Delta Air Lines Inc (DAL) — Q4 2022 Earnings Call Transcript

Thank you, Matthew, and good morning, everyone. And thanks for joining us for our December quarter and full year 2022 earnings call. Joining us from Atlanta today, our 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. We ask that you please limit yourself to one question and a follow-up, so we can get to as many 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 will 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 will turn the call over to Ed.

Thank you, Julie. Good morning, everyone. We appreciate you joining us today. Earlier Delta reported our full year results including our December quarter earnings per share of $1.48 on record revenue that was 8% above 2019 levels. We generated a 12% operating margin, our third consecutive quarter of double-digit operating margins pointing to the strength of our recovery. I want to sincerely thank the 90,000 strong Delta team for their outstanding work in delivering these results and serving our customers during a very busy holiday travel season. In my opinion, 2022 was the most difficult operational year in our history and was capped off by severe winter storms over the holidays. I am grateful to our employees for their great work to recover the operation while keeping our customers and each other safe. They are the reason our brand and customer loyalty is at the top of the industry. Our December quarter earnings per share and margins exceeded guidance, marking a strong close to a year where we made significant progress regarding restoration of our financial foundation. For the full year, we reported earnings of $3.20 per share on $46 billion of revenue. We delivered pre-tax income of $2.7 billion, an improvement of more than $6 billion over 2021. Delta’s profitability led the industry and in our nearly 100-year history, 2022 was our seventh highest result even with a $1 billion loss in the first quarter. We are pleased to report positive free cash flow for the year, which funded $6 billion of capital invested back into the business and we repaid close to $5 billion in gross debt. Sharing our success is a longstanding pillar of Delta’s culture and I am proud to announce that we will be paying our employees $550 million in well-earned profit sharing coming Valentine’s Day. 2022 came in ahead of our plan on revenue, earnings and cash flow, demonstrating strong execution in the first year of the three-year plan we laid out at the 2021 Capital Markets Day. I am incredibly proud of the team for rebuilding the world’s best performing airline, and importantly, we are not just building back, we are continuing to improve and extend our competitive advantages. Delta’s brand continued to strengthen in 2022, with record performance from our loyalty and co-brand card programs, and customer satisfaction scores consistently perform above pre-pandemic levels. Through the year, we have hired and trained 25,000 new employees, now representing over a quarter of the total company. Our team showed their operating talent and resilience as we retained our number one position in completion factor and on-time arrivals amongst our peer set, despite having so many new team members. The Delta brand is centered on our safe, reliable and exceptional service, and our operational excellence was recognized by Cirium last week, which named us yet again the most on-time airline in North America. We fortified our international partnerships in 2022, positioning us for profitable international growth in the years ahead. As detailed last month, expanding our international margins to domestic levels is an important opportunity for Delta in the years to come. We have invested in the customer experience at every stage of the travel journey, from the continued refresh of our fleet with next-generation far more fuel-efficient aircraft to generational airport rebuilds and technology investments that are providing our employees better tools and our customers a more seamless experience. And we continue to attract and partner with leading brands to grow our SkyMiles ecosystem and further enable customers to use their SkyMiles during travel and beyond. Heading into 2023, our momentum continues. At the Consumer Electronics Show in Las Vegas just last week, we unveiled the next phase in our vision to connect the Sky. Starting February 1st, Delta will be the first major U.S. airline to provide fast, free, unlimited WiFi to all through its free SkyMiles account. This will be available on nearly 80% of our U.S. system to start and growing every week. By the end of next year, we expect to deliver this service seamlessly throughout the rest of our international and regional fleets. And we debuted Delta Sync, which will create personalized experiences and engagement opportunities on the free WiFi portal. We are partnering with great brands like T-Mobile and Paramount+, as well as building on our longstanding relationship with American Express to bring to life our vision of a more connected and personalized travel experience. As a trusted consumer brand, Delta continues to differentiate the premium flying experience, building loyalty and supporting our ambition to transcend the industry. Moving to our outlook, at our Investor event last month, we provided full year 2023 guidance for revenue growth of 15% to 20% year-over-year, earnings of $5 per share to $6 per share and free cash flow of over $2 billion. We are affirming that guidance today and introducing our March quarter outlook, which Glen and Dan will provide in detail. For the March quarter, we expect to deliver a 4% to 6% operating margin and improve our pre-tax income by more than $1 billion compared to the same period last year. Importantly, we are embedding the assumed impact of all labor cost increases throughout our guidance metrics. We are pleased to have reached an agreement in principle with our pilots, but out of respect for the process, we will not be discussing the details of the agreement on today’s call. As I outlined last month, I have never seen a more constructive backdrop for the industry. Demand remains strong as passengers return to the skies and the industry returns to the long-term trend to GDP, all while supply constraints continue. I believe our industry will see tens of billions of dollars of incremental demand in the next few years coming out of the pandemic. As the industry leader with a proven strategy and strong execution track record, Delta is well positioned to build on our momentum in the New Year. We are confident in our ability to deliver significant improvement in earnings and free cash flow in 2023, consistent with the plan we laid out last month and we are on track to deliver our 2024 targets of more than $7 of earnings per share and $4 billion of free cash flow. As always, we remain mindful of the macroeconomic trends and have demonstrated that we have the tools to effectively manage a changing economic climate. In closing, Delta delivered in 2022, outperforming our plan and leading the industry operationally and financially. We are uniquely positioned to grow earnings and cash flow in 2023, 2024 and beyond. The power of our premium brand continues to grow, and with the very best people in the industry, I couldn’t be more excited about what’s ahead for Delta and our customers. Thank you again. With that, I will turn it over to Glen.

