Delta Air Lines Inc (DAL) — Q3 2022 Earnings Call Transcript

Thank you, Cody. Good morning, everyone, and thanks for joining us for our September quarter 2022 earnings call. Joining us from Atlanta today are CEO, Ed Bastian; our President, Glen Hauenstein; our CFO, Dan Janki. Ed will open the call with an overview of Delta's performance and strategy. Glen will provide an update on the revenue environment, and Dan will discuss costs in our balance sheet. After the prepared remarks, we will take analyst questions and we ask that you please limit yourself to one question and a brief follow-up, so that we can get to as many of you as possible. After the analyst Q&A, we will move to our media questions. 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, and 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, I'll turn the call over to Ed.

Well, thank you, Julie, and good morning, everyone. We appreciate you joining us today. Before we begin, I want to recognize all of those who have been impacted by Hurricanes Ian and Fiona, including Delta employees who live in the affected communities. We have contributed $600,000 to the Red Cross relief efforts and activated our Delta Care Fund to take care of our employees who have suffered loss. Delta will continue to support our people and our communities through recovery and rebuilding. The demand for air travel remains very strong, and that is reflected in today's results and outlook. We generated earnings of $1.51 per share in the September quarter. Our results mark clear financial progress as we report the highest quarterly revenue in Delta's history, 3% above the third quarter of 2019 and $1.5 billion of operating income, generating a 12% margin. This was our second consecutive quarter of double-digit operating margins. And importantly, we achieved these results despite record high fuel prices and on capacity only 83% restored relative to 2019. Our customer satisfaction scores are running meaningfully above 2019, and loyalty to Delta has never been stronger, with record SkyMiles acquisitions and American Express results ahead of our plan. I want to sincerely thank the Delta people for their great work in delivering these results and restoring our operational reliability through a very difficult summer. Delivering safe, reliable, and on-time service for our customers remains our top priority, and no airline does this better than Delta. We saw strong consistent improvement in our operating metrics throughout the quarter. For example, excluding the impact of Hurricane Ian, we ran a 99.9% domestic completion factor in September and month-to-date in October with 90% arrivals on time. To put that in context, out of 120,000 mainline flights over the last 45 days, we had just 108 cancellations in total, performance that is even better than our pre-pandemic levels. And year-to-date, Delta remains in the number one industry position amongst our peer set in completion factor and on-time arrivals. After two years of delaying travel, it is clear that consumers are getting out and traveling the world. Business travel continues to recover in line with our expectations as bookings have improved after Labor Day and companies reconnect with their teams and their customers. And while consumer spending on experiences is growing, the airline industry revenues are still $20 billion to $30 billion below the historical trend against GDP, highlighting the significant opportunity still ahead. We expect our December quarter revenues to maintain this momentum, and we will be 5% to 9% higher than 2019. With strong demand, we expect earnings per share of $1 to $1.25 and a 9% to 11% operating margin. While we face numerous challenges and headwinds this year, Delta has demonstrated its resilience. We're ahead of our plan that we laid out for you last December on profitability and cash flow, and we expect to be free cash flow positive in 2022. Our priority over the next six months is to prepare for full network restoration by next summer, consistent with our original plan, but always conditioned on continuing demand strength. This will support another meaningful step-up in profitability and cash flow next year as we stay on our path to earn over $7 of EPS and $4 billion of free cash in 2024. We'll provide more details on our outlook for 2023 and progress towards our long-term targets at an investor meeting that we will host December 14 in New York. As we think about our long-term plan, we had some really important achievements this quarter. Building on Delta's global network and partnerships, we strengthened our network with the recent DOT approval of our joint venture with LATAM. Together with LATAM, our JV will have the number one market position in South America. To support our best-in-class network, we continue to reshape our fleet and recently placed an order for 100 Boeing 737-10 aircraft. We're also expanding the power of our loyalty ecosystem with the recently announced Starbucks partnership, bringing two premier brands together. And this week, we announced a strategic partnership with an investment in Joby Aviation, aligning the industry's best airline with the innovation leader in developing eVTOL. Joby shares our vision of providing customers a premium experience. We're excited to help support Joby's long-term vision of faster, more reliable, and more sustainable transit to the airport. In closing, while we are mindful of macroeconomic headwinds, the travel industry is experiencing a countercyclical recovery. Global demand is continuing to ramp as consumers shift spending to experiences, businesses return to travel, and international markets continue to reopen. Demand has not come close to being quenched by a hectic summer travel season. At the same time, industry supply is constrained by aircraft availability, regional pilot shortages, and hiring and training needs. With record high fuel prices and increasing cost of capital, the hurdle rate is rising for incremental capacity across an industry that's still restoring its financial condition post-pandemic. Against this backdrop and coupled with meaningfully improved asset utilization, at Delta, we are uniquely positioned to grow our earnings and cash flow in 2023. At the same time, we will remain nimble and have the tools to manage through any changes in the overall environment. Over the last decade, Delta has structurally improved in significant ways, creating a trusted consumer brand built on a foundation as the most reliable airline globally driven by the very best professionals in the industry. And I truly believe that we are positioned to come through this period as a stronger airline than ever before. With that, let me hand it over to Glen, who can provide more details on our commercial performance.

