Delta Air Lines Inc (DAL) — Q3 2019 Earnings Call Transcript

Thanks, Jake. Good morning, everyone, and thanks for joining us for our September quarter call. Joining us from Atlanta today are Delta’s 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 the review of our cost performance and cash flow. 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. And you can find a reconciliation of our non-GAAP measures on the Investors Relations page at ir.delta.com. And with that, Ed.

Thanks, Jill. Good morning, everyone. We appreciate you joining us today. Demand for the Delta product is as strong as ever, and our powerful brand, unmatched competitive strengths, and pipeline of initiatives are driving earnings growth, margin expansion, and solid returns for our owners. Earlier today, Delta reported the September quarter pretax profit of $2 billion, which is up $350 million from last year. Our EPS increased 30% to $2.32 per share with operating margins expanding by 2.5 points. Importantly, we’ve already generated $4 billion in free cash flow year-to-date. Our employees continued to deliver the very best operational reliability and service for our customers, even against the summer’s backdrop of record passenger volumes, airport construction projects, and difficult weather. We’ve now had 123 days without a single cancellation across the entire Delta system this year, a 23% improvement over last year’s record performance. This unprecedented level of reliability combined with great service from our team continues to drive higher customer satisfaction and growing brand affinity for Delta. Year-to-date, our domestic net promoter score has improved more than 5 points over the prior year, and 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 $12.6 billion in the quarter, and we now expect to achieve approximately 7% top-line growth for the full year. I want to thank the entire Delta team for producing one of the best quarters in our history. You are the force behind the Delta brand. And to recognize your efforts through a challenging summer, we have accrued another $517 million towards next February’s 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 the 4% base pay increase that went into effect last week for ground employees and flight attendants. Beyond investments in our people, we are continuing to improve the customer experience through a record number of new aircraft deliveries, airport terminal projects, and technology innovations. These investments support long-term growth, industry-leading profitability, and strong cash flow. In many ways, 2019 has been a transformational year for our Company. We’ve firmly established Delta as the largest airline in the world, both on revenues and profits and are solidly on track to produce our fifth straight year with pretax profits in excess of $5 billion. We have the world’s most valuable airline brands, one that is 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 LATAM Airlines. The agreement adds geographic diversity in a fast-growing continent, adding 100 new destinations to our map and significantly improving our position in South America. Once approved, our proposed joint venture will move Delta from the 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 and WestJet, we’re creating a true carrier of the Americas with the ability to connect travelers as never before. 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 the major relaunch of our Delta SkyMiles American Express Card portfolio. We are providing our customers with more ways to earn miles and new benefits that deliver an even better travel experience. The investments we’re making in our people, product, service, and partnerships are 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 our product has never been higher. We’ve grown our revenues by 15% over the last two years. And to ensure that we continue to deliver the very best product and 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 and will add about 1 point to our CASM-Ex fuel run rate in 2020. I'm confident that these are the right investments for the health of our brand. And with the productivity still to come from our fleet, facility, and technology investments, we have the right platform to mitigate this cost inflation over the long term. With that said, it is important to note that our overall fourth quarter unit costs all-in are expected to be down 1% due to the drop in fuel prices and our margins should expand once again in Q4. In closing, we are on track to deliver very strong results in 2019. Demand trends remain healthy and our full-year earnings guidance is for more than 20% improvement over last year's earnings per share. We have built a durable foundation through our culture, leading operational reliability, unrivaled network, our loyalty program, and our 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. I look forward to sharing more details on our strategic outlook and 2020 business plan at our upcoming Investor Day in December. Now, with that, I’d like to turn the call over to Glen and Paul to go through the details of the quarter.

