Delta Air Lines 3Q16 Earnings Call Notes

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Delta Air Lines’ (DAL) CEO Ed Bastian on Q3 2016 Results

We have had a few incidents with exploding phones

“Well Doug, it is a challenge but I don’t want it to be blown out of proportion either. We’ve had a very few single digit number of incidents occur. We’re certainly reminding our passengers of the requirements, we’re educating our crews, we’re putting some additional safety elements on board the cabin to help mitigate a smoke situation. But it’s not fundamentally different than challenges that we’ve had for some time. We’re aware of the concerns around lithium batteries and we’re very mindful of that, safety is always our most important concern…So what we’ve done is of course really the target training with our flight crews along with equipment. There are some other modifications that we’re adding with containment bags as an example, that with any device that did experience a lithium battery fire you can put it in a containment bag that would certainly contain any possible scenario. ”

Glen Hauenstein

Biggest problem is persistent decline of unit revenues

Thanks, Ed and good morning, everyone. I’d also like to start by thanking the Delta people for their perseverance through a challenging quarter. It is your hard work and dedication that sets Delta apart in our customers’ eyes. And that translates into the revenue premium we realize to the industry. As Ed mentioned, the biggest challenge we face as a company is the persistent decline of unit revenues. This quarter our RASM was down 6.8%, including roughly 1 point of impact on the August outage and an additional point of headwind as we lapped the yen hedge gains from last year. Excluding our outage, our unit revenues were at the bottom end of our initial guidance range and we attribute that shortfall primarily to two factors.”

Reasons: weak transatlantic and weaker than expected close in yield environment

First, the Transatlantic proved more challenging than we expected, given the supply/demand imbalance in the region, caused by multiple terrorist events, low-cost carrier growth and Brexit which we’re primarily seeing in the devaluation of the British pound. Second, the domestic close-in yield environment was weaker than expected in the first half of the quarter, particularly in early August. Overall, domestic unit revenues declined 7% on 4% capacity growth in the September quarter, with nearly 2 points of the decline attributable to the August outage. While this result was weaker than we initially anticipated, we did see improvement as we went through the quarter, particularly as we lowered our capacity levels with our fall schedule in mid-August and adjusted some revenue management strategies.

Transatlantic hit by overcapacity

“And finally we get to the Transatlantic. September quarter unit revenues were down 9.7%, driven by overcapacity, particularly from LCCs and Middle East carriers, while terrorism concerns, sluggish economies and Brexit all weighed on the demand side. While the revenue environment was probably the most challenging, we also had a solidly profitable summer because of lower fuel. That said, as we go into the seasonally weaker period, we will reduce our capacity offering by three to four points starting in November to address the unit revenue challenges we’re facing.”

It takes a few months to ratchet up or down capacity

Hunter, that’s a great question and of course there are a lot of elements that go into those decisions, including the market sizes, the relevant positions of the carrier, the long term sustainability and profitability potential of the market. But we adjust on a monthly basis, as you know and at about 3 to 4 months out, the less we touch the schedule, the better it is for our customers, because customers once they buy a ticket want you to fulfill that commitment of applying what they’ve purchased from you. So that’s why it does take us a few months to ratchet up or ratchet down capacity in advance, once we see the trends developing.

Paul Jacobson

Fuel prices have been trending higher for a while now

“We’ve known for a while now that fuel prices were trending higher and as we’ve talked about for multiple quarters, we’re here. And that is fully expected and we believe the steps that we’re taking are the necessary ones to preserve the foundation that we’ve created.”

Higher fuel should lead to higher fares

“if you look back at history, significantly lower fuel ultimately translates into lower fares. That’s kind of a very high correlation over a long period of time, higher fuel turns into higher fares. The exact lag can vary, but it’s usually in the 3 to 5 month category and as Paul says, we’re facing higher fuel. And so we would expect seeing what we’re seeing in the events and what we know, based on history of how long it takes for that to work its way back into the pricing structure, that it is right around the corner, we feel.”

Fare realization inside of 21 days are improving

“I think that the fares that we’re realizing inside of 21 days are improving generally and the question is they are improving at different rates, corporate managed versus unmanaged and I think they are at slightly different rates, with managed being slightly below unmanaged. But the general trends are that inside the month now, we’re seeing a more robust fare.”