Thank you, Ed, and good morning, everyone. I want to first thank our employees for their hard work restoring our operations and delivering for our customers during a very busy summer travel season. Demand for travel on Delta remains strong. Investments in our products, airport service and the loyalty are reshaping customer perceptions and driving record satisfaction scores. Brand affinity supports our revenue premium to the industry, and we're making meaningful progress against our multiyear commercial strategy. September quarter results reflect momentum in premium products and loyalty, supporting continued diversification of our revenues. This quarter, a record 54% of our total revenue was generated by premium products and diverse revenue streams. We expect this to grow to 60% by 2024. September quarter revenues of $12.8 billion is a new quarterly record and 3% higher than 2019 on 17% less capacity. Hurricane Ian impacted revenues by approximately $70 million, with the impact evenly split between the third and fourth quarters. Total unit revenues finished 23.4% higher versus 2019, improving three points sequentially as international demand accelerated. Demand was strong throughout the quarter, with premium revenue growth outpacing main cabin by 10 points. Delta Premium Select is performing well ahead of our expectations as we expand the offering to more of our international network every day. We see continued runway ahead with the return of business travel, complementing strength in premium leisure. Our growing loyalty base drives high-margin revenue and supports continued growth in our valuable co-brand relationship with American Express. SkyMiles acquisitions are running 40% above 2019 with over 60% of our passenger revenues now generated by SkyMiles members. In the third quarter, record spend and strong acquisitions on our Amex co-brand cards resulted in $1.4 billion of Amex remuneration. This was 37% higher than 2019, and we now expect 2022 remuneration of $5.5 billion, further reinforcing our confidence in achieving our $7 billion target in 2024. Other revenue streams continue to perform well, with cargo revenue up 27% and MRO revenues up 4% versus '19. Business travel continues to improve. We expect corporate sales recovery in the December quarter in the low- to mid-80s at a system level. Importantly, less recovered sectors like banking, consulting and consumer services have all seen double-digit growth post Labor Day, helping bring New York largely in line with domestic system. We have growing confidence that while there will be changes, corporate travel will fully recover and increased workplace flexibility is creating new travel patterns. Our recent corporate survey validates our perspective with nearly 90% of accounts expecting near travel to stay the same or increase as we move into the fourth quarter. That optimism is also reflected in GBTA's recent travel survey where 80% of respondents expect travel volumes to increase in 2023 compared to '22. On the consumer side, domestic revenue remains well ahead of 2019, with international consumer revenue now fully restored. International is being led by the transatlantic where revenue was 12% higher than 2019 on 89% capacity restoration. The Pacific was the most improved entity in the quarter and generated the highest unit revenue growth. We are encouraged by how the Pacific recovery is progressing, led by strong demand in our hub in Korea and to Australia. And we expect continued improvement as Japan reopens. Turning to the December quarter. Bookings for travel and spending on our co-brand cards continue to show healthy trends. We expect our revenue compared to 2019 will continue to improve in the fourth quarter, up 5% to 9% on 8% to 9% less capacity. Demand for transatlantic travel is extending well into the fall. Starting in October, we anticipate flying more transatlantic capacity than 2019, making it the first geography to exceed 2019 capacity levels. And while European currencies are down versus the dollar, foreign yields are more than offsetting the foreign exchange impact, and U.S. demand is driving higher U.S. point of sale than 2019. October and November revenue is trending well. The December month will be impacted by an elongated period between the holidays and more return travel than usual pushed into January. Demand for the entire holiday period, however, is very robust. Fourth quarter unit revenues are expected to be up mid-teens versus 2019 as we continue to restore international capacity and increase domestic stage length. During the pandemic and through 2022, we set out a goal to improve our share in coastal gateways to become the leading global carrier in these important revenue centers, and I am proud of the team for successfully achieving this goal. Looking to 2023, we are shifting our focus to our core hubs, Atlanta, Minneapolis, Detroit and Salt Lake City, with approximately 75% of domestic seat growth dedicated to full restoration of our higher-margin core hubs. As our plan progresses, Delta will continue to prioritize our people and our customers, and extend our competitive advantages. In closing, we're coming into the final quarter of the year with a healthy demand backdrop, running the most reliable operation and exceeding our key commercial goals. And with that, I'd like to turn it over to Dan to talk about the financials.

