Delta Air Lines Inc (DAL) — Q4 2018 Earnings Call Transcript

Thanks, Augusta. Good morning everyone, and thanks for joining us. With us in Atlanta today are our CEO, Ed Bastian; our President, Glen Hauenstein; and our CFO, Paul Jacobson. Our entire leadership team is here in the room for the Q&A session. Ed will open the call and give an overview of Delta's financial performance, Glen will then address the revenue environment, and Paul will conclude with a review of our cost performance and cash flows. To get in as many questions as possible during the Q&A, 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 Delta's SEC filings. We'll 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 Investor Relations page at ir.delta.com. And with that, here's Ed.

Thanks, Jill. Good morning everyone. Thanks for joining us today. Earlier today, we reported our full-year results, including a December quarter pretax profit of $1.2 billion and earnings per share of $1.30, both of which were at the top end of expectations that we gave you at the start of the quarter. Our top line grew 7% in the quarter. This solid performance, combined with our best non-fuel unit cost result of the year, offset a $500 million increase in fuel expense. The December quarter marked a successful step on our path to improve margin performance, with our pretax margin expanding over last year's, even if excluding the one-time gain from our DGS transaction. 2018 was a successful year for Delta as we delivered strong results for our customers and our owners. Our earnings per share improved nearly 20% over the prior year, and we returned $2.5 billion back to our owners. We ended the year with an 11.6% pretax margin and a return on invested capital of 14.2%. Notably, our $5.1 billion in pretax income was only 3% below 2017, despite a 30% increase in our fuel expense. The last time we saw a 30% annual fuel increase was in 2011, and that year earnings fell approximately 25%. This really sums up the resiliency of our business and how different Delta is. For our customers, Delta's operation is the best in the industry, and 2018 was another record-setting year. We ended the year with 143 days without a single cancellation across the entire Delta system, including both mainline and Delta Connection, exceeding 2017's full-year record of 90 days. For our mainline product alone, we had a record-breaking 251 days without a cancellation, delivering an on-time arrival rate of 85.7%. This exceptional performance by our operations team resulted in Delta being named 2018's Most On-time Global Airline by FlightGlobal for the second year in a row. Running a great operation is the foundation for high customer satisfaction. When combined with the great service our employees provide and the investments we've made in our product, we're creating some of the most loyal customers in the airline industry. We drove improvement in net promoter scores during 2018 in every region of the world. Our domestic net promoter score has tripled over the last decade and reached an all-time high in September of over 50%. All of these results were a reflection of the incredible work of the Delta people, and I'm pleased to recognize our employees' outstanding performance this year with over $1 billion in profit sharing for the fifth consecutive year. As we move into 2019, while fuel volatility has been a major story in the last few months, prices now sit almost exactly where they were a year ago, and by the way, where we thought they would be. This, coupled with strong non-fuel unit cost control, should position us well for cost stability in the New Year. The revenue environment remains solid. After 8% top line growth last year, we are assuming a modest reduction in global economic growth rates for 2019. We expect top line growth to be 5% this quarter, a rate we are also anticipating for the full year, as we communicated last month at our Investor Day. Our revenues to China, a market that's driving some trade and travel concerns, grew 27% in the fourth quarter, and we expect a similar level of growth this quarter. Most importantly for Delta, the domestic revenue environment, which accounts for approximately 70% of our total passenger revenue, continues to do well. Corporate revenues grew 8% in 2018, and recent bookings show this trend continuing. Now, with respect to the government shutdown, we are seeing some pressure on our business. On the revenue front, we're experiencing about $25 million per month in lower government travel. The bigger impact is on our operation; with non-essential work at the FAA shutdown, our Airbus 220 start date is likely to be pushed back due to delays in the certification process. This is also hampering our ability to put seven other new aircraft deliveries into service, but it's our customers who are seeing the biggest impact, with longer lines at airport security. We are working closely with TSA on any steps we can take to minimize these delays, including mobilizing Delta employees to perform non-essential aspects of the security process. We strongly encourage our elected officials to do their very best to resolve their differences and get our government fully open as quickly as possible. In summary, 2018 was a strong year for our customers, owners, and employees. We experienced significant top line demand growth for our product, our operational reliability was record-setting, and our brand has never been more healthy. Despite a $2 billion fuel headwind, we generated double-digit margins, topping $5 billion in profits for the fourth year in a row, and we expect 2019 will build on these strengths and deliver a great year of returns for our stakeholders. The demand environment is solid, and our cost base should be stable, resulting in improved earnings and cash flows for our owners, and while we're certainly mindful of the challenges that exist, macro trends, currency headwinds, and extended government shutdown, our team has built a great foundation for our business, and Delta is well positioned for success in 2019. And now, I'll turn it over to Glen to discuss the revenue environment.