Thanks, Ed, and good morning. First, I’d like to thank the entire Delta team for their hard work during our busiest summer ever. In the quarter, we ran record load factors and carried 3.3 million more passengers than last year, up 6%. The exceptional operational performance and unmatched service our people provide are the foundation for improving customer satisfaction and the reason why more customers than ever are choosing to fly Delta. When combined with the solid demand backdrop and progress against our commercial initiatives, we delivered a record quarterly revenue of $12.6 billion, up 6.5% over last year. This marks the ninth consecutive quarter of top line growth at a level more than two times GDP. We also continue to diversify our business with 52% of our revenue generated by premium products, loyalty, and other non-ticket revenue sources. Premium product revenue grew 9% in the quarter to $4 billion on top of last year's growth of 13%. Momentum is expected to continue 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 in mileage redemptions, co-brand spend, new card acquisitions, and roughly 100 million benefits 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 redesigned card offerings will deliver rich rewards and support continued growth in our membership base 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 end of the year, we expect nearly 1 million customers will have used miles to upgrade their experience. This revenue stream is projected to deliver over $100 million this year, ahead of our initial expectations. We expect this to continue to grow as we give our SkyMiles members more options to use miles anywhere they can use cash with Delta. Corporate revenue was solid, improving 5% in the September quarter on top of the 12% improvement in the same period of 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 in 2020. Leisure revenues remained healthy, growing 7% for the quarter with very strong demand during the peak summer travel season. Our MRO grew 9% in the quarter, and we are confident in our goal of roughly 20% improvement for the full year. Similar to the freight operators, we are seeing pressure on cargo revenues, which declined 17% on both lower volumes and yields. 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 the prior year as strengthening in domestic and 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 continued 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 of nearly 120%. Revenue and margins grew in every domestic hub with revenue improvements of 10% in our coastal hubs and 6% in our core hubs. Boston performance led the system again with a 24% increase in revenue and a 5-point improvement in margin. Internationally, revenues grew by 1.1% as 3.1% capacity growth offset a 1.9% decline in PRASM including more than 1 point of currency headwind. Latin was our best performing entity with a 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 a major factor during the quarter, driving nearly all of the 1.6% PRASM decline. Pacific is the only entity where revenue was down over the prior year. This was due to a decline in corporate travel driven by tariff impacts on the automotive and manufacturing sectors, and lower leisure demand to and from China. While Pacific is facing some near-term headwinds, we continue 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 of flat to up 2%. We are seeing solid corporate and leisure demand with revenue growth driven by premium products, loyalty and MRO. Sequentially, the December quarter TRASM is negatively impacted by the timing of joint venture settlements and Jewish holiday calendar shift. Excluding these items, underlying PRASM growth remains consistent at approximately 1.5% in both 3Q and 4Q. For the full year, we now expect to achieve approximately 7% revenue growth on full year capacity growth of 4.5%, while sustaining our 110% unit revenue premium to the industry. While still in the planning stages for 2020, the strong demand environment and our commercial initiatives and our relaunch of service to India 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 prices, and the industry landscape. Our additional planning assumptions for 2020 call for 3 to 4 points of capacity, with a point of that capacity related to our relaunch of service to India. Generally, capacity growth will be focused in the areas of strength that support our long-term plans. This includes further optimization of our domestic network and 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 cabin revenue growth into next year as we build on our strong 2019 results. We will provide more details of our capacity growth and commercial initiatives for 2020 and beyond in our upcoming Investor Day in December. In closing, a more diversified revenue base along with our pipeline of Delta-specific initiatives gives 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, Glen. Good morning, everyone, and thank you all for joining us. We’re delivering against our Investor Day plan to drive top line growth, margin expansion, and consistent returns to our owners. Year-to-date, our top-line has grown 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 the long-term growth potential of the business. Our after-tax return on invested capital on a trailing 12-month basis is 15.9%. This represents more than 300 basis points of improvement 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 pretax margin of 15.7%, 2 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 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. While non-fuel unit costs in the quarter were up 2.4%, total unit costs were down 2% as a result of those fuel prices. During the September quarter, we announced a pay increase for eligible ground and flight attendant employees effective October 1st. This had a modest impact on the September quarter and has about a 1 point impact on CASM-Ex in 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 1 point to non-fuel costs in 2020. Our current plan assumption for 2020 is non-fuel unit cost growth of 2% to 3%. We’ll provide more detail on that at our December Investor Day. In the December quarter, we’re also seeing an approximate 1.5-point impact to unit cost from the mark-up 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 3 points of CASM-Ex pressure in the December quarter and resulting in expected non-fuel unit cost growth of 4% to 5%. Non-operating expenses for the quarter were $65 million higher than the prior year, primarily due to higher pension expense consistent with our 2019 guidance. For the full-year, we continue to expect non-operating 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 pretax margin of 9.5% to 11.5%, which is down from the prior year as we lap more than $100 million of one-time gains, including the sale of Delta Global Services last year. Excluding this non-operating gain, our pretax margin is expected to improve over the prior year and we expect our 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 the solid fourth quarter outlook, we are on track to grow full-year earnings per share by more than 20%. Turning to the balance sheet and cash flow. At the end of the September quarter, adjusted debt to EBITDAR was 1.7 times at the low end of our target leverage ratio of 1.5 to 2.5 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 LATAM. This produced free cash flow of $1.4 billion, meeting our full-year free cash flow target of $4 billion in just nine months. Our full-year core CapEx guidance of $4.5 billion is unchanged, including the $100 million as part of our LATAM agreement to acquire 14 A350 aircraft. This recent transaction with LATAM is an exciting opportunity for Delta and as an example of how our balance sheet enables strategic moves that expand our competitive strengths. We continue to consistently return cash to our owners in addition to investing in the future growth of the Company. During the September quarter, we returned $468 million to shareholders. For the year, we remain on track to return approximately $3 billion, in line 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 continue 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 Q&A.