Thank you, Glen, and good morning to everyone. The September quarter demonstrated progress on our financial priorities to drive margin improvement and reduce debt. We reported a $1.5 billion operating profit, and that's on a margin of 11.6%, our second consecutive quarter with a double-digit operating margin. That is on a network that's 17% smaller than 2019. Our non-unit fuel costs were 22.5% higher, in line with guidance, excluding the impact of the hurricane on capacity. The refinery generated profit of $192 million partially offsetting the impact of volatile crack spreads. Gross CapEx spend was $1.5 billion as we took delivery of 11 aircraft, including five A321neos, which are generating margins approximately 10 points higher than the aircraft they're replacing. CapEx was lower than our guidance, with a few delivery delays, and we now expect CapEx spend of $5.7 billion for the full year. We ended the quarter with $20.5 billion of adjusted net debt. We repaid $1.8 billion of debt during the quarter as we continue to manage down our maturities over the next several years. This brings our debt repayment to over $4 billion year-to-date, reducing our run rate interest expense and reflecting our continued focus on returning to investment-grade metrics by 2024. For the December quarter, we expect earnings to be between $1 and $1.25 per share and an operating margin of 9% to 11%. Fuel prices remain volatile. With the most recent move up last week, we expect fourth quarter adjusted fuel price per gallon between $3.35 and $3.55. This includes a $105 million contribution from the refinery equating to a $0.23 per gallon benefit. We expect the December quarter unit cost to be 12% to 13% higher than 2019. This is a 10-point improvement sequentially and shows clear progress as capacity restoration increases from the low 80% to low 90%. It's taken significant resources to rebuild the airline with industry-leading reliability. We are nearing the final stages with the workforce now in line with 2019. From here, we expect further benefit from scale as we reach full network restoration and better utilization of our fleet, our hubs and our workforce. The incremental cost to restore additional capacity is low as the resources are already in place, reducing unit costs. As Glen noted, much of our growth next year will be in our lowest cost core hubs through increased mainline aircraft utilization. Approximately 75% of our domestic seat growth in 2023 will be in our core hubs, including 45% from Atlanta alone. Further, between inefficiencies and rebuild expenses, we are carrying over $1 billion of excess costs in 2022. With the teams in place and the operations running reliably, we are seeing early improvements in efficiency. October metrics are pacing ahead of September, and we expect to return to historic levels as elevated training and the network normalizes next summer. Achieving scale while restoring efficiency are Delta's largest CASM levers, these are within our control based on the pace of restoration and running an operation in line with Delta's standard of excellence. We know managing costs down is the best protection from economic uncertainty, and it is a company-wide priority. We are making progress restoring our financial foundation with significant profitability and positive cash flow this year. As we fully restore our network and unit costs improve, we expect another step-up in earnings next year, resulting in meaningful cash flow to further reduce our debt on path to our long-term targets. We are confident in delivering a competitive cost structure and our 2024 mid-teen margin target. In closing, I want to recognize the entire Delta global team for the operational improvements they delivered over the past few months. We are on track for meaningful and well-deserved employee profit-sharing payments, and I look forward to celebrating with our employees in February. Now with that, I'll turn it back to Julie for Q&A.

Cody, can you please remind the analysts how to queue up for questions?

You mentioned it briefly in the prepared remarks, but there is an opportunity in Atlanta.

Conor, you're cutting out. Can you please repeat your question?

Is this better?

Try again.

Is that better?

Yes.

You mentioned the opportunity in Atlanta and other key markets for 2023, which I believe is a significant trend for your company. Could you provide more details on this? I'm particularly interested in the margin profile of flow traffic and how you anticipate it will evolve next year.

During the pandemic, we focused on two key priorities that we believed were essential for the long-term strength of our franchise. The first was enhancing our competitive positions in coastal gateways, which we successfully achieved as we transitioned out of the pandemic and into a more normalized demand environment. For example, we have now secured the number one position in Los Angeles and similarly improved our standing in Boston, while also strengthening our presence in important markets like Seattle. The second priority was to maintain our market share in our core hubs, which proved to be quite challenging. When we entered this phase, our market share in our core hubs was around 58% to 59%. Our objective was to increase that to 60% or more, and we accomplished this as well. While our core recovery has been approximately 20 points behind the coastal gateways, which are now fully restored or growing, we maintained or even increased our core hub share with a lot of focus from our revenue management systems. We had to limit our traditional flow in critical markets where Delta has historically dominated, particularly in the Southeast. Heading into 2023, we have tasked our team with bringing back those historically high-yield flow customers to Delta, and this is the main focus of our rebuilding efforts for the year.

I was to achieve those kind of goals that you just talked about on the pilot side, could you detail a little bit more about what you're seeing in terms of training bottlenecks and pilot staffing on the mainline side as well as maybe attrition and staffing levels on the regional side?

I could take it, Savi. We continue to make good progress in clearing those bottlenecks and getting our pilots into seats and categories every week. We're producing more and more pilots back to the operation. As we said in our remarks, our goal is to be in a position to have our network fully restored by the summer, and the pilots are obviously a big part of that.

But can you provide a little bit more color on the regional side given that's a little more unique as to what's happening there and not just about training throughput? Is some of the kind of the changes that you're seeing in the industry in terms of pilot rates and things like that, is that having an impact? What's Delta doing to make sure you're rebuilding that capacity?

Clearly, labor rates at regional carriers have increased significantly during the pandemic compared to pre-pandemic levels. Conventional wisdom suggests that this will result in a smaller regional fleet in the long term. In the short term, we aim to stabilize the demand for pilots, which we expect will happen sometime in 2023. These higher rates should encourage more pilots to stay in their positions, but we do not anticipate a full restoration until at least 2024 or 2025. We are in a strong position since we are continuously delivering A220s and have reactivated the 717s, which weren't initially part of our reactivation plan. We have relied on them heavily to expedite our rebuilding efforts. Additionally, with the new labor rates, the unit costs have decreased significantly compared to pre-pandemic levels. We are uniquely positioned as the only major carrier with a substantial number of 100-seat airplanes. We will monitor the regional situation in 2023, but we believe we are approaching the lowest point in terms of pilot availability.