Thanks, Ed, and good morning everyone. 2018 was a strong year for Delta. Demand for our product and the affinity for the Delta brand has never been higher. I'd like to thank the Delta team for delivering record revenue and operational results this year, and our customers for their continued loyalty and support. For the full year, revenue grew 8% to nearly $44 billion on unit revenue growth of 4.3%, with a record revenue premium of 112%. Passenger unit revenues improved in all entities for the first time since 2012, with demand strength in both Corporate and Leisure segments throughout the year. Corporate average fares improved 5% and returned to 2016 levels. Non-ticket revenue streams were strong as we diversified our revenue base. Cargo revenue grew 16%, and MRO was up 19%, both producing double-digit margins. Our close relationship with American Express is a source of competitive advantage. In 2018, we drove $360 million of incremental value for a total contribution of $3.4 billion. During 2018, we set a new record with over 1 million co-brand acquisitions, and spending across the card portfolio grew double digits. In the December quarter, revenue grew 7% on a 3.2% unit revenue improvement. Corporate revenues grew 7% in the December quarter on both volume and fare improvements with growth across almost all sectors. Revenues from premium products were up 10% in the December quarter on a 4% increase in premium capacity. On December 7th, Miles as a Currency launched, allowing our customers to redeem miles for post-purchase upgrades. Initial customer response has been strong, with over 30,000 flight upgrades purchased within the first month, driving a 2.5 point increase in upsell on Delta.com. Miles on Mobile will roll out later this month, and we plan to deliver much more additional functionality as we move through 2019. Turning to specific entity performance in the quarter, domestic revenues increased 7.7% on 2.6% higher unit revenues. Both business and leisure revenues grew 8%, and we continue to set records for domestic revenue premium. This is noteworthy given an industry-leading increase in both stage length and gauge. Internationally, we saw the revenue growth of 4.8% on 2.3 points higher unit revenues. Our Latin region returned to positive unit revenue growth of 1% in the December quarter. The Caribbean was the best performing sub-entity, with 5% unit revenue improvement, and we are really pleased to see recovery taking hold on Mexico, where we posted a 3% rise in growth. In the Pacific, unit revenues were relatively flat year-over-year, with significant increases in stage and currency headwinds offset by strong demand. Japan and Korea saw mid to high single-digit unit revenue growth, with Korea posting the strongest performance. Transatlantic unit revenues increased 4.1 points, but we started to see some cautionary signs in the quarter, in addition to more pronounced currency headwinds. The strength of our absolute performance was unfortunately overshadowed by the one point miss to our guidance midpoint. This was attributable to two main factors. First, we gave guidance near the peak of fuel prices, and expected fuel recapture initiatives did not materialize. Second, the early Thanksgiving in 2018 created the longest possible calendar period between the holidays, and revenue during these weeks, while strong, was not as robust as expected, potentially due to consumer fatigue during this extended period. Retailers have reported seeing similar trends. The good news here is that January traffic and yields have returned to pre-holiday levels, and demand is back on plan. Looking forward, March quarter total revenue is expected to increase 4% to 6%, with adjusted unit revenue growth of flat to up on a 4% higher capacity. The two-point sequential change in unit revenue from the December quarter is due to a half-point impact from Easter shifting to late April, a half-point from the timing of joint venture settlements, and a full point of trends in Europe currency and the government shutdown. We are optimistic about domestic performance for the March quarter. Leisure and corporate demand remain healthy, with strong bookings for the upcoming Martin Luther King and President's Day holidays, as well as the spring break period, and the overall outlook for corporate travel is positive. In our most recent survey, 90% of travel managers expected to maintain or increase their travel spend into 2019. This is a two-point improvement over the last survey we did a year ago. For January, on-hand corporate bookings are already up 7% year-over-year, with both fares and passenger volumes continuing to improve. Domestic capacity growth for the industry and for Delta is moderate compared to 2018, and we are seeing improved competitive outlook in Delta hubs. For the March quarter, Latin will be our best-performing international entity driven by the Caribbean and Mexico. Brazil remains challenging as Delta is committed to improving profitability by trimming marginal capacity. With capacity plans down approximately 20% in 2019, we expect Brazil to become a rising contributor as the year progresses. In the Pacific, stage length and currency headwinds will persist into the first half of 2019. For the March quarter, unit revenues are expected to remain flattish, but profitability will improve as we capitalize on cost efficiencies from new aircraft, upgraded products and services, and further integrate our Korean joint venture products. In the Transatlantic, we see some cautionary signs in the March quarter. This is the entity expected to be the most challenged. We have seen leisure and corporate impacts in France due to the domestic unrest, and when you combine this with uncertainty surrounding Brexit, more pronounced currency headwinds and the timing of Easter, which historically impacts this entity the most, we expect modest negative unit revenues for the March quarter. While current trends are not as robust as what we saw in 2018, we are confident that the summer will be strong based on early bookings. We are watching this region closely given the uncertainty and are prepared to adjust capacity as we approach the next shoulder season. In closing, a more diversified revenue base across geographies and products, along with a continued pipeline of Delta-specific initiatives, give us confidence in our plan of 46% revenue growth in 2019; delivering on this target while also expanding margins is a top priority for Delta. And with that, I would like to turn to my good friend, Paul, to discuss the financials.

