Delta Air Lines Inc (DAL) — Q1 2023 Earnings Call Transcript

Thank you, Matthew, and good morning, everyone. Thanks for joining us for our March quarter 2023 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian; our President, Glen Hauenstein; and 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 and our balance sheet. After the prepared remarks, we’ll take analyst questions. We ask you please limit yourself to one question and a follow-up, so 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.

Thanks, Julie. Good morning, everyone. We appreciate you joining us today. 2023 is off to a strong start for Delta with record advance summer bookings, the launch of free Wi-Fi and continued recognition as the industry leader, not only by our customers but by Fortune, Cirium and the Wall Street Journal. During the March quarter, we generated earnings of $0.25 per share on revenue that was 45% above last year and a record for the March quarter. Delta’s operating income was $550 million, a more than $1 billion improvement year-over-year, bringing our trailing 12-month operating profit to nearly $5 billion. We generated close to $2 billion of free cash flow in the quarter, reflecting robust demand for summer travel. Better-than-expected cash generation enabled us to accelerate that reduction, moving us closer to our goal of returning to investment-grade metrics. All-in, a very solid performance by our team in the seasonally weakest quarter of the year. Delivering safe and reliable service remains our top priority, and no airline does this better than Delta. I’d like to thank our teams for all they do for our customers each and every day. The dedication, professionalism and hard work of Delta’s 90,000 people worldwide are the foundation of our company. Sharing our financial success with our people has always been an important part of our DNA. Our industry-leading profitability in 2022 enabled us to pay out more than $550 million in profit sharing in February. More profit sharing than the rest of the industry combined. And we’re looking forward to larger payouts next year as we expect to deliver significant earnings improvement. We also rewarded eligible employees with a 5% pay increase on the 1st of April, and received strong ratification from our pilots on the new four-year contract, providing well-deserved increases for all of our people. The performance of our people and the momentum of our brand was recognized when Delta was ranked number 12 overall of Fortune’s World’s Most Admired Company list, a remarkable statement about the resiliency of our company, given the pandemic challenges of the last few years. Our brand is built on a foundation of service and operational reliability, and we are committed to delivering the level of service our customers expect as we ramp operations for the coming summer season. The operating teams have done a great job getting ready and we are planning to grow June quarter capacity 17% over last year to meet strong customer demand. This growth is, though, a couple of points below our initial plan to fully restore capacity this summer, as we focus on delivering the best operation in the industry and remain prudent in our capacity restoration. As I mentioned at last December’s Capital Markets Day, aviation infrastructure is still fragile. But collectively, we’re working to ensure resiliency as we manage constraints around the supply chain, aircraft delivery delays and training needs. I want to commend the FAA for collaborating with the industry to help improve the customer experience in New York by temporarily relaxing minimum flight requirements given ATC staffing challenges. Turning to our outlook. With solid first quarter performance and visibility into the strength of summer travel demand, we are confident in our full year guidance for revenue growth of 15% to 20% year-over-year, earnings of $5 to $6 per share and free cash flow of over $2 billion, the three main guideposts we shared with you last December. For the June quarter, we expect to deliver the highest quarterly revenue in our history, a 15% operating margin and EPS of $2 to $2.25 a share. Our forecast operating profit of $2 billion matches Q2 of 2019, demonstrating that the earnings power of this franchise is intact. Glen and Dan will provide more details on the components of our outlook. As we look to our upcoming Investor Day in June, we will outline the long-term opportunities that we’ve cultivated through years of investment, building on our industry leadership position and further enhancing our long-term financial profile. One focus area will be innovation and digital technology, where we continue to grow our leadership position. Increasingly, it’s one of the reasons customers are choosing Delta with significant growth in direct bookings and higher engagement through our digital channels. We have reached an important step in our digital transformation with the rollout of fast, free, high-quality Wi-Fi, which has been a tremendous success. We began this effort several years before the pandemic, and it has required significant investment and resources to achieve. In addition, this month, we began rolling out Delta Sync for SkyMiles members, which will unlock a more personalized customer experience in the air and on the ground. When customers join the SkyMiles loyalty program, it enables us to deepen our trusted relationship and create stronger brand preference. As we’ve rolled out fast, free Wi-Fi as well as other benefits, new SkyMiles memberships have accelerated at a record pace. Growth has been particularly strong among younger customers with a record 3 million total enrollments during the quarter. Thanks to the size and growth of our loyalty program, the value of our Amex co-brand card portfolio continues to reach new highs and leading brands are joining our consumer ecosystem, creating further opportunities. I look forward to discussing this and more about how Delta is transforming the customer experience on June 27th in Atlanta. Hope you all can join us that day. In closing, the industry backdrop remains constructive, and we are well positioned to grow earnings and cash flow in 2023, 2024 and beyond. Delta continues to set itself apart. We are on our way to transcend the industry with our leading consumer brand and deliver financial outcomes that create significant long-term value for our owners. Thank you again. And with that, let me hand it over to Glen for more details on our commercial performance.