Thank you, Ed, and good morning, everyone. I couldn’t be prouder of what the Delta people accomplished throughout 2022 and I want to congratulate our teams on their much-deserved profit sharing payout they will be receiving next month. For the full year, we generated revenue of $46 billion, a $19 billion improvement year-over-year. We delivered record December quarter and full year unit revenues, sustaining our revenue premium to the industry of more than 110%. For the 12th consecutive year, Delta was named the number one corporate airline in Business Travel News survey, as we continue to invest in our network and product offerings. And through the year, we made significant progress on our long-term commercial strategy to deepen our network advantages, expand premium revenues, grow our loyalty ecosystem and further diversify our revenues. Starting with our network strategy, we focused on solidifying our positions in coastal gateways while protecting our core hub shares. We secured the leading positions in both Boston and Los Angeles, while increasing local market share in our core hubs. Premium led all year with paid load factors higher than 2019 and yield growth outpacing Main Cabin, while basic economy made up less than 5% of revenue, half of 2019 levels. We expanded our Delta Premium Select rollout during the year. Customer response has been positive and the cabin performed better than our initial expectations. Our rollout continues in 2023 and we will have this product on 84% of our international wide-body fleet by this summer. Our loyalty program continued to exceed our expectations with record SkyMiles acquisitions in 2022, 42% higher than 2019. As Ed noted, we are partnering with leading companies to expand our loyalty ecosystem, increasing the value of our program for customers and deepening customer engagement with Delta. With an expanding ecosystem and free, fast WiFi, we expect continued growth in our loyalty base. Our partnership with American Express delivered record results, with full year remuneration of $5.5 billion, ahead of our initial target and positioning us to deliver over $6.5 billion in 2023 and over $7 billion in 2024. Cargo revenue was a record in 2022 and we expect to grow cargo revenues in 2023, as increased capacity offsets the cargo yield environment. With strong execution across our business lines, a record 55% of revenue was generated by premium products and diverse revenue streams. We are confident in our path to exceed 60% by 2024. While not without challenges, 2022 was a strong year for Delta and we exited the year with momentum. During the December quarter, we generated revenue of $12.3 billion, 8% higher than 2019 on 9% less capacity. We saw revenue recapture at the end of December that offset the impact of weather disruptions in our system around Christmas. Fourth quarter unit revenues were 19% higher than 2019, with strength driven by consumer demand throughout the quarter. Corporate travel demand was steady through the quarter, with corporate domestic sales 80% recovered to 2019 levels. We expect March quarter revenue to be up 14% to 17% higher versus 2019. On capacity approaching full restoration, we expect March quarter unit revenues will be up 15% to 17% compared to 2019, including a 2-point impact from higher stage. Based on how we are deploying our network, our stage length is expected to be up 5 points compared to 2019, resulting in a higher restoration of ASMs and seats. This is a temporary dynamic that is unique to Delta among major carriers. Stage will begin to normalize relative to 2019 and relative to the industry as we rebuild our core hubs later this year. For 2023, we expect to grow revenue 15% to 20% year-over-year as we fully restore our network and further diversify our revenue streams. Consumer demand remains healthy, with advanced bookings significantly ahead on both yield and load factor for each month of the March quarter compared to 2019. And in our recent corporate survey, results were positive with 96% of respondents expecting to travel as much or more in 1Q than 4Q led by financial services. In the New Year, bookings reflect the survey optimism and are accelerating. International revenue continues to be led by the transatlantic. We are seeing robust demand across our expanded footprint in Europe and expect the spring and summer to set new record revenues. Latin America is performing very well, led by Mexico, the Caribbean and Central America, with a recovery in Deep South America now accelerating. And we are pleased with the early results from the launch of the LATAM JV and I am excited about the opportunities for us in 2023 and beyond. In the Pacific, we expect record first quarter profits in both Australia and Korea as our multiyear international transformation delivers on anticipated results. Japan is also building momentum and we expect a very strong summer there. And lastly, with China indicating its reopening, we expect to rebuild capacity in line with demand starting later this year. In closing, we delivered on our key commercial priorities in 2022, supporting a significant improvement in our revenue, while strengthening our competitive advantages. We have started the New Year with great momentum and are well positioned to extend our leadership position in the years ahead. And with that, I will turn it over to Dan to talk about the financials.