Thanks, Glen. Good morning everyone, and thank you for joining us. Changing our cost trajectory was the top priority for the finance team in 2018, and I am pleased to say that December quarter non-fuel unit costs were down 0.5%. Importantly, our full-year unit cost growth of 1.4% marked an inflection in our cost trajectory, putting us back within our long-term target of keeping unit cost growth below 2%. I would like to thank the entire Delta team for their hard work and innovative thinking. Our operating units are executing well on cost, achieving lower non-fuel CASM year-over-year, which is helping to offset overhead pressure from fleet and facility investments. Hats off to Gill and the operations team for a job well done. Our 2018 performance and initiatives underway give us confidence in our path to 1% non-fuel cost growth in 2019. In the March quarter, we expect non-fuel unit cost to increase 1% to 2%. Relative to the December quarter, there is incremental cost pressure for maintenance timing ahead of summer flying with about half of the full-year increase in maintenance occurring in the first quarter and creating approximately 1.5 points of pressure. Despite this pressure and as evidenced by the midpoint of our CASM guide, we expect each quarter of the year to be 1.5% or lower, which this quarter is expected to be the high watermark and is consistent with our guidance at Investor Day. In 2019, we expect an additional $350 million of benefit from One Delta, beyond the $150 million realized in 2018, and we'll continue to see benefits from re-fleeting as we replace aging narrow bodies throughout the year. Turning to fuel, our total fuel expense drove $508 million of pressure in the December quarter. Our all-in fuel price of $2.42 per gallon was 25% higher than the prior year. While market prices moderated significantly from the beginning of the quarter, inventory pre-purchases and the scheduled maintenance turnaround at the refinery drove a $0.16 headwind during the quarter. For the March quarter, we expect our all-in fuel price to be roughly flat to last year. Some of this is driven by a loss at the refinery of approximately $40 million due to lower gasoline crack. We currently forecast March quarter earnings of $0.70 to $0.90 per share, an approximately 10% improvement over the prior year at the midpoint. This equates to a March quarter pretax margin in the range of 6.5% to 8.5% compared to last year's 7.1%. Our full-year results in 2018 were impacted by two unique items, the sale of 51% of our Delta Global Services business and early adoption of the new lease accounting standard. These two items together increased 2018 earnings per share by $0.14, adjusted for profit sharing, with the majority of that benefit coming in non-operating expense. As we said at investor day, in 2019, we expect non-operating expense to be $450 million to $500 million. This is $350 million to $400 million higher than 2018, primarily due to a lower pension benefit and the lapping of the gain from the DGS sale. And finally, our strong cash generation and healthy balance sheet allowed Delta to execute on investment opportunities and consistently return capital to shareholders. During 2018, we generated $7 billion of operating cash flow and invested $4.7 billion back into the business, resulting in free cash flow of $2.3 billion. In 2019, we expect to produce roughly $8 billion in operating cash flow, and free cash flow of $3 billion to $4 billion, which is more than 50% higher than last year, and represents an approximate 10% free cash flow yield at our current stock price. As outlined at Investor Day, we are planning capital spending of $4.5 billion in 2019 as we continue to replace our fleet and invest in our product and technology. 80% of this spend is fleet-related, including the replacement of less efficient narrow bodies. Our investments are transforming our fleet to drive margin benefits through higher customer satisfaction, increased premium seats, and significant cost efficiency gains. For the first quarter, we expect capital spending of roughly $1.3 billion as we take delivery of 29 aircraft in the quarter. We remain committed to consistent return of capital to our owners as well. In the December quarter, we returned $325 million in share repurchases and $238 million in dividends, for a total of $2.5 billion returned to shareholders for the year. We expect a similar level in 2019, in line with our target of returning 70% of free cash flow to shareholders annually. Over the past five years, we have reduced our fully diluted share count by more than 20%, returning more than $12 billion through dividends and share buybacks, with a current dividend yield of nearly 3%. Importantly, we've done that while also reducing our debt and our pension liability, improving the health of our balance sheet. We are comfortable with the current level of debt, and as we highlighted in Investor Day, we have moved to a long-term leverage ratio target of 1.5 to 2.5 times adjusted debt to EBITDAR. This ratio was 1.9 at the end of 2018. Our targeted range should allow us to maintain investment grade ratings through a business cycle and also includes the incremental lease liabilities recognized with the adoption of lease accounting. At year-end, our pension funded status was 68%, with an unfunded pension liability of $6.4 billion. Our 2018 planned asset returns underperformed our target of 9% by about 14 points. This return shortfall will reduce our pension benefit in 2019, contributing to the year-over-year pressure in non-operating expense. Looking back on 2018, I am extremely proud of what we have accomplished at Delta. We successfully navigated challenges and have positioned the company for another year of solid top line growth, and more importantly margin expansion, which should drive double-digit growth in our earnings and free cash flow in 2019. As Ed said at the outset of this call, this performance is enabled by the Delta difference; our combination of the powerful brand coupled with our unmatched competitive advantages continue to deliver industry-leading results and drive long-term value for our owners. And with that, I'll turn the call back over to Jill to begin the Q&A.