Thank you. Before we proceed to the Q&A, I want to mention that it's that time of year again when we announce our December Investor Day. Please save the dates of December 11th and 12th, as we'll be back in our hometown of Atlanta. Mark your calendars; we'll provide more information as the date approaches. Now, Jake, could you share the instructions for the analysts on how to join the queue?

Hey. Thanks, yes. Hey. Good morning, everybody. I guess, maybe this is a question to Ed. If you can just give us an update on kind of where things, to the best of your knowledge, stand with respect to the tariff situation and the potential impact to Delta? And is it new aircraft orders; is it order aircraft as they deliver? Any color around this topic would be great. Thanks.

Thank you, Mike. The situation with the aircraft deliveries has raised concerns for us, as it feels like a retrospective tariff on past decisions. We are currently exploring all available options and do not anticipate incurring any tariff costs by the end of this year. We expect some deliveries from Mobile regarding the 321s, which do not carry a tariff. Looking ahead, we are assessing our options for next year to ensure we can avoid increasing the prices we have already negotiated with Airbus. At this moment, we are considering our options, but I won’t go into specifics since the situation is still evolving. We do not foresee this being a significant cost to Delta, especially in the near term.

Okay, great. And then, just a quick follow-up to Paul. I'm not sure if I heard it right. You mentioned the CapEx related to the LATAM A350s, and I think that was an amount for 2019. Did you say $100 million or did I hear that correctly?

Mike, you heard that correct. That’s expected in the fourth quarter of ‘19.

Hey, thanks. So, just playing back the summer, it feels like you’ve tried to flex up and respond to the environment, and that has obviously driven some expense, some overtime, 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 mentioned several times that in the second and third quarters, we definitely benefited from the MAX not being in operation. However, we do not expect to see a significant amount of new incremental growth from that. Most of the growth came from the strength of our own brand and the performance of our products and services, which continue to exceed historical levels. The costs we've discussed are not solely a result of high demand. Keep in mind, we maintained a load factor of 90% from April through August. Additionally, we experienced extremely volatile weather this summer that limited our recovery options. The elevated load factor expectations, the absence of the MAX, and the weather all contributed to a situation where we need to reinvest to ensure that next year, as I anticipate retaining any market share gained, we are better equipped to handle the volumes in 2020.

Okay, thanks. And then just for my follow-up, I wanted to ask you maybe a longer-term question about South Florida. How do you think about the growth prospects for that market longer term and potential connecting opportunities 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 points south? Thanks for taking the questions.

Thanks for the questions, Duane. It’s a little bit of both. I think, if you think about improving the connectivity to the existing LATAM infrastructure in South Florida, there is a little bit we probably have to add to replace some of the flows that’s existing today on American, but we’re not creating a new hub; we're not creating a new giant connecting complex. We're doing selective adds. So, think of it, if you think about Miami as a hub and you think about our size in Dallas or Denver or Chicago, it probably looks a lot more like that to make sure we have key fleets that will go over Miami and then really work with LATAM once we get ATI to continue to develop Atlanta and our other U.S. gateways as the primary connecting points for South America traffic. So, I think we have a pretty good plan that takes the best of both, that’s connecting complexes in the U.S. and best service within the local markets, and I think that’s going to be a great platform for growth moving forward.

