Delta 4Q16 Earnings Call Note

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Delta Air Lines’ (DAL) CEO Ed Bastian on Q4 2016 Results

$7 billion of operating cash flow in 2016

“Financially, we produced $6.1 billion of pretax profits, 16.5% operating margin and a 26% pretax return on invested capital. It looks like we will be the only major to have grown its operating margin in 2016. We generated $7 billion in operating cash flow and nearly $4 billion of pretax [loans] [ph] we used to reduce our adjusted net debt to $6.1 billion, achieved an investment grade credit rating and returned over $3 billion to our owners.”

Excited about infrastructure investment possibility

“Hi Duane, this is Ed. There’s a number of things we are excited about. One of the things we are very excited about is the potential investment opportunities of the new administration, talk a lot about improving in airport facilities we have been doing, a considerable amount of investment alongside our public partners in LaGuardia, LA, Seattle, Salt Lake, Atlanta, but the ability to continue to work with the federal government to drive improvements to the infrastructure is clearly a big deal for us”

Glen Hauenstein

Business yields were weak in 2016 but picked up after the election

“While total demand remained strong throughout 2016, weak business yields were prevalent and drove RASM declines. To address this, in the December quarter, we adjusted our revenue management approach and capped our capacity growth below 1%. Following the election in November, we began seeing improvements in business demand and the firming of business yields. These trends continued into December, which was the first month in over two years that yields improved on a year-over-year basis. As a result, our fourth quarter unit revenues were down 2.7%, better than both our initial guidance and the updated outlook we gave at Investor Day.”

We are substantially capacity constrained at LAX today

“We are substantially constrained at LAX today. We have, I believe, 15 gates currently in terminals five and six and when we get to terminals two and three, we have the possibility to come close to doubling the gate pods but it is going to take some time as we redevelop terminals two and three. That’s not overnight. And it will also take a little bit of the pressure off of the turns on the gate today. We turned terminals five and six to highest levels in the system and once we get a better gate pod, we will be able to reduce some of the congestion at the airport. So, we will have more gates but that doesn’t necessarily mean more direct flights as a result. But net net, we absolutely will be increasing our footprint and our capacity in LAX over the next few years.”

Should be opportunity to increase fares

“I think if you look at the travel spend on a lot of corporates, particularly in major lane segments of domestic U.S., they are considered to be the primary business segments, that the fares were down 30%, 40% on historical basis. And I don’t think we have to get a significant, we are not expecting them to go back to the historical levels in our current plan. This is a journey. It’s not a race. And so I do think that if the economy holds out, which we are forecasting today that it will and business continues to travel which we are forecasting it will, that the opportunity to raise fares in that environment with a lower level of capacity offering from the industry is significant and it gets better as we move throughout the year because the fare has got to be so low for business travel by midyear last year. If you take one of the primary business markets in Atlanta to City X, that used to be $750 for a day trip, it got down to $119 for a day trip today. It is sitting at $350 for a day trip. Could it go to $400? Could it go to $450? We see no propensity to decrease travel going from $750 to $100 and I don’t think we will see it our way back.”

Continued appreciation of the dollar would pressure foreign routes

“If I had one issue that I would be a bit of a cautionary issue is if the dollar continues to appreciate, that would put a little bit more pressure on foreign point-of-sale. But core demand as strong and capacity levels seems to be generally in a better spot this year than they were last year looking forward. So I am cautiously optimistic that absent of another run in the dollar, another significant run in the dollar, that this is, as we have said, in the Pacific, that the fourth quarter would be our low point and that we would move forward from there and that summer in the Transatlantic with heavy point of sale U.S. would be a very good summer.”

Paul Jacobson

Cost escalation in 4Q

“That said, fourth quarter saw a bit more cost escalation than we have been seeing so far this year. In addition to the impact of wage increases related to the ratified pilot agreement, there were timing issues in light items such as maintenance, contracted services and rents and landing fees that drove expense pressure in 4Q after having provided benefits in earlier quarters. ”

Low crude crack spreads have helped keep jet fuel prices in check

“Turning to fuel. Our total fuel expense declined by $240 million or about 15% despite higher crude oil prices, as we lapped hedge losses from 2015. While crude has moved higher, crack spreads have remained low, which has helped keep jet fuel prices relatively in check for the airline with pressures result at the refinery which lost $40 million for the quarter as expected. For 2017, we expect our fuel cost pressures will be weighted for the first half of the year. As you remember, during the first quarter of last year crude prices averaged $35 a barrel and hit a low of $26 in late January before they began to increase steadily from there.”