Augusta, we are ready for questions from the analysts, if you could give instructions on how to get into the queue.

Hey, good morning everyone, and thanks for taking my question. So I guess Ed or Glen, I mean you guys mentioned challenges from European economies that look maybe a little bit slower this year, the government shutdown here in the U.S., maybe some lingering challenges in the Pacific and Latin. So, I guess when we look at capacity growth, I think scheduled right now in 2Q is about 4.6. What's the ability to take capacity down if some of these trends continue or even worsen from here?

We are quite optimistic about the global situation, even though you've described the slowdown uniformly. Specifically, we're excited about the performance in Latin America, as this marks the first quarter of positive growth after two negative quarters. We anticipate continued acceleration in this region into Q1 and throughout the year. Domestically, we are seeing solid returns as well. Last year was an outstanding year for Transatlantic routes, one of our best ever. Therefore, being relatively stable during this off-peak season is not something we are concerned about. We will, however, monitor the situation closely, especially as we analyze current events, including developments in France and the final resolution of Brexit. We are confident that summer in Europe will be strong due to lower fuel prices, and we are more focused on the latter half of the year to determine if further adjustments are necessary post-summer peak. We will keep you updated on this.

Okay, I appreciate that, Glen. And I guess we've heard it from FedEx too that maybe Europe is incrementally slow from here, so that's why I asked. But thinking more broadly, if the market is really concerned here that the economy will slow, because it's not necessarily slowing right now, with 35% of your passenger revenue tied up in premium products, should investors be thinking that maybe the Delta business now is more cyclical than maybe it was in the past? And I think at the analyst day you guys tried to answer that and said, look, the spread between a premium ticket and the economy ticket actually isn't that far off, so we don't think so, but can you give folks maybe some additional ideas on why this may not be as cyclical as folks think?

Well, I think there's two things we should talk about in that question, and the first is the disparity between the higher-end corporate travel and the lower-end leisure. The spread between those, absent other premium products, is at an all-time low. If you think about what's happened over the past couple of years, leisure fares have continued to increase, and we've had very stubborn corporate yields. And while we return to 2016 levels, we're still far off the peaks that occurred many, many years back. So if you think about the last cycle or some of the big cycles, we had really big differentials in the realized fare from corporate versus leisure, and those at a macro level have never been closer if you were thinking how does the next cycle play out. So, I think that's a very big issue we need to talk more about because that should make the whole industry a lot less cyclical. And then in the premium products, I think if there was a tick down in demand, we're more than confident that all of the new products and services and the way we're distributing and the broadness that we're able to offer, including their Pay with Miles feature and things like that, we would be able to offset weakness in demand by bringing new ways to buy the product into the marketplace. So really confident on both those, and we should probably talk more about that as we move through the year. We hear a lot of your concerns about where we are in the cycle, and while we haven't really seen any weakness in domestic, we are mindful that we are many years into this expansion, and eventually we will face a recessionary or contractionary environment, and we're planning for it, and we'll tell you more about why we feel so confident that we will weather the next cycle so much better.

Thank you.

Yes, I have two quick questions. Glen, you mentioned the challenges regarding RASM in the March quarter. I heard that the government shutdown and currency impacts account for about a point, and the Easter shift is approximately half a point. What was the other factor you mentioned that contributes an additional 50 basis points?

There was foreign exchange and joint venture settlements.

Okay, the joint venture settlement piece. Okay.

And that's really just a timing issue of when they come in and when they go out. That should balance out throughout the year.

Okay, great. My second question is about the strong sales in China and the positive commentary regarding Japan and Korea. However, I noticed that the Pacific RASM decreased slightly. What caused that? Is it related to longer stage lengths, or is there another area in the Pacific, like Australia, experiencing significant weakness?

No, most of that is stage length. In China, we discontinued the Narita to Shanghai route and replaced it with Atlanta to Shanghai. While the RASM is lower, the profit potentials are significantly higher, which is driving a slightly negative Chinese unit revenue, all based on stage length.

Great, that makes sense. Thank you.