So, I think this might be a question for Paul. As I look at those actuarial assumptions you changed, you mentioned that it doesn’t flow through to next year. But, I think you are also spending some money to bring your pension plans into closed or funded status. So, I was just wondering if it's possible for you to give us an update on that.

Good morning, Helane. The two issues are somewhat unrelated. The actuarial changes pertain to the long-term disability program, which involves actuarial tables updated every few years. We've noticed a slight increase in trends, so we need to mark up that liability one time. This will impact the profit and loss statement, but it's not expected to happen again this year or next year. Regarding the pension, we are still aiming for an 80% funded status by the end of 2020. So far, the assets are on a strong trajectory this year with robust returns. Our pension expense, as mentioned earlier, is primarily influenced by last year's returns, which get spread over a full year. As we approach 2020 and receive updates on both funding and investment returns, we will provide more details at Investor Day about 2020.

Paul, maybe just picking off where Helane left off there on 2020. I’m not asking for explicit cash flow guidance for 2020, obviously, but just hoping you could walk us through some of the puts and takes in operating cash flow for next year, 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. Obviously, we see growth in the business, we see growth in the Amex portfolio as we continue to work our way up to nearly $7 billion by 2023. Those are some good sides in the business. We have articulated a belief that we’ll 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 commercial opportunity from that initiative, 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 over time?

Hey, Joe. This is Ed. I’ve again been vocal on this. I think it’s something that our customers 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 our selling proposition. But then, you’re right, there’s a second derivative order with respect to any commercial opportunities that we could create around that surface. We’re not ready to talk in detail yet. We’re still a ways off from announcing the exact start date. We’re learning a lot on the technical capacity that we currently have and any additional changes we need to make. But we’re on the path to getting there and I'm excited by it. I think it’s going to be a great new service to our customers when we get there.

Good morning. I know it's early stages, but I was hoping you could clarify the cost outlook for 2020. It appears you might be suggesting that you over-earned this year since the costs are associated with keeping up your current market share. However, you also incurred significant expenses by compensating for your ongoing efforts to meet capacity needs. I'm curious about how this adds to that incremental point and how we should view the cost outlook for next year.

Good morning, Savi, and thanks for the question. The pressure that you cited and certainly what we’ve called out going back to some conferences this fall was real. And as I articulated, we felt a little bit like bursting at the seams with all the passenger loads and some of the weather pressures that we saw. And undoubtedly, some of the staffing investments that we’ll 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 in an expanding base. Our total revenues are up 15% over the last couple of years, and there are 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 said, we’ll give more details at Investor Day.

Savi, this is Ed. I would like to add that we have projected a long-term growth rate for non-fuel costs at around 2%. We strive to keep costs below that level, as we have successfully done in recent years. However, there are times when costs may exceed this target. Overall, I believe that a 2% growth rate is a reasonable goal for us. I wouldn’t characterize our earnings this year as excessive. We faced costs in both Q3 and Q4 due to the high volumes we experienced. This situation reflects our significant investments in infrastructure to better accommodate growth, including improvements in airports, technology, staffing, and service providers, as well as managing the secure volumes during a busy summer. This is a long-term investment, and I am confident it will yield sustained returns.

That makes sense. If I might just ask a smaller cost question on 4Q, just on Trainer, just expectations there? I might have missed it.

Sorry, Savi. On Trainer?

Yes.

Trainer is expected to have a slight loss for the quarter that’s built into our fuel price guidance. We have some scheduled maintenance on a couple of units that’s going on now that's expected to be completed in early November. But overall, the refinery continues to operate well.

Ed or Glen, when we think back to simple fares in 2005, I’m wondering why that failed. And at its core, this is really a loyalty question. Is there a thought to maybe trying something like that again, given such clear product distinctions between their types and the segmentation era?

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 infrastructures we're putting in place now and how we see the evolution of pricing occurring over the next year. One of the things that you would have to admit about the industry in general is it’s transactional and it's not really trusted very well. And I think we learned that because sometimes you go look and the flight you want to take on a Monday morning is $500 and sometimes it’s $1200, and sometimes it's yet another number. And 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 fares but it's more reliable fares. 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 it will 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 of the things that we have to do is to have trust from our consumers.

That's great. Thank you, Glen. Ed, is the third runway at Heathrow a confirmed project? How can you apply the airport initiatives you've been working on in the U.S. with your stake in Virgin to influence the development of that extension? Thanks.