I would like to highlight that we have the smallest regional jet presence in the industry. Over the past decade, we have been focused on phasing out the 50-seat regional jets, and we are almost finished with that process. We have 325 two-class regional jets that we will continue to operate, but our exposure to the regional pilot shortage is significantly lower than that of our competitors.

Glen, I'm sure you've gotten this from a lot of investors. But obviously, folks are worried about a looming recession in the U.S. just driven by rates and inflation. And we're reminded of that again today. But obviously, your revenue guidance is pretty positive, but I do think it's a sequential decline in your yields. Can you talk to the components there? Because I know your long-haul flying is coming up as well. Just, if you're seeing any weakness or softness across your geographies.

Yes, that's a great question, and I'm happy to explain it. There are three main factors. First, international restoration is continuing in the fourth quarter as the Pacific opens up, and we increase our capacity there, which affects RASM negatively. Second, the domestic segment is experiencing significant growth at a faster rate than all of our competitors as we approach the fourth quarter. This growth is primarily driven by increased flights to Hawaii from East Coast hubs that weren't available before the pandemic. Lastly, there's a shift in holiday travel during December, with December expected to perform below the trend while January will be above the trend. These are the three primary factors contributing to the sequential decline. However, when we exclude these factors, we aren't seeing a decline at the market level; it remains quite strong, and we haven't observed any negative impact yet. We are monitoring the situation closely and will make adjustments if necessary. Ed previously highlighted that from an industry perspective, we are off-trend concerning our percentage of GDP, and getting back to that level indicates significant upside potential for the industry.

And I guess related to that, can you talk about business travel recovery in the quarter and what you're seeing right now in the fourth quarter?

Yes. I think we outlined at earlier conferences that we've seen about a 10-point improvement between 3Q and 4Q, and we see that continuing through 4Q. So, we're now in the low to mid-80s in terms of revenue, with traffic being about 10 points below that. And that's what we see as we head into the end of the year.

Ed, I want to go back to the comment that you made in your opening comments. You said something about $20 billion to $30 billion on the table relative to GDP. Can you shed some light on that? And are you assuming that we get back to that historical relationship? Or are you building in some cushion there, if you could elaborate?

Sure, Mike. That's an industry number, as you can appreciate. And that gets you closer to the historical relationship. We've seen over many, many years, it's a very sticky relationship. We saw it fall a bit after 9/11, and we saw it bounce back. We saw it fall during the recession. We've seen it bounce back. And we certainly saw it the biggest fall ever coming back from the pandemic. So one of the things that we're seeing is such outsized demand for our product across the board. And when you couple that as well with the industry constraints that we also talked about, that is also keeping the pricing strong at the same time. So whether we get back to the full $20 billion or $30 billion, I don't know, but I think we're gaining on it as we go.

Okay. Great. And then just a quick one, Glen, on the percentage of your total revenue that ties to a premium and diverse revenue streams. I think we're at 54% now, but the goal is to get to 60% by 2024. That seems somewhat conservative, but maybe you're envisioning just a much bigger pie as other segments recover like Asia Pacific, and that's probably why it's taking that much longer. Am I thinking about that correctly? Or is there something else going into that?

I am very confident that we can reach 60% since our international recovery has been slower, but this market has a higher share of premium revenues. Additionally, with new fleets being introduced and the ongoing growth at American Express and in our loyalty programs, I feel positive about our targets. However, I currently have doubts about cargo performance for 2024, as we have noticed declining yields, which are being offset by international recovery. Therefore, I don't anticipate cargo growing at double-digit rates heading into 2024. While 60% was our aspirational target, it seems that we may need to adjust that target upward as we approach 2024.

So Dan, you mentioned the cost of adding incremental capacity right now is very low as we get through to '23. '24. Can you talk about how low that is relative to the average? And then maybe as a follow-on, Ed or Glen, can you talk to the topic of maintaining capacity discipline, right? Obviously, if there's a way to unlock costs, you want to unlock the costs, but you also don't necessarily want to flood the market. How would you suggest we kind of soothe the investor concerns about that tension between adding capacity to lower costs versus potentially adding too much capacity and tipping over the fare cart?

First, regarding the cost opportunities and the associated incremental costs, this year, we are seeing unit costs that are 18 points higher compared to 2019. Out of that number, over nine points are related to scale improvements, as we move from being 85% restored to fully restored, which would come in at a low incremental cost per available seat mile in the range of $0.03 to $0.04. Additionally, there are five points tied to over $1 billion for rebuilds and inefficiencies, nearly half of which pertains to rebuilding efforts. When considering this area, half of it is attributed to the hiring and training intensity we are experiencing. As we bring people back into production, this will start to decrease. The remainder of this point is split between elevated overtime costs to protect operations and the reactivation of the fleet, which isn't part of normal maintenance. Therefore, the opportunity lies in 14 out of the total 18 points, with the incremental aspect being particularly appealing at nine points for growth at a low cost per available seat mile.