Hey, good morning. Just a clarification from Glen, on the domestic commentary you mentioned solid trends. So just outside of Easter and maybe kind of the government shutdown should we assume that the magnitude is similar at least at the core level?

Yes, I think we're very confident. We had that little blip in December, right around the holiday. But as January and everybody came back from work we are back on track. And the corporate trends and the leisure demand look very similar to what we saw in the earlier part of Q4.

That's helpful. I have a follow-up on the Trainer. The color information you provided, Paul, was useful. I'm trying to understand what is causing the loss in Q1 and how we should view it as the year advances.

Sure, good morning, and thank you for that question. There are two major factors affecting Trainer year-over-year. First, the difference in gasoline cracks, which are currently at historic lows, is negatively impacting production year-over-year. Second, last year we gained from a slight revaluation of a RINs liability from 2017. With the current lower RINs prices, which have been relatively stable, we've fulfilled our obligations for 2017 and 2018 to date, so the impact is smaller now. However, the primary concern is still the lower gasoline cracks, which we anticipate will improve throughout the year, particularly as we enter the summer season.

Thank you.

Thanks very much. Good morning everyone. First question is for Paul on unit costs. I appreciate the color on the timing of the maintenance spend here in Q1 and the expected cadence for the year. But at a high level, can you just talk about where you see the biggest risks and opportunities in your cost structure to either materially outperform or underperform your 1% CASM-Ex target for the year?

Sure. Good morning, Joe. We've come out of 2018 with a lot of momentum that we expect to continue into 2019, so I'm optimistic on our One Delta initiatives in particular as we continue to progress and get better at that enterprise level of thinking, but I'm also optimistic about the fleet efficiencies that we'll get. We'll take approximately 60 airplanes in the first half of the year, and as that phases in over time we start to realize some of those efficiencies going forward. So again, I reiterate the optimism conveyed at investor day, I feel very confident about our 1% goal and the timing of maintenance was fully expected in that when we gave that guidance on a quarterly basis.

Okay, thanks. And then a question for Glen on cargo, I was curious if you could give us some more color on what you're seeing in the cargo operation, particularly across the Pacific, and what you're seeing there in terms of volumes and yields, and whether or not it makes sense for us to think of that as potentially being a leading indicator of what we might see in passenger demand?

Yes, this is Gil West. Just a couple of comments on cargo; first, the cargo business had an exceptionally strong year in 2018, as you probably know, revenues were up over $100 million or 16% as Glen mentioned, due large part to the yield performance. So despite lapping some pretty challenging comps year-over-year, we're seeing yield performance continue to hold strong. We do see some volume pressures, some geography to that, as you allude to, that's occurring. But I will say revenue growth, while it's moderating, is still up single digits driven primarily by yield performance.

And should we view that as a potentially leading indicator of what we might see with volumes on the passenger demand side, or is that not the right way to think about it?

I think you've got to think about what's going on with the tariffs in the more macro sense, and how people are trying to offset tariffs with it. They're using air or sea, and I think we could always look at leading economic indicators, but we are very, very close when we look at that passenger revenue side, and we don't see the same trends translating into the passenger revenue side, and I think we don't try to get ahead of ourselves, we try to size what their revenue is going to be as quickly as we can, and then we make the appropriate decisions.

Understood, and appreciate all the color, thanks everyone.

Good morning, everyone. Thank you for taking my questions. Glen, since you're differentiating between premium products and the main cabin, I've observed that growth in premium revenues has slowed a bit to 10% in Q4, compared to the mid-teens rate you were seeing earlier this year. What factors contributed to this change? I would like to hear your insights on how this premium revenue segment relates to corporate spending.

No, I think there are two factors at play. First, the base is growing significantly, which we hadn't anticipated would lead us to be in the mid to high teens as the base continued to expand. Second, this quarter had the fewest premium seats available compared to any other quarter. We were tracking around eight additional premium seats previously, but this quarter saw only four extra. As we move into 2019, that number will return to six. Therefore, your ability to sell premium is closely tied to the inventory you have, and the inventory growth in Q4 was the lowest we'll experience in the coming quarters.

Oh, got it, that makes sense. My second question is about the government shutdown. I understand this is a fluid situation, but I know you mentioned a lack of corporate contracts on the government side. Have you noticed anything in your bookings or discussions with corporate travel managers that might suggest corporations are beginning to delay travel due to the crowding issues at airports, or is that not part of the conversation yet? Thanks.

Andrew, this is Ed. No, we're not seeing any evidence that before looking at this extended shutdown as anything other than something that's going to be resolved hopefully soon.

Thank you. Good morning.

Good morning.

Good morning.

Hey, Paul. Good morning. So Paul, that pension plan return of -5%, what happened there? I think you guys said in your 10-K you get about 40%, 50% of gross seeking assets. I'm wondering if that's what drove it, and how are you thinking about that pension plan asset allocation, given some of the comments you made about maybe some concerns you may be starting to have around global economic growth?