I don't believe it's a done deal. I think it's certainly something that's needed. I think there is a lot of work going into the termination of the cost, the long-term impact to the city. We're going to provide certainly through Virgin our perspective on a build there, but we are a relatively small share of overall Heathrow. So, I’m not sure we're going to have much of a voice in that process.

For Glen, the 10% PRASM premium, that's driven by about 20% domestically and basically flattish on the international, if I’m correct. Why don’t you think you get a RASM premium on international?

It varies by entity. Each international entity is unique. We receive a premium in the transatlantic market, but historically, we haven't achieved that premium in Latin America. This is one reason we are particularly excited about the LATAM transaction, as our offering wasn't competitive enough to generate revenue premiums, being the fourth carrier. We recognized the need for structural improvements in our Latin American offering to eventually secure significant premiums, which we believe we can achieve over the long term by acquiring LATAM. In the Pacific region, although it's smaller for us and we've made notable improvements, our stage length is a disadvantage. As we prepare for our transition to Haneda next year, we've communicated to our investors that we are undergoing a multi-year transformation. At our upcoming Investor Day, we'll discuss our progress toward achieving our goals in Asia, which will provide us with the foundation to offer products that will generate premiums, including the introduction of Delta One suites and premium economy. I believe we are well-positioned to earn premiums in the Pacific over time as well.

And second on loyalty, maybe for Paul, maybe for Ed. 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, the path towards that $7 billion figure, how that gets altered by a U.S. recession? I've got all the data on what happens to air travel demand. But, what are your recessionary assumptions in terms of quarterly mileage sales, card openings, consumer spending? I mean, 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 the economic outlook over the next five years. And the $7 billion number that we have disclosed is our target together with Amex over this timeframe. It doesn't necessarily indicate that's recession-proof. I mean, certainly, it's sensitive to spend, probably the single biggest element that we have in there. But we also have modeled what happened in 2009 and how quickly spend did return. It's one of the reasons why we're creating not just greater loyalty through the card and the brand portfolio but also getting avenues for currency to be used as dollars, and the technology work that we have. And I think it's actually been one of the 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 would say it's our target. Could there be bumps along that way? Certainly. 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 five years. And at the same time, even through the process, this year while you have some economic concerns, I wouldn't say significant concerns in terms of consumer spend, we're still seeing growth on the card portfolio at double digits.

Is there a quarterly minimum in terms of what Amex is obligated to purchase in terms of miles, or is there a scenario where spend was soft enough, they would have enough miles and they could just drop to zero for a period for Delta?

We're not going to get into any details of the contract, Jamie, as you can appreciate.

Ed, Paul, a question for 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 your ability to bring those costs back down to that target of 2% or below level when you've got a pilot deal that's out there and you are likely going to be decelerating some of that capacity growth back to more normal levels, if you will?

Ed, I will address that. The 2% figure is consistent with what we've shared previously, and we continue to observe that trend. We will offer more detailed insights during Investor Day regarding our cost outlook for 2020. However, one challenge we are encountering this year is that our gauge for 2020 is expected to remain relatively flat compared to the previous year, which has certainly been a factor in our productivity concerning unit costs. We anticipate an improvement in 2021. This is another short-term challenge we are facing, but we will share our viewpoint when we provide further details. We have encountered labor pressures before and expect that any agreement reached with the pilots will align with the frameworks we previously discussed.

You talked about a pretty strong demand environment. The supply backdrop seems pretty favorable from what we can tell. At 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? I think we were trying to get to that in the call. So, I appreciate the question that our lift PRASM, which is what's coming off the tickets, is really very flat between 3Q and 4Q at about 1.5%. So, the TRASM decline between 3Q and 4Q is really a previous year accounting adjustments, which didn't occur this year. And so, that's what we were trying to say in the call. I'm sorry if we weren't clear enough. But, thanks for the question because I do want everybody to understand that the revenue coming off the tickets themselves is positive, it's consistent at about 1.5 up between 3Q and 4Q.

The decline in TRASM from the third quarter to the fourth quarter is primarily due to accounting adjustments from the previous year that did not happen this year. I apologize if that wasn’t clear during the call. I appreciate the question because I want to ensure everyone understands that the revenue from ticket sales is positive and has remained consistent, increasing by about 1.5% between the third and fourth quarters. Next, we will hear from Joseph DeNardi with Stifel. Joseph, please proceed with your question.