On capacity, we will continue to monitor it as we move forward. Each market is different, and we analyze it at a market level to maintain our required margins. Historically, this has been our approach and it has worked well. Our focus is very granular, and we have noticed that demand in 2022 has returned differently compared to 2019. While overall numbers are now higher than in 2019, the reasons for travel have changed. We will keep focusing on identifying and seizing opportunities as we progress with our rebuild in 2023.

And David, if I could add to Glen's comments, as you also appreciate, we've been, by far, the most cautious about building back our network, given that we wanted to make certain we're doing it reliably, and we're doing it with our customers and our people in mind, first and foremost. And so, a good chunk of the restoration is solely that, just getting back up to our normalized industry share, our full capacity and utilization of the airline. There are a lot more governors in this environment on the capacity than ever before, whether it's high fuel prices, high-cost capital, difficulty getting pilot staffed, typically OEMs producing aircraft. So I think with respect to investor questions around overall capacity levels, I feel very comfortable with what we're doing here at Delta.

So is it fair to say that profitability is more important than achieving some unit costs and market share goal?

Of course, it's always about profitability and margins. And that's why I said in my remarks, I think we are uniquely positioned to do both, to grow where we haven't had the opportunity to grow as quickly as others have grown with strong demand supporting that, coupled with a significant unit cost benefit as we move forward because we already own all the assets and we already have the full staffing numbers pretty much on property.

Maybe I wanted to ask a big picture question, Ed. Industry unit revenues are up fairly substantially over the long-term trend due to a number of factors you guys have talked about. I know you don't want to comment on forward pricing trends for you, but broadly about the industry. Do you think that through the pandemic, with the growth of expansion of premium, growth of loyalty products and other shifts, do you think that there's a structural shift in the way airlines think about pricing and the consumer takes that price?

Yes, we do not comment on forward pricing. However, the industry has historically managed to recover higher costs in both fuel and non-fuel areas effectively. I do not see any signs indicating that this will change in the future.

Okay. Then maybe just a quick follow-up. Can you just talk about the strength of the dollar versus other currencies and then how that's potentially affecting international demand at all?

Absolutely, great question. As we know, the dollar is at historic highs right now. And normally, we would see that impacting our offshore point of sale in terms of realized fares. But given the demand and supply balance that's existing right now in all of the international marketplaces that we serve, we see that not materializing. The fare increases have more than offset the lower currency rates. And indeed, the onshore tracking as a percent of 2019 is roughly in sync with offshore revenue, so really good balance. And what we've also seen is given the strength of the dollar, that outbound travel has more than offset a bit of weakness in terms of the outbound travel from the foreign point of sale. So all in all, that's been a very positive mix for us. At a service level, you might look at it and say that could be trouble. But for us, it's not been trouble as Delta.

So on the Amex side, $5.5 billion, you're talking about going to $7 billion by '24. How do you think about '23? Is it linear? How does the downturn in consumer spending impact that trajectory?

I'd say given where we sit right now, we are very confident in the $5.5 billion, and we have some rate adjustments that occur in '23 that give you a good way to the $7 billion, and then the continued acquisitions. I think we have some cushion in there right now. And it's not a stretch objective to get to $7 billion in '24 as we sit today. And so there's a little cushion in there should we see revenues plateau. Well, having said that, we have not seen card spend plateau. And although we have a record number of accounts in force, we're also seeing record spend on individual cards right up until today. So I mean these are really current numbers that we're looking at. And so while we're mindful that that may trend down a little bit, I think we've got some cushion in there given the strong acquisition and, if any, the brand.

Okay. And then with all the talk about the excess cost in the network right now and restoring the network, what's your degree of confidence that CASM could be down year-over-year, '23 versus '22, and you can maintain sort of double-digit margin even if pricing starts to moderate?

Yes. Referring back to what I mentioned earlier, we have seen an 18-point increase year-over-year. Our confidence regarding the opportunity for improvement, particularly the 14 points I discussed, remains high, with 15 points alone contributing over nine points to that growth. I also provided detailed insight on the rebuilt costs, which will gradually diminish as we finalize the rebuild process. Additionally, we will enhance efficiency over time, which accounts for the other half of that five-point adjustment. This improvement is linked to our workforce becoming more effective and operational reliability, allowing us to better align working hours with operations. As a result, we expect to see improvements in processes and efficiencies.

And Scott, if I could wrap that, is that when you think about next year, obviously, we're going to be bringing a fair bit of capacity into the domestic system. That's going to help with what Glen mentioned earlier, a lot of our customers are priced out of our products. And so, we're going to be bringing more affordability, opening us up to additional buckets of demand. Yet at the same time, the incremental marginal cost of delivering that supply is substantially lower than any modest price adjustments we would see.

Glen, when I look at kind of your domestic passenger revenues, 3Q, they were up two. And 2Q, they were up three. What do you think it takes to get the domestic network growth accelerating? Is it just the capacity adds in your core hubs that you spoke of earlier on? Or should we just think about the opening up of international markets being the main driver of the revenue recovery over the next few quarters?