Thank you, Glen. In 2022, we made substantial progress in re-establishing our financial foundation. We reported earnings of $3.20 per share, with pre-tax income of $2.7 billion, surpassing our expectations. Our operating margins reached 7.8%, supported by three quarters of double-digit margins. We enhanced profitability through strong advanced bookings, generating $6.2 billion in operating cash flow, which allowed us to continue investing in our employees, fleet, partners, and technology. After accounting for $6 billion in gross capital expenditures, we achieved $244 million in free cash flow. We closed the year with $9.4 billion in liquidity and an adjusted net debt of $22.3 billion. Our adjusted net debt to EBITDAR stood at five times, and our after-tax return on invested capital was 8.4%. We concluded the year on a high note, reporting a $1.4 billion operating profit with an 11.6% margin for the December quarter. Our non-fuel costs were 13.4% above 2019 levels, consistent with our guidance, excluding a one-point effect from severe winter weather in late December. Regarding guidance, as Ed noted, we are factoring in all anticipated labor rate increases in our guidance metrics, including non-fuel CASM. If our pilots ratify the proposed agreement by March 1st, pay rates will be retroactive to January 1st, which will have a three-point effect on our non-fuel unit costs for the year and for each quarter. Incorporating this into our full-year guidance from last month adjusts our 2023 non-fuel unit decline to a range of 2% to 4% year-over-year. Maintaining a competitive cost structure is a key financial priority. Delta has led the industry in investing in our workforce and customers, and this is reflected in our outlook along with a complete reevaluation of regional costs and inflation. As we progress through the year, we anticipate that scale and efficiency will lead to a decline in 2023 non-fuel CASM compared to 2022. While we approach pre-2019 capacity to realize scale advantages, we are still incurring costs to fully restore our network to peak summer levels, with a continued focus on operational reliability during this ramp-up. We expect to complete our rebuild in the second half, with most of our flexible fleet reactivated and pilot training levels returning to historical norms. This will enable a significant resource shift from training to production, giving us confidence in our ability to deliver a fully restored network during the peak summer period and allowing our operational teams to enhance efficiency in the latter part of the year. One specific aspect this year is the timing of our core maintenance, as we prepare to ramp up for summer operations, with the first half seeing higher activity year-over-year than the second half. While these factors will influence the beginning of the year, we forecast a 3% to 4% year-over-year increase in non-fuel unit costs for the first quarter. We anticipate improving year-over-year unit costs progressively throughout 2023 as we finalize our rebuild and manage increased maintenance activities while driving efficiency across our operating divisions. This pattern aligns with our overall outlook for a 2% to 4% decline in non-fuel unit costs year-over-year. In terms of revenue, we are projecting operating margins for the March quarter to be between 4% and 6% with earnings per share ranging from $0.15 to $0.40. For the full year, we are adjusting our earnings outlook to $5 to $6 per share and projecting operating margins of 10% to 12%, which reflects a 2 to 4-point margin expansion, including over a one-point impact from increased profit sharing. We expect free cash flow for the full year to exceed $2 billion alongside gross capital expenditures of $5.5 billion. In 2023, we estimate that non-operating expense will increase by $470 million year-over-year, primarily driven by non-cash pension expenses rising by over $550 million due to widespread market downturns, more than offsetting reductions in interest expense from debt repayment. We plan to pay cash for our $2.4 billion in debt maturities while strategically reducing debt using surplus liquidity. Our goal is to achieve a leverage ratio of 3 to 3.5 for 2023 and remain on track for a 2024 adjusted debt-to-EBITDAR ratio of 2 to 3. Our focus is on regaining investment-grade metrics by 2024 while continuing to reinvest back into the business. In conclusion, I would like to express my appreciation to the Delta team for their hard work this year. We surpassed expectations in the first year of our three-year plan and entered 2023 positioned for significant improvements in both earnings and cash flow. We remain confident in our ability to reach our 2024 target of $7 per share in earnings and generate over $4 billion in free cash flow. Now, I will turn it back to Julie for our Q&A.

Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions.

Good morning, everyone. So good to be back. So maybe I will start with a question on the capacity bottlenecks that you mentioned in your prepared remarks Ed. So I know Delta itself has made a lot of progress in hiring and getting through a large wave of training, but there are other constraints outside of the airline industry’s control with aircraft delivery slower than planned and aviation infrastructure still fairly strapped at airports, the FAA. Now I know the answer will be different for Delta than some of your peers who are further behind in their pilot hiring, but how do you think about the timeline to remove some of these bottlenecks across the industry that aren’t directly in airlines control and I guess really what I am asking is, do you expect there to be continued tension between supply and demand over the medium-term, just how do you think about those rolling off? Thanks so much.

Thank you, Catie, and it's great to be back. I believe you've summarized the situation well. I mentioned at our Capital Markets Day last month that while we at Delta, and the industry in general, provide our capacity expectations, those expectations feel somewhat aspirational due to factors beyond our control. We are doing our best to ensure we have our team in place, and our hiring efforts are strong. We have assembled the team, but we need to get them, especially our pilots, through training using the limited resources we currently have. By summer, we anticipate that we will not only clear much of that bottleneck but also manage the significant resources required for our existing team to train new hires, whether they are pilots, flight attendants, mechanics, or staff at airports and reservations. It can be difficult to see how this affects the system from an outside perspective, but it's very significant for us at the airline. By summer, our goal at Delta is to be back at full capacity. I previously described the aviation system as fragile, and recent weeks have provided clear examples of that fragility. Therefore, we will continue to strive to operate within our capabilities to ensure we deliver an excellent service for our customers and provide adequate support for our employees.

That’s great. Helpful, Ed. And if I could maybe just for my follow-up. Glen, I know 75% of this year’s growth by your core hubs. Can you help us think about RASM performance at your core hubs versus the rest of your network or even better since we know it’s lower-cost capacity? Can you help us think about the margin differential of adding capacity in core hubs versus competitive coastal hubs? Thank you so much.

Sure. I think we outlined that at the Investor Day and core hub is about 10 points higher than coastal hubs and 10 points in margin. And about 20 points in terms of RASM. I think as we continue to build our core hubs out we will see, that’s one of the things we are counting on is acceleration of profitability in those core hubs and driving efficiency so we are getting them back to scale. As we mentioned in our Investor Day, we are already at scale in our coastal cities. That was our priority, just because we thought it was a once in a lifetime opportunity during the pandemic and so that was our priority to ensure that we came out in a good position there. I think we are very happy with the positions we have established there and now it’s back to the core where we think it’s actually easier lifting.

Thank you. Good morning, everyone. Ed, you said in your prepared remarks that you have never seen a more constructive industry backdrop. Black Swan event aside, what do you see are probably the biggest risks or things to watch out for in the industry in 2023? Is it your previous response about infrastructure and things that are outside of your control or what are you looking at?

Thank you, Ravi. That's correct. The most important thing we can do at Delta is to continue to rebuild the confidence of the traveling public. We understand that people want to travel in large numbers, and we need to do our utmost not to let them down as they return to flying. Last year was quite challenging because demand clearly outpaced our ability to meet it in many ways, particularly regarding the high level of service we aim to provide. We all in the industry have a responsibility to our customers to ensure we do not operate beyond our capabilities. Therefore, I believe that is the key focus we need to maintain, and I wouldn't categorize it as a Black Swan risk, but rather as a matter of staying within our limits.