Sure, Hunter. So as you know, the pension plan has a pretty long life, and with an approximate 9% expected return, we tend to be heavily weighted toward equities. It was a challenging year in the equity markets across the board, but particularly in global stocks around emerging markets, etc. We're always looking at ways to tweak that, but we do that through a lens of a long-term expected return matching that, that liability profile. So be careful not to overreact, but at the same time we want to manage that exposure prudently.

Okay. And then, maybe this is a question for Glen. Do you know how many seats, do you want to maybe take a stab at quantifying this, Glen, you know how many seats go unsold relative to your target, like maybe seven or 10 days before the flight today, and maybe how that's changed in the era of well, oil prices or higher industry capacity growth, and basically wondering if the industry is just a little bit more geared, particularly you guys, I should think, Delta, is just a little bit more geared towards that last minute, seven-day AP window than maybe you were five, six years ago? Can you provide any data around that for me?

Yes, I think when you look at where we have been going into each one of the months in 2018 and into 2019, we've entered the months actually ahead in load factor. So we've actually become a little bit less reliant on the very close end demand, and that's really where we want to continue to position ourselves in '18 as with a little bit less risk on the table as we head into each one of the months.

Hey, thanks. Just with your commentary about aircraft induction delays, I think I understand that the A220 in certification process, but I think you mentioned some other aircraft types. Can you just expand on why this shutdown is driving delays?

Of course, the A220, we've talked about, I think. There is some potential impact on some other fleets, namely, the A330-900neos, and it gets back into certification issues that we certify seats and crew rest and things of that nature, Wi-Fi systems that with the government shutdown become problematic for us. So there's not an immediate impact, but it certainly could have an impact, downstream, on us.

Thanks, that's helpful, and then with the A220s specifically, can you just remind us what aircraft types are those replacing? So in other words, are you going to be parking 717s, and are these delays part of what is driving maybe some maintenance pressure in the short run as you keep these older aircraft around?

Duane, I think you're overthinking it. We're not expecting this to be an extended delay and the primary aircraft the initial 220s are replacing are really long-range two-class RJs, of course, some MD-80s as well.

Hey, good morning, everybody, first one for Glen. I'm guessing the majority of your passengers that do fly in government fares have SkyMiles accounts. Can you give us a feel for how much these passengers drive in terms of non-government spend? I mean, for somebody in tech or finance, you know, their personal spend is a fraction of what their annual corporate spend probably is. I just don't really know how that dynamic looks for a typical government employee, obviously trying to figure out the knock-on effect on leisure spend even if the government were to reopen tomorrow?

We are currently working to quantify that. As you can imagine, figuring out all the implications is quite challenging due to various factors involved. Our estimate of $25 million takes all of those elements into account. It's not just about...

Oh, it does?

Yes.

But any reduction in leisure spending by government employees in January wouldn't have shown up immediately. Typically, you don’t return from vacation, get back to work, and then take another vacation. So, this impact would likely occur later in the quarter.

Exactly. I mean, we'll see how long…

Thanks very much.

Helane, we can't hear you, could you repeat your question?

Oh, can you hear me?

No, we can't hear you.

Well, Operator, can you open the right line?

Is that better?

Yes.

I'm having some difficulty with the connection while calling in from London, and my office is in New York. I have a question about TechOps. I didn't hear you mention it, but could you discuss the revenue growth trajectory for that sector and how it might impact your performance, especially in the first half of the year, in light of the other challenges you're facing in maintenance?

Sure. This is Gil. So, our MRO business and TechOps, you know, again had a great year in 2018. They pushed a little over $700 million, up $100 million year-over-year. We see a similar trend in 2019, a little more moderated growth, but still pushing probably close to $800 million. Longer term though, as you probably know, we've made investments in our capabilities, new engine shop, new test cell, all that as a foundation to introduce two new engine-type fleets into our MRO, that work the geared turbo fan Pratt Whitney engine and the Rolls Royce Trent series engine, and then longer term as that revenue ramps, we will see over a billion dollars a year incremental revenue from those two engine titles.

Yes, good morning. Paul, the ROI of 9% is about as high in assumption as I've seen, can you just talk about the sustainability of that, what the knock-on effects would be if you lowered it, and whether lowering it is contemplated in your earnings guidance for '19?

Sure, Joe. Good morning. The 9% expected return assumption is at the high end of corporate plans, but remember that our plan is unique, not only to Delta in the airline industry, but to all corporate plans because of airline relief. So what we have done is taken an approach where we've proactively funded with a little bit more of an aggressive return profile because we have the time to do that with airline relief with having fully met our minimum obligations through 2024. So, it has always been in our plans that we would work on reducing the risk in that portfolio as we get closer to fully funded, but what I would say is the long-term returns of that plan, as we've thought about it over the last 10 years have been wholly consistent with that strategy of trying to drive a better funded status through both contributions and investment returns, and that will change over time, but there's no change contemplated in the rate in 2019.

