the investment.”

Pacific Restructuring

Delta has been busy in the Pacific region trying to improve margins and restore the profitability of its hub at Tokyo Narita, which it has successfully done. It has improved Pacific margins by six points, and Narita is now profitable, despite a $160 million Yen headwind. Part of the key to being successful in restructuring is down-gauging some of the flights from the 747s and building out Seattle to be a stronger gateway to Asia to/from the United States.

Although, Bastian says that “China has become a pillar of our Pacific strategy.” Delta plans to have China capacity up by 5-6% in 2016, and China has surpassed Japan as the largest transpacific market from the US with more growth potential in the future.

Anderson noted that they just finished some meetings with China Eastern earlier this week, and it would seem that there could be a stronger relationship between the two airlines coming soon, although time will tell. Regardless, the current partnership/ownership agreement between Delta and China Eastern is working out quite well for both airlines in utilizing both networks to connect passengers.

Looking Forward to 2016

Delta expects top line growth to continue to grow again in 2016, and only about 0-2% capacity growth which will be done with fewer aircraft. Additionally, it plans to see about $3 billion in fuel savings on lower year over year fuel prices and lower hedge losses. Lastly, it plans to have the highest free cash generation in the industry with a commitment to return at least 50% to the shareholders.

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