We have experienced our highest levels of corporate bookings post-pandemic in the past week to ten days. This indicates a strong demand following the holidays. Currently, we are in a unique situation as this is the Martin Luther King Jr. weekend, while the actual MLK weekend is next weekend. I believe that once we pass MLK, we will provide a clearer perspective. We are anticipating that bookings will maintain around 80%. Surveys suggest it may actually be better than that, and if it turns out to be better, it would provide positive momentum for our future forecasts.

Hey. Thanks. Good morning. Glen, if I look at the RASM guide for Q1, down about 6% just in absolute terms from Q4, so that’s worse than normal Q4 to Q1 seasonality. Any color on that and then when do we really start to see this hub tailwinds show up in RASM?

In this quarter, we observed a 2-point increase in domestic stage compared to the previous quarter. This change is unique to Delta and we estimate that about 1 point of this increase is due to a decline from 19 to 16. There's also another point attributable to shifts in international mix and increased length of haul internationally. Therefore, we view the sequential change as approximately a 1-point difference needed to move from a 91% restoration to a full 99% restoration. For our core same-store sales, the first quarter is showing stronger performance than the fourth quarter, with improvements sequentially from February to January and better results in March compared to February. Overall, we are optimistic about our position as we begin 2023.

Certainly. There’s two pieces in there. Maintenance being one, it’s about a 2-point headwind in the first quarter and first half and it’s driven by engine induction levels and scope of work related to that. As you get into the back half of the year, that’s a 2-point to 3-point benefit year-over-year, so a 5-point progression from beginning to end. And then the second piece of that is related to the completion of our rebuild and those rebuild costs stepping down. Most of our rebuild over 85% of that cost is in the first half of the year. You don’t have that in the back half of the year. And as Glen just talked about, one of the enablers that efficiency is, as we restore the core hubs, these low-cost subs, low CP most competitive as we put that capacity and that drives efficiency of our assets and our workforce. That is 5 points. So the 5 points related to that and the 5 points related to maintenance is a 10-point progression as you go through the year from the beginning to the end and that drives that continuous cadence improvement as you go through the quarters.

Thank you, and good morning, everyone. First, I wanted to maybe ask about just profitability levels. You finished the year with 8% margins and are guiding to Q1 with 4% to 6%, and given the full year guide, how do we think about margin progression throughout the year?

Part of the improvement is linked to cost progression, which you can see has increased. I'm indicating that you can expect around a 10-point improvement in costs from the beginning to the end of the year, which will enhance your margin expansion as the year advances, along with what Glen mentioned regarding the commercial rebuild associated with the core. You will observe this progression. Year-over-year, the improvement compared to last year contributes significantly to the first quarter, exceeding $1 billion pre-tax, which is a major factor in the increase in earnings compared to last year. Additionally, further improvements will be evident as we move through the year.

Our international recovery is progressing well, and in Europe, we expect to exceed our 2019 performance by about 8 points in terms of seats this year. Early advanced bookings are particularly strong, which is encouraging. The main region yet to fully reopen is China, and we will approach this cautiously, being mindful of demand and how the situation evolves. This remains the significant uncertainty regarding international demand for 2023. However, we are confident about our trajectory with the other markets, which should enable us to return to 2019 levels or exceed them with improved margins.

And I think as we talked about at Investor Day, the multiyear progression on international, the structural elements here, right? The next-generation fleet that we are at, the reconfiguration of more premium seats with DPS, better cargo capability stronger partner network, all those are systematic drivers not only in this year but really on a multiyear basis.

Hey. Good morning, everybody. And Glen, it’s been a while since we visited the topic of domestic and international RASM premiums. We know what those metrics were pre-COVID, there’s obviously been quite a bit of international upheaval since then, a bit of domestic change, and of course, the premium market at least is stronger than what I was anticipating in 2019. How should we think about the magnitude of Delta’s RASM premiums going forward and any related timing?