Is that better?

There have been more discussions about the Amex partnership than usual, and analysts are asking about it more frequently. I still believe that investors remain uncertain about the company's valuation. This suggests that there may be a gap in understanding. I am curious as to when you anticipate being able to show investors the path to profitability from a financial perspective. Thank you.

Joe, you were still breaking up. If I understood your question, it's along the lines of, are we prepared to increase the segment disclosure relative to the American Express loyalty component of our business. Is that right?

Yes. That's right.

Yes. We're always evaluating how we provide the best insight for our investors into the drivers of our opportunities for the future. We've improved some of the disclosure. And certainly while we have to work within the confines of our contractual obligations to Amex, the confidentiality provisions, yes, I think it's a valid question, it's a fair question. It's something we need to continue to think about how we get greater visibility. It's a very important source of revenue for us today, it's certainly a growing source, probably growing faster than most other revenue components we have in the business, and it's certainly margin accretive. We can debate how you want to cost those miles, but it's certainly highly accretive to us. So, I think it's a fair question. I don't have an answer for you quite yet, but we're going to keep looking at. And then, Ed, given the value of the Amex agreement and how valuable you think it can be, why isn't Sandeep's role a C-level position? Did Sandeep ask you to ask that question? Sandeep and the loyalty team are incredible contributors and highly valued. And I wouldn't go on title or definition. I've got great visibility to Sandeep and I see him just about every week. So, he’s a great asset to the Company as well as his entire team.

So, year-to-date, you've been seeing some nice growth in some of your non-ticket revenue categories like travel-related services and, of course, loyalty revenue with the new Amex deal. Could you maybe walk us through some of the puts and takes on these non-ticket revenue streams into next year? Is there still room left to add some more products or should we expect to see growth accelerate in some of your ancillary businesses? Thanks.

I will discuss premium products and then pass it to Gil for insights on ancillary services like MRO. We see significant growth potential in this area, which is following a different trend compared to base ticket fares. As noted, we achieved a 9% increase in premium products this quarter, surpassing the overall revenue growth average of 6.5%. We believe this growth is driven by our ability to price these products based on rising consumer demand and our expansion of distribution channels. We have been enhancing our digital channels and collaborating with travel management companies and OTAs, yielding positive early results. However, we recognize that there is still work ahead in the months and years to come. We remain optimistic about growth in this sector, even in the face of a challenging economic climate.

Yes, this is Gil. I want to acknowledge our tech ops team, as they are exceptional. The MRO business has seen an increase of about $120 million year-over-year, which is a growth of around 23%. We are experiencing strong growth this year. Looking ahead, the investments we've made in capacity for new generation engines, particularly the Rolls-Royce Trent engine and the Pratt & Whitney geared turbofan, will start to ramp up next year. While those volumes will mature over the next three to four years, we will benefit from that momentum in the MRO business as we progress.

That's great. Thanks. And then, maybe just one quick follow-up on costs. And I think, you already alluded to this Ed, but I just want to make sure I've got it right. In your 2020 CASM outlook, the 2% to 3%, there is a potential new pilot deal that is contemplated in that number. Is that correct?

Katie, I'll take that. We are not going to comment on the pilot deal or in any nature. 2% to 3% is our best estimate where our costs will be next year. We're not going to get into the details relative to our negotiations.

And Jake, we're going to have time for one more question from the analyst.

Hi. This is Ran Yang speaking on behalf of David Vernon. So, just to clarify talk go back to the CASM-Ex guide into 2020. The one-point step up, is that something that you can potentially offset with other cost initiatives, like One Delta?

One Delta continues to pay big dividends for us. And while we expect the level of investment back into the product and the infrastructure as Ed articulated, we're always striving to find some of that productivity. And as we've said before, we'll detail more about the 2020 cost outlook at Investor Day in December.

That will conclude the analyst portion of the phone call. I will now hand it over to Tim Mapes, our Chief Communications Officer, for the media portion.

Good morning, everybody, and thank you to the members of the media for 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.

Good morning. Thanks for taking my question. Curious how the Trainer refinery is going to adjust to the higher renewable fuel blending requirements that the Trump administration is proposing begin next year?