I believe it's a bit of both, and they're fairly evenly balanced. For the first time ever, we are seeing that in October we are actually larger in the transatlantic market than we were in October of 2019, benefitting from successful unit revenues and enhanced profitability. As we move into winter, we anticipate international growth, particularly with LATAM starting to come online effectively and the recent opening of Japan, where we have historically been a significant carrier. If international markets remain open and unrestricted, we expect strong demand to continue as a backdrop. We also have good visibility for winter in Europe due to longer advance purchases there. Looking ahead to spring, I can't imagine that we won't see strong demand next spring and summer since we've missed three years of leisure travel demand to Europe, leading many, including myself, to reflect on how much time we have left to travel. This gives us a favorable outlook. Domestically, we know these are customers who prefer to fly Delta, and in our core regional markets, we previously didn't have the capacity at attractive inventory levels that they wanted to purchase from Delta. As we reduce pricing, as Ed mentioned, and open up our hubs, we believe this will be relatively straightforward for us.

Got it. That's helpful. And just wanted to follow up from an earlier question regarding the improved training pipeline that Ed mentioned earlier, look, you've been very consistent about carefully building back the network by next summer. But if you wanted to, would you have enough pilot availability and enough labor to accelerate that network restoration? Not saying that you will, but I'm just trying to get a sense of where you stand just in terms of the pipeline of training backlog.

You can expect our network rebuild to be disciplined. It's going to steadily grow. But we're not going to fall in the trap we were last spring where we pushed ourselves too hard. So we learned from that. We're not going to accelerate it faster, and we're ready to deliver.

Glen, you commented a couple of times on corporate recovering, but looking different. Hoping you can expand on that, but also include leisure. And just a couple of examples, looking at JPMorgan employee patterns, Friday meetings are increasingly difficult to get. So most of our employees are coming back Thursday night instead, I'm seeing people leave earlier for Thanksgiving since they know they can work on the road. I'm just looking for more examples of these types of shifts and, more importantly, whether revenue management and scheduling have to evolve to take advantage of it.

I believe they have already made those changes. As I mentioned earlier, the demand patterns are significantly different from what they were in 2019 in terms of where and when people are traveling. We are adapting to those changes. One interesting observation is that the peak travel times, which used to be Sunday night outbound and Monday morning outbound, are now extending into Tuesday departures and returns on Thursday, leading to shorter midweek trips. There is also a blend of business and leisure travel. For example, I traveled to Paris last week for meetings and extended my stay for leisure, whereas previously I would have returned right after my meetings. We are noticing changes during the holiday season too, as many people no longer need to be in the office as frequently since the pandemic, which is allowing them to extend their holidays. The Sunday after Thanksgiving was typically our highest revenue day, but now that day is not as strong, with travel shifting to Monday and Tuesday. We have been making adjustments to accommodate these trends, and I believe we are doing so successfully. Overall, while travel is returning differently, it is also coming back stronger.

Okay. And quickly for Ed. So Mark and I have been doing quite a bit of work on LATAM. You referenced it before now that the JBA is in place. Can you update us on the partnership? I mean how have your forecast changed because of their restructuring as well as the industry dynamic in South America? How should we think about the contribution of Delta going forward? Just an update there would be appreciated.

Sure. A couple of things that have changed. One, as you know, they've also worked through the very difficult restructuring. And they're still not out of the court process, though they expect to be out sometime next month. So, we're anxious to see them out, and that's going to provide them some additional opportunities to start to grow and really take advantage of the powerhouse they've become as well as the substantial reduction in cost as well as balance sheet reductions on debt that they've been able to achieve through the bankruptcy process. We just got the ATI from DOT, and we're excited about that. So we haven't really been able to talk in three years to them at a detailed level about the JV itself, though those meetings are beginning literally as we speak. And it's a little bit of a delayed response, but there's nothing in there that we laid out three years ago when we announced the investment in LATAM that I'm any less excited for. I think if anything, we're going to have an accelerated impact there. The competitive balance in South America is less intense. There's a lot of local airlines got hit by the pandemic pretty hard. And you look at them, you look at what we're doing with Aeromexico in the same time, we see a lot of growth potential for Delta as well as the JV.

Most of my questions have been asked. But maybe one for Glen on seasonality and sort of getting back to normal seasonality, which some other carriers have referred to, can you just talk about which regions, if any, are sort of back to normal and maybe contrast domestic with some of the international regions, which are probably outperforming sequentially?

I would say there's a new normal emerging in our operations. We are beginning to see the return of seasonality patterns that were less pronounced during the initial recovery phase, but they may not be as intense as they were before the pandemic. For example, we had a remarkable September in Florida, despite the absence of a hurricane, which might have surprised some. Typically, September is one of the weaker months for Florida, yet we had high demand for Disney tickets, with reports of families unable to purchase them as they were sold out. This indicates a shift in behavior. As airfares and hotel prices have risen, travelers are also leaning toward the shoulder seasons to take advantage of slightly lower costs and the increased flexibility that comes with remote work, allowing them to avoid crowded periods. While we are definitely witnessing the return of more traditional seasonality, several factors are also balancing it out and softening its impact compared to the pre-pandemic period.