I believe we are currently experiencing a low point in the industry due to our stage length and the way we have rebuilt the airline. I expect to recover a couple of points domestically as we progress into the latter half of the year with our rebuild efforts. Overall, I’m satisfied with our performance at both the macro level and individual flight level. Although it may seem like we are taking a step back when looking at the total picture, this is more about our approach rather than indicating any structural issues or loss of customers. I feel confident in our position moving forward.

I believe everything is progressing steadily. We have maintained a consistent, deliberate, and disciplined approach concerning capital expenditures. Last year, there was some catch-up required, and we are continuing that in 2023 for the deferred investments from the previous years. By the end of 2024, we should be in a normalized position. At the same time, we are growing as an airline and expanding our operations, which provides a solid foundation as we move forward into 2024.

Yeah, Jamie, this is Ed. I agree with Dan’s comments. Remember, we have been exclusively acquiring Airbus equipment for the last few years and will continue to do so for the next few years, with plans to return to the MAX in 2025. We haven’t faced any significant supply interruptions during the past couple of years, including through the pandemic, and I don’t anticipate any major fluctuations moving forward. I’m confident we will maintain our position within our preferred range for the fleet.

Hey. Thanks. Good morning and thanks for the time. Maybe just start with Glen on transatlantic. Typically, this is a pretty quiet time of the year, but it appears the industry is sort of doing less seasonal shaping or kind of deseasonalizing transatlantic, which probably makes sense in light of rebuild for the summer. Can you just talk about what you are seeing in transatlantic less about this summer and more about getting from here to there?

Right. Well, there’s not a lot of room between here and there. We are seeing really robust bookings for March and beyond. So it’s really, if I look at how we view the transatlantic, there’s April through October peak spring, March is getting to be a peak month these days. So that leaves you really the non-holiday weeks in November and the non-holiday weeks in January and February as really your low periods and so how we have shaped it this year is we have had a bigger transatlantic in 2019. We had some operational issues in Amsterdam. Excluding those, we were very pleased with the results in the off-peak season and it’s setting up really well. Because I think one of the things that you forget about building up for the summer is the first few weeks for the high point of sale U.S. travel are always throwaway weeks, because you have got a significant amount of outbound traffic and very light inbound traffic. So getting those out of the way earlier in the season and really allowing the summer peak to be even more robust than it has been before is, I think, how we are shaping. So I don’t know if I answered your question, but I’d say we really like what we saw. There are things we are going to do differently next year. There are learnings from this year that we can improve on. So we are excited about those learnings and then really excited about the summer peak season to Europe. We think this is going to be a record breaker.

In 2022, we experienced constrained markets, particularly disrupted significantly in the second quarter. We don’t expect those levels to return this year. However, for the next 12 to 18 months, we anticipate being structurally constrained. Global flows for both oil and refined products have shifted, with traditional routes for gasoline, diesel, and jet fuel from Europe to the U.S. not occurring as they used to. Refinery utilization remains high, which can lead to disruptions, as evidenced by the winter storms in December that caused significant impacts and have created a ripple effect into January. Recently, there has been a shortage in the physical market, particularly with jet fuel, where we saw spikes throughout 2022, especially in diesel. As refineries work to increase utilization and optimize, we expect some balancing, but the situation remains tight, and we anticipate elevated levels to continue.

Hey. Good morning. Glen, could you talk a little bit more about what you are seeing on the corporate demand side across the international entities and just as you get to the summer, I realized it’s early days, but where you expect kind of capacity to be restored across these entities?

I think we covered some of this in the previous question. We anticipate that transatlantic capacity will reach about 108% of 2019 levels, meaning it will exceed 2019 figures. This increase is largely due to our new, more efficient fleets. We still have some exciting flights to announce, with our complete summer schedule expected to be released in the next 8 to 10 days. There are a few additional components we need to finalize. In the Pacific, excluding China, we have completely rebuilt our operations in Australia and Korea, while we're about 75% restored in Japan. We expect to achieve between 75% and 100% restoration in Japan depending on whether we receive slot waivers. If we do receive them, we will be around 75%. If not, we will revert to 100%. China remains uncertain, as we are unsure of future demand there. Therefore, we will not finalize a summer schedule for China until we have more clarity on our ability to operate there and the expected demand. Lastly, in Latin America, we are close to fully restoring our operations, particularly with the Deep South initiatives partnering with LATAM, which are showing encouraging initial results. Overall, besides China, we are fully restored internationally, and we observe international recovery to be similar to domestic levels, around 80%, where countries are open.