Okay, that's helpful. And then Glen, I just have a two-part revenue question for you; first is, I think your agreement with AmEx probably comes up in a couple of years; typically when both parties are happy, though, they'll extend that early, so can you just talk about the timing of that, and what sort of revenue opportunity that could offer you? And then whether you've changed the way that you guide based on kind of the challenge you've had over the past couple of years of hitting guidance, whether first quarter guidance is different than it has been? Thank you.

We do not comment on any potential negotiations, so I can't address the first part. However, regarding the second part, we have certainly listened to our investors who want us to meet our targets. Although 3.2 falls within the three to five range, we recognize that we have adjusted our expectations, and we are currently reviewing that. We want to avoid missing our targets again, as it has been difficult for everyone involved.

Good morning everyone. Thanks for the time. So, first question just on business travel, I usually think about business travel being booked within seven days, but I could imagine booking curves for international business travel could be slightly longer in average. So, could you maybe talk about the differences in the booking window you see between regions, and then is there a region in particular maybe where that that booking curve is longer or shorter, or you build in more cushion or less cushion to your forecast? Thanks. That's my first question.

You can think of the booking curve in relation to the distance of the trip. Generally, the further the destination, the earlier bookings tend to occur. For very short trips like Atlanta to Jacksonville, Atlanta to Orlando, and New York to Atlanta, the booking window closes relatively quickly. In contrast, for longer flights such as New York to China, New York to Japan, or Atlanta to Japan, we see much longer booking windows. That's the general guideline. Was there another part of that?

Yes, and then the second part was just keeping that in mind, do you build in more or less cushion, given some of these longer booking windows for international into your forecast than you might for domestic?

Oh, of course, the way we build our forecast is really what's happening in the last few weeks versus what happened in the last few months versus what's happened in the last few years. So, it's a very complicated mathematical equation, and for those that have longer booking windows, we clearly take that into account.

Okay, I appreciate that, Glen. And I guess we've heard it from FedEx too that maybe Europe is incrementally slow from here, so that's why I asked. But thinking more broadly, if the market is really concerned here that the economy will slow, because it's not necessarily slowing right now, with 35% of your passenger revenue tied up in premium products, should investors be thinking that maybe the Delta business now is more cyclical than maybe it was in the past? And I think at the analyst day you guys tried to answer that and said, look, the spread between a premium ticket and the economy ticket actually isn't that far off, so we don't think so, but can you give folks maybe some additional ideas on why this may not be as cyclical as folks think?

Well, I think there's two things we should talk about in that question, and the first is the disparity between the higher-ending corporate travel and the lower-ending leisure. The spread between those, absent other premium products, is at an all-time low. If you think about what's happened over the past couple of years, leisure fares have continued to increase, and we've had very stubborn corporate yields. And while we return to 2016 levels, we're still far off the peaks that occurred many, many years back. So if you think about the last cycle or some of the big cycles, we had really big differentials in the realized fare from corporate versus leisure, and those at a macro level have never been closer if you were thinking how does the next cycle play out. So, I think that's a very big issue we need to talk more about because that should make the whole industry a lot less cyclical. And then in the premium products, I think if there was a tick down in demand, we're more than confident that all of the new products and services and the way we're distributing and the broadness that we're able to offer, including their Pay with Miles feature and things like that, we would be able to offset weakness in demand by bringing new ways to buy the product into the marketplace. So really confident on both those, and we should probably talk more about that as we move through the year. We hear a lot of your concerns about where we are in the cycle, and while we haven't really seen any weakness in domestic, we are mindful that we are many years into this expansion, and eventually we will face a recessionary or contractionary environment, and we're planning for it, and we'll tell you more about why we feel so confident that we will weather the next cycle so much better.

That's going to wrap up the analyst portion of the call. I'll hand it over to Ned Walker.

Okay. Hey, thanks very much, Jill. Good day, everyone. We will go ahead and begin the Media Q&A at this time. I'd like to ask everyone if they could ask one question with a brief follow-up. That way, we should be able to accommodate almost everyone, and Augusta, if you could review the process for asking a question, we'll go ahead and begin.

Hi, there. Wondering about the shutdown and long lines, can you give us some idea of how much you're seeing in a way of passengers getting delayed, missing flights, maybe missing connections at customs, if there are shorting stoppages, and what kind of financial impact is that having on Delta, and have you been able to measure that as a material in any way in terms of rebooking cost and so forth?