Good morning, Elliot. This is Paul. We are in full compliance with our RINs requirements under the RFS standard and have done a good job of managing through that volatility that we've seen over the last several years. And I’m confident that the team will be able to continue to address that. We continue to advocate on behalf of small and independent refiners that long-term solutions have to be identified. But, we’re managing through that in the short term.

So, do you believe that this added cost will not impact the refinery’s long-term viability?

We certainly think that it can result in added costs. We don't believe necessarily that it affects the full viability. But, it does have an economic impact to the region and on our ability to continue to drive those results at the refinery.

Hey. Good morning. This is for Ed. You gave a figure on TV for hiring this year and next year. Can you go over those targets and how many will be pilots for example? And then, overall, how much of that hiring is just replacing people who retire or leave and how much of it is actually pure growth?

Sure, David. We haven't provided specific job classifications for next year yet. However, we have been bringing on around 6,000 new employees each year for the past couple of years, and we expect to maintain that level next year. The number of pilots will increase due to retirements, as the retirement age is set to rise significantly in the next two to three years. Consequently, these numbers will grow to support the business expansion we are experiencing. This year, we plan to approach hiring differently by starting earlier and maintaining a continuous hiring process throughout the year, rather than concentrating it in specific periods. Our aim is to have all new hires in place to manage the expected increase in volume next year. Overall, I would estimate that about half to two-thirds of the 6,000 positions relate to retirements and replacing retiring workers, with the remainder being for growth.

Okay. I'm a little unclear about pilots. Will you grow the overall number of pilots, or next summer you'll have more? Okay.

We just haven't given the number, but we're going to be growing our pilot hiring too. Yes.

I have two questions. First for Glen, if I look at what you're doing this quarter, it seems like you're growing at southern most major airport on the East Coast in Miami and then northern most in Boston. Is that a good way to look at it?

I don't think we've announced any plans to grow Miami yet. But, as I outlined in the earlier call, I think we will add some key spokes into Miami. It won't be giant. But, I think we have had a successful growth in Boston. And as you know, this past quarter, we just took back our terminal. That terminal was constructed almost 15 years ago and opened, and this is the first time that we've occupied the terminal that was built for Delta. And I would assume that we will be the leading carrier in Boston in terms of revenue in 2020. So, yes, we've done a lot of growth in Boston.

For Ed, regarding the impact of the tariffs, will your ability to respond depend on Mobile and increasing production there? Do you have any priority for moving production to Mobile?

Mobile is going to be very important for us moving forward. It will be the focus of our domestic strategy to obtain our 220s and 321s as Airbus continues to increase that production capability. I won't discuss any longer-term plans we might have since they don't necessarily pertain to the wide bodies. However, we are considering options, and our goal is to reduce any potential tariff exposure.

Hi, good morning. Thank you for taking my question. I'm interested in the basic economy. I've noticed that the fare differences between the main cabin and basic economy seem to be increasing across various routes. A couple of years ago, the difference was around $30 to $40, and now it's sometimes as much as $100. Is this trend consistent across the board? What benefits are you seeing from this change?

Well, basic economy is not something that we want to grow. It's not really a premium product. And as we've outlined before, it's a defensive product against ULCCs, 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 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 what are people willing to pay for that. And sometimes in business markets, it's a bigger differential. And I think maybe that's what you're looking at. At a market basket level of all markets, the difference has only been a couple of dollars different. But, I think at individual market levels, it may be greater.

Hi. Thank you for taking my call. We've observed considerable data indicating weakness in the U.S. manufacturing sector at the moment. There's an ongoing strike in Detroit, one of your key locations. Are you currently noticing any decline in your demand forecast for the U.S. overall? There has been increased discussion about a possible recession in the next couple of years. Have there been any changes or weaknesses compared to a few months ago?

John, this is Ed. No, not at all. As we've mentioned several times on this call, we experienced a record summer in terms of both volumes and revenues, achieving all-time high revenues. The domestic system was responsible for those records, with our domestic revenues increasing by 8% in the third quarter. We continue to see strong advanced bookings, and the domestic consumer remains quite robust. We anticipate a strong holiday period. Looking ahead, we don’t have a clear outlook for 2020 since it’s still early in our booking cycle, but our business is closely tied to the U.S. consumer, who is performing well and showing a preference for Delta.

With that, we'll conclude today's call. As has been mentioned earlier, we look forward to seeing everybody on December 11th and 12th here in Atlanta. And we're grateful for your time today. Thank you.