Thank you very much.

Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley. Your line is live.

Thank you. Good morning, everyone. Ed, you said in your prepared remarks that you have never seen a more constructive industry backdrop. Black Swan event aside, what do you see are probably the biggest risks or things to watch out for in the industry in 2023? Is it your previous response about infrastructure and things that are outside of your control or what are you looking at?

That’s great. Helpful, Ed. And if I could maybe just for my follow-up. Glen, I know 75% of this year’s growth by your core hubs. Can you help us think about RASM performance at your core hubs versus the rest of your network or even better since we know it’s lower-cost capacity? Can you help us think about the margin differential of adding capacity in core hubs versus competitive coastal hubs? Thank you so much.

Sure. I think we outlined that at the Investor Day and core hub is about 10 points higher than coastal hubs and 10 points in margin. And about 20 points in terms of RASM. I think as we continue to build our core hubs out, we will see, that’s one of the things we are counting on is acceleration of profitability in those core hubs and driving efficiency so we are getting them back to scale. As we mentioned in our Investor Day, we are already at scale in our coastal cities. That was our priority, just because we thought it was a once in a lifetime opportunity during the pandemic and so that was our priority to ensure that we came out in a good position there. I think we are very happy with the positions we have established there and now it’s back to the core where we think it’s actually easier lifting.

Yes. We have normal maturities at 2.4. We had 1.8 this past year and we ended up retiring $4.5 billion of debt. Ken and the team were opportunistic in regards to debt that we can take out that we think is higher cost and has good economic payback associated with it. And given our liquidity position, as we progress through this year, we will continue to look at those options. There are certainly a number out there that are targets for us, but we will either do it through how we have done it with through tenders, but also just as you go open market repurchases and being smart and going after the higher cost debt, that’s a priority. We want to drive down that non-op interest line over time and the team is good at it. They have done it. Did it for a decade. They will continue to do it.

Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions.

Thank you, and good morning, everyone. First, I wanted to maybe ask about just profitability levels. You finished the year with 8% margins and are guiding to Q1 with 4% to 6%, and given the full year guide, how do we think about margin progression throughout the year?

Part of this is linked to cost progression, and as you see that cost increase, you can expect about a 10-point improvement in costs from start to finish. This will contribute to an expansion of margins over the year, along with what Glen discussed regarding the commercial rebuild related to our core business. You'll notice this progression. Year-over-year, the improvement compared to the previous period drives significant improvement in the first quarter, exceeding $1 billion pre-tax, which is a large factor in the year-over-year earnings increase. Improvement will continue as we move through the year.

Our international recovery is progressing well, and for Europe, we expect it to surpass 2019 levels by about 8 points in terms of seats this year. Early advanced bookings are incredibly strong, which is encouraging. The main area left to reopen is China, and we will be cautious regarding capacity there. We want to see how demand develops before making any decisions, and that's the key uncertainty for international demand in 2023. However, we are confident about the other markets and believe we can return to or exceed 2019 levels while improving margins.

And I think as we talked about at Investor Day, the multiyear progression on international, the structural elements here, right? The next-generation fleet that we are at, the reconfiguration of more premium seats with DPS, better cargo capability stronger partner network, all those are systematic drivers not only in this year but really on a multiyear basis.

Hey. Good morning, everybody. And Glen, it’s been a while since we visited the topic of domestic and international RASM premiums. We know what those metrics were pre-COVID, there’s obviously been quite a bit of international upheaval since then, a bit of domestic change, and of course, the premium market at least is stronger than what I was anticipating in 2019. How should we think about the magnitude of Delta’s RASM premiums going forward and any related timing?

I believe we are currently at a low point compared to the industry due to our stage length and the way we have rebuilt the airline. I anticipate that we will gain a couple of points, around 2 to 3, in domestic performance as we move into the latter half of the year based on our rebuilding strategy. Overall, I am satisfied with our position, both on a macro level and at the individual flight level. While it may seem like we are taking a step back when everything is considered, I believe this is more about our approach rather than any systemic issues with Delta or a loss of customers. I feel confident that we are in a good position moving forward.

I believe we are maintaining our course. We have been very consistent, intentional, and disciplined regarding our capital expenditures. Last year, we had a period where we needed to catch up, and we are continuing that process this year for what was delayed over previous years. By the end of 2024, we should be back to normal. At the same time, we are growing as an airline, which provides a solid foundation for our progress as we move into 2024.