That's helpful. And then maybe just one for Dan. Just given the move in rates, any high-level thoughts on pension gains versus interest expense? And any particular pieces of debt that you'll need to roll in 2023 and how we should be thinking about that?

Yes, certainly. Regarding our debt situation, 17% of our debt is variable, and compared to our cash position, which is strong, we are well positioned. As rates continue to rise, our interest income will significantly surpass our interest expenses during this time. Concerning the pension, the changes in rates will reduce our liabilities and alter our interest expenses, and these factors will largely balance out as we move forward. However, we have seen a decline in our asset returns relative to our expected performance, especially given the recent trends in the debt and equity markets, which means we've underperformed our target rate. Over a 20-year period, these will be averaged into our earnings, resulting in lower overall rates, creating some challenges ahead. We will address this further in December. Although we anticipate some reductions, they won't be as substantial as necessary. However, our interest expenses are currently manageable as we effectively reduce our debt levels, and our interest income is expected to improve, which will help mitigate these challenges.

I just wanted to confirm something that I heard you say about the holiday season being extended and that kind of pushing some demand into January. Can you unpack that a little bit and kind of talk about how much that impacted your 4Q comps versus 2019? And also, did you see something similar over the summer into the fall where do you think that some people who may have been priced out of traveling over the summer are now traveling in the fall?

No, I think it's mostly due to a calendar shift in where the returns are. We believe that about two points of the sequential decline from 23.5 to 17 is attributed to the returns from the holiday season being pushed into January.

We'll now go to our final analyst question.

Appreciate the time. So team, here's my question. As you think about the shift in mix that you've been talking about, not just this quarter, but most of the year, how should we think about the importance of loyalty? You've talked about the increase in SkyMile cards and the spend you're seeing. But I have to think that loyalty is shifting kind of away from that business traveler to the leisure traveler. So how should we think about that going forward?

Well, Helane, I think at a macro level is that whatever your purpose was, the redemptions that carried at the end, was always for the leisure travel. And so as people continue to see our brand evolving and want to become involved with it, whether or not it's for business or for leisure, we've seen the opportunity to continue to grow the program itself at record pace, which is very exciting and, I think, a real testament to the brand strength and all the hard work that Delta people put out every day. And now it's our job to take that brand strength and turn it into profitability. And of course, we do that through using those as prospects for our American Express card, but we're also increasingly making our ecosystem broader. And I think just yesterday, we had a very claiming announcement about partnering with Starbucks and linking our programs together. And I think creating an exciting dynamic ecosystem that is the cornerstone of our loyalty program, which is, of course, based on the fantastic airline that Delta runs every day, is really the base of it. But we are very excited about where we can take this over the next five years in terms of expanding that loyalty platform to be more than just Delta as an airline.

All right. With that, we'll wrap up the analyst portion of the call. I'll now turn it over to Trebor Banstetter, our Managing Director of Enterprise and Leader Communications, to start the media questions.

Thank you, Julie. Cody, as we transition to the media Q&A, please remind all the reporters on the call the process for joining the queue. We're going to try to get to as many questions as we can in our remaining time.

I wanted to get a quick clarification. When you mentioned that regional capacity is still constrained due to the pilot shortage, I thought you indicated that full restoration at the regional level may not happen until 2024 or 2025 at the earliest. I just want to confirm if I heard that correctly and whether this applies only to Delta or to the industry as a whole.

Well, I can't speak to the industry. I can speak for Delta. And yes, you've got it right, '24 to '25 is when we think we'll have the utilization back to historic levels on all the equipment we have contracted.

Okay. My second question is regarding the trend during the pandemic where many leisure travelers were choosing to upgrade to premium seats due to the availability of empty ones. Are you still observing this trend of upgrades, or have you noticed a decline in that behavior?

It's strengthening as we come out of the pandemic. We're very excited about this. Our recovery is being led by premium products, which are performing 10 points better than main cabin and basic economy. We're thrilled to see that people are getting used to this, enjoying it, and over 70% of customers intend to repurchase. This indicates that customers are coming back for more.

And have you dropped the number of basic economy fares that you offer per flight, or even total?

That fluctuates every day based on demand and supply. So in general, it's been trending lower, but that could reverse itself today or tomorrow. So, it's not something we actively manage. It's kind of a daily occurrence.

I'm wondering just with the growth in co-brand spend and card acquisitions and everything, are you seeing more numbers just year-over-year and year over '19 meeting medallion status or meeting the higher levels of status?

Absolutely. We want to continue evolving our program. It's designed for our most premium customers. As you all know, we announced some changes for the '24 program earlier this month, aimed at ensuring we have the right participants. During the pandemic, we were particularly generous in extending benefits. This has led to a significant increase in our number of premium customers. Our goal is to ensure that every premium customer has a truly exceptional experience, so we need to maintain a balance.