Andrew, this is Ed. We're not seeing a meaningful impact. The operations are running on schedule, on time, our team is doing a great job of working with the TSA to help the queues moving forward. I mentioned earlier today that the TSA published yesterday they had an unscheduled absence rate of 7% that compares to a 3% rate. They typically run, so it's in isolated airports we are having some longer lines, but it's not a system-wide issue at all, and to the extent that customers are impacted by delayed lines, we are re-accommodating them and getting them to their destinations in good manner.

And just as a follow-up on the A220. You mentioned in your remarks that the shutdown is causing $25 million from government workers. But just wanted to know how much will you be leaving on the table as the launch is delayed for weeks and weeks? Is there a way you could quantify that?

We are not anticipating that outcome. That's probably the short answer. We are not leaving any money on the table. We are not going to be cancelling routes or flights. We will just delay the introduction of that specific aircraft type.

Thank you. You talked earlier in the call about the dip in the corporate travel and the bookings right before Christmas and then how that rebounded. Can you talk just a little bit more on that in general terms on was it just the one week? Or, did that one week extend into the start of the New Year and you've rebounded since then?

I think it was really specific to the long period between Thanksgiving and Christmas. And it wasn't corporate. It was really just an across-the-board lull. As you know, once every seven years this occurs where the first day of the year is on a Thursday in November and creates the very longest possible period between the holidays. I think you are seeing a lot of people talk about this, not only in our industry where that long period probably is not advantage for airlines or retail. So, next year it moves again and it will move a lot closer. And we are not expecting that to recur. And yet, all the trends did go online right after the holidays.

And Mary, this is Ed, just to affirm, we had a great Christmas, all-time record in terms of volume that we carry. So, it wasn't a lull. It was just the impact on pricing was a little softer than we anticipated, but it was a very very strong Christmas and holiday season for us.

Great. And if I could just ask on the seven planes that are being delayed into entry, does that include the A220s, and if so, how many? And then the other question is related to that. Were others all A330-900s or were there some other fleet types in there?

We are not going to get in all those details. It's primarily the Airbus 220, yes, but as Gil mentioned earlier, the 330neo could also be impacted here.

My question, I just wanted to clarify. It's $25 million a month in lost revenue or just January? And also on the shutdown, what else can you not do? I mean you mentioned the 330neo and then internet, can you launch new routes? So what can you not do with FAA furloughed?

On the revenue estimate, $25 million is what we are seeing in the month of January. Obviously, if it was to continue, we think that's in order of magnitude number, but we don't know what those impacts could be, and we're not seeing any significant operational challenges. The introduction of new aircraft types for us is primarily the Airbus 220 and 330neo. And that's where our concerns are limited to.

Is there any issue especially on the TechOps with hiring mechanics with some FAA furloughed or hiring on any aspects of the business?

We're not seeing any meaningful change. Certainly, the onboarding is delayed a little bit for any new hires in that space. But again, it's something hopefully that we are going to be moving through relatively quickly. We are not making any changes in our producers.

Hi, my questions have already been answered, but just one more shutdown-related question. You said that you haven't seen any impacts on bookings, but has there been any rise in passengers canceling travel plans this month that can be attributed to the shutdown?

We're not experiencing that. The $25 million estimate we provided for January includes all of those factors.

Good morning. I have a quick question about the 52% revenue from premium products in non-ticket sources. You mentioned there is a double-digit increase in that. What do you expect for 2018? Do you think that growth will continue at that rate?

Yes, we expect that we'll continue to grow in premium products and services more than we grow the base fare products. So, if you think about our total growth of 4% to 6% next year that would indicate that we are growing significantly higher on the premium product side. So, probably close to that 10% to 15% as we have in the past few years.

Good morning. Thanks for making time for me. You guys had a process late last year exploring partnership options at the refinery. Just curious if you can give us an update on what you determined in that, or if it continues, and also curious just more broadly if Delta is looking at making any other non-maintenance investments maybe logistics to bringing crude from the Macon and that refinery to improve performance?

Good morning. We have continued with that process and have received some interest and having discussions with parties. There is no update on the strategy broadly as we articulated. We are looking for ways to enhance the value and the strategic value to Delta of the refinery through a partnership, and those discussions can be complicated, but right now, we are focused on running and operating the refinery as efficiently as we can. We just came out of a major turnaround investment that is done every five to six years. And the refinery is running quite well. So, nothing needed in terms of enhancing the performance.

Okay. So, you are satisfied with the access that you have to crude right now? You don't feel like you need to build anything on to that?

Absolutely. So, we take a wide variety of crude. Sometimes we swing domestically and some internationally, and we have the logistics to be able to take advantage of that as those opportunities present themselves.

Okay. Thanks Ed, Glen, Paul, and Gil. And that does conclude our December quarter and full-year 2018 earnings call. We will back here again in April when we report our March quarter 2019 earnings. Have a good day everyone.