Yes, Jamie, this is Ed. I concur with Dan's statements. Keep in mind that we have been acquiring only Airbus equipment for the past couple of years and will continue to do so for the next few years, but we will return to the MAX starting in 2025. There have not been any significant supply interruptions over the last few years, including during the pandemic, and this trend will continue. I am confident that you will not observe any major fluctuations, whether increases or decreases. We are committed to maintaining our position within our optimal range concerning the fleet.

Hey. Thanks. Good morning and thanks for the time. Maybe just start with Glen on transatlantic. Typically, this is a pretty quiet time of the year, but it appears the industry is sort of doing less seasonal shaping or kind of deseasonalizing transatlantic, which probably makes sense in light of rebuild for the summer. Can you just talk about what you are seeing in transatlantic less about this summer and more about getting from here to there?

Right. Well, there’s not a lot of room between here and there. We are seeing really robust bookings for March and beyond. So it’s really, if I look at how we view the transatlantic, there’s April through October peak spring, March is getting to be a peak month these days. So that leaves you really the non-holiday weeks in November and the non-holiday weeks in January and February as really your low periods and so how we have shaped it this year is we have had a bigger transatlantic in 2019. We had some operational issues in Amsterdam. Excluding those, we were very pleased with the results in the off-peak season and it’s setting up really well. Because I think one of the things that you forget about building up for the summer is the first few weeks for the high point of sale U.S. travel are always throwaway weeks, because you have got a significant amount of outbound traffic and very light inbound traffic. So getting those out of the way earlier in the season and really allowing the summer peak to be even more robust than it has been before is, I think, how we are shaping. So I don’t know if I answered your question, but I’d say we really like what we saw. There are things we are going to do differently next year. There are learnings from this year that we can improve on. So we are excited about those learnings and then really excited about the summer peak season to Europe. We think this is going to be a record breaker.

The markets faced significant constraints throughout 2022, particularly in the second quarter, and we do not expect those levels to return this year. However, for the next 12 to 18 months, we are likely to remain in a period of structural constraints. The global flows of oil and refined products have shifted, with traditional exports of gasoline, diesel, and jet fuel from Europe to the U.S. being disrupted. Refinery utilization remains high, and instances of disruption, like the winter storms in December and the extremely low temperatures, have affected operations. We're witnessing the consequences of this in January, with the physical market experiencing shortages. In 2022, diesel was often in high demand, causing spikes, but as refineries boost their utilization and optimize operations, we can expect some balancing. Nevertheless, the supply remains tight, and we anticipate it staying elevated.

Hey. Good morning. Glen, could you talk a little bit more about what you are seeing on the corporate demand side across the international entities and just as you get to the summer, I realized it’s early days, but where you expect kind of capacity to be restored across these entities?

I believe we touched on that in the earlier question. We anticipate transatlantic operations will reach about 108% of 2019 levels, meaning it will exceed 2019 performance. This growth is primarily due to the introduction of newer, more efficient fleets. We have some exciting departures planned, although we haven’t finalized our entire summer schedule yet; that announcement will come in the next 8 to 10 days. There are still a few elements we need to reintroduce. Regarding the Pacific, excluding China, we have fully rebuilt our presence in Australia and Korea, and we are approximately 75% restored in Japan. We foresee being between 75% and 100% restored in Japan. If we receive slot waivers, we expect to maintain around 75%. If we don’t receive the waivers, we will aim to reach 100%. China remains uncertain, as I've mentioned. We are unsure about demand there, and therefore, we won't publish a summer schedule for China until we have a clearer picture of what we can operate and the demand levels. We will let demand dictate our China operations. Lastly, in Latin America, we are close to fully restoring operations, with significant progress being made in the Deep South in collaboration with our partners at LATAM, yielding very positive early results. Overall, aside from China, we are fully restored internationally, and we see international recovery where countries are open aligning with domestic recovery at about 80%.

Thank you. Good morning, everyone. Ed, you said in your prepared remarks that you have never seen a more constructive industry backdrop. Black Swan event aside, what do you see are probably the biggest risks or things to watch out for in the industry in 2023? Is it your previous response about infrastructure and things that are outside of your control or what are you looking at?