We will provide our customers with the experience they expect by maintaining a robust operation. Glen mentioned earlier the changes in travel during the holiday period. You can anticipate a more balanced flow compared to typical patterns, as holidays usually see peak travel on certain days and lighter travel on others. With travelers enjoying increased flexibility related to work, we expect a busy Thanksgiving week throughout the entire week, which will aid us in managing operational flow. This trend should also be evident during the Christmas and New Year period.

I'm curious about your perspective on the overall state of the economy. Do you believe we are approaching a recession, or do you think the travel sector is showing more resilience than in previous times? I'd like to hear your thoughts on this given your comprehensive view on the situation.

We believe the airline industry, including Delta, is experiencing a recovery that runs counter to the economic cycle as we continue rebuilding from our previous state. The current market supply likely reflects some of the recession risks. Delta is not operating anywhere near its past levels, which is why demand and pricing for our services have remained robust. Our forecasts are reliable for the next 90 to 120 days, but become uncertain beyond that time frame, as our advanced bookings do not extend much further in significant numbers. However, indications from our major corporate clients suggest the travel sector will remain strong through this quarter and into the new year. That's the best insight we can provide. We cannot comment on the overall economy, but we are aware of significant shifts in consumer spending from goods to services, which benefits us. We are pleased to see travelers returning after contributing to the opposite trend over the past two years.

And then if I could ask one more. Just curious how you're thinking about share repurchases like you can sort of see that becoming a political issue already. I'm just curious how much sort of the pushback we've already seen from certain lawmakers and labor groups, how much that factors into your thinking about that?

Our main focus at Delta is to ensure that any surplus cash generated is utilized to reduce debt. We took on a significant amount of debt during the pandemic, and our goal is to regain our investment-grade rating, as previously mentioned. For the next few years and beyond, prioritizing debt repayment will be the main use of any excess cash. Additionally, we will also allocate funds to continue investing in the business and our workforce. Therefore, that's how we plan to use our cash. I do not anticipate any share repurchases at Delta in the near future.

Delta has been making significant efforts to establish itself as a premium airline, and there is considerable interest in the premium cabins. Looking ahead, do you think there is still a need for basic economy? Additionally, how much larger could the airline be if it had updated pilot training, adequate hiring, and more aircraft?

Basic economy is not a hard cabin. It simply refers to the availability of a fare, and we intend to maintain that. It serves as a very effective tool. Historically, we haven't utilized it as much due to high capacity, but as we move toward a more normalized environment, there will likely be more basic economy options available in 2023 compared to 2024. We developed this approach in response to how ultra-low-cost carriers price their products by presenting a low introductory fare while charging for add-ons, from carry-ons to beverages. Therefore, we aimed to offer a relatively discounted product that is still far superior to what is available from ULCCs, although it lacks the features and upgrade options of higher fare structures. It's a very effective competitive strategy. However, the fare structures either exist because we are not filling airplanes or they do not. That's how we have designed it; it is not a hard cabin like the premium products, which include Comfort+, Delta Premium Select, or Delta One. Those have tangible attributes along with additional components.

And Leslie, on your second question, this summer, we operated roughly 15% below where we were in the summer of '19. And we said our goal is for next summer to close that gap and have our network fully restored. So I think that's a ballpark number of 15%. That doesn't mean we're going to have 15% more people or 15% more planes. It's really just utilizing the people we already have because we're already at pretty close to 2019 staffing levels. And the fleet we have has taken a pretty significant utilization hit as we've reduced supplying and bringing it back. So, it's really using the assets and the people we already have more efficiently. That's going to generate a meaningful amount of that growth.

Have the passengers used most of their vouchers and credits from the pandemic, or do they still have many left? If you have any information on the amount or value, please share.

We don't provide specific details, but we have a long-term expiration on that, so nothing will expire until the end of 2024. Additionally, there are still a significant number of credits available.

I want to ask what Delta's plan is if the Congress does not extend the waiver for the 737 MAX 10 cockpits that expires at the end of the year?

I was asked this question on CNBC this morning, and I mentioned that there is a plan B. When we decided to purchase the 10, we had many discussions with Boeing regarding this specific issue because it significantly affects our capacity, and we want to ensure we have alternatives. So, we do have a plan B. Although we are not sharing the details of that plan B, it is established with Boeing in case it does not receive certification. That said, we are hopeful it will be certified.

Ed, I wanted to ask you about the DOT's latest proposal on fee transparency. You guys and other airlines blasted it in 2014. What is your take on this latest proposal? I know you haven't filed a formal comment yet. And secondly, what do you think the chances are of this going through?

It's Peter Carter. What I would say in response to the proposal is we think that customers do have access to fee and pricing information. Today, on the Internet, we think our pricing is transparent. We will be providing formal comment to the DOT because one of the challenges with the rule as proposed is the way they're viewing transparency, they're expecting a carrier to provide a moment of making the search every single potential fee or price without regard to who's actually searching. So it may be a fee that's not relevant to the consumer, which, of course, could create quite a bit of confusion for consumers. So, we'll be providing that input to the DOT, and we hope that they obviously see that rule as something that's unnecessary to impose.

Thank you, Dawn. And we have time for one final question.

All right, Cody, we'll follow up with Kelly later, but I think that is going to conclude our call. So thanks, everybody, for listening and participating.