Thank you, Ed. I’d like to start by thanking our employees for the difference that they make every day. We delivered record March quarter revenue at $11.8 billion, 14% higher than 2019 on 2% less capacity. Total unit revenues, or TRASM was 16% higher than the same period in 2019. These results include approximately a 1-point impact from flying less capacity than initially planned. Consumer demand was well ahead of pre-pandemic levels and drove strength in domestic and international travel. Business travel improved in the quarter with small and medium businesses ahead of ‘19 levels while managed corporate travel showed steady progress led by international. Diverse revenue streams, including premium and loyalty, generated 56% of total revenue in 1Q. Premium revenue growth continued to outpace the main cabin. Total loyalty and revenue grew 28% versus the prior year, with continued momentum in our American Express co-brand portfolio. We saw card spend up more than 20% year-over-year. This supported a record $1.7 billion of remuneration from American Express during the quarter, keeping us on track to deliver over $6.5 billion in 2023. Throughout the recovery, travel behaviors and patterns continue to evolve. The hybrid workplace is blurring the lines between business and leisure trips while the removal of change fees has increased customer flexibility, allowing them to book trips earlier. This dynamic was more pronounced in the March quarter, and so we are continuing to adopt and see opportunities to further optimize our revenue management approach to these new travel behaviors in future months. We expect June quarter revenue to be up 15% to 17% year-over-year on capacity that is 17% higher. This implies unit revenues will be flat to down 2% compared to the prior year, including a couple of point impact from higher international mix as well as lapping record cargo revenues. For comparison to the March quarter, the midpoint of this outlook is a 3-point sequential improvement in total unit revenues versus 2019, driven by improvements in both domestic and international. Moving forward, we are sunsetting the comparisons to 2019 and returning to year-over-year metrics. Domestically, we are growing our seats mid-single digits over last year with our core hub rebuild beginning to take hold in June and accelerating through the fall. On international, we are excited with the momentum we’re seeing and expect record revenues and profitability for the summer travel season. To meet increasing demand, we are growing our international seats by more than 20% in the June quarter compared to the prior year, and we already have about 75% of our bookings on hand. In the transatlantic, we’re seeing strong demand on our largest ever summer schedule. Our Amsterdam hub performance continues to improve, and we are pleased with the outlook for all of our new markets. In Latin America, momentum is continuing to build. The breadth of Delta’s long-haul network to South America continues to improve as we begin to leverage our partnership with LATAM. Pacific demand is accelerating, and we expect record margins significantly ahead of pre-pandemic levels. Our multiyear restructuring efforts in the Pacific are paying dividends, and our partnership with Korean Air is performing extremely well, providing us future growth opportunities. In closing, consistent execution of our long-term commercial strategy is supporting industry-leading margin performance and demonstrating the resiliency of our business model. The long-term investments we’ve made in our fleet, global network and technology pave the way for future growth and margin expansion. Thank you. And with that, I’d like to turn the call over to Dan to talk about the financials.

Thank you, Glen, and good morning to everyone. For the March quarter, we delivered earnings of $0.25 per share and a 4.6% operating margin in line with our guidance. Our nonfuel costs were 4.7% higher than the first quarter of 2022, including a 1-point impact from lower capacity, primarily due to winter storms. Fuel price for the quarter averaged $3.06 per gallon, this including a $0.25 benefit from our refinery, which continues to provide a unique hedge to fuel volatility. Our operating cash flow was $2.9 billion. That was the highest March quarter result in Delta’s history. After investing $1.1 billion back into the business, we generated $1.9 billion of free cash flow. Strong cash generation enabled $1.2 billion of debt reduction. This including accelerated debt repayment of $700 million with an average interest rate of 7%. Liquidity ended the quarter at $9.5 billion and adjusted net debt of $21 billion. Our leverage ratio improved from 5 times at year-end to 3.9 times at the end of March on a trailing 12-month basis. We now expect to complete our full year planned debt reduction in the first half of the year, and we’ll continue to evaluate opportunistic debt repayment. Over the last year, we accelerated more than $3 billion in debt reduction, targeting our highest cost debt and reducing our interest expense. Recognizing this progress we are making, S&P and Fitch both upgraded their outlook for our ratings. Returning to investment-grade metrics is a key priority. We remain focused on reducing net debt and achieving our targeted 2 to 3 times leverage ratio in 2024, while continuing to consistently reinvest in the business. Now, moving to guidance for the June quarter. On fuel, we expect our fuel price per gallon to be $2.55 to $2.80, including a $0.10 to $0.15 contribution from the refinery. While lower than last year, I’d note that fuel prices remain volatile and are still approximately 30% higher than in 2019. On nonfuel, we expect unit costs to be 1% to 3% higher than the prior year. For the first half, we expect to grow capacity 17%, approximately 2 points less than our initial expectations, with a similar 2-point impact expected on our unit cost. More than three months into the year, our absolute costs are tracking as expected. Higher labor rates are fully incorporated across the mainline and regionals. Inflation is stabilizing and we are in the final stages of our rebuild. By the end of June, aircraft reactivations will largely be complete and training is starting to step down with a third of our pilots moving into production. As I outlined on our call in January, core maintenance is higher year-over-year in the first half of the year. We expect it to decline in the second half, resulting in a 5-point year-over-year progression in our unit cost from the beginning of the year to the end. Secondly, achieving scale while restoring efficiency are Delta’s largest CASM levers. The pace of capacity restoration remains the primary level. In summary, we are confident in our year-over-year decline in the second half and expect a 10-point improvement in our unit cost progression as we progress through the year. Running the most reliable operation in the industry is key to delivering a competitive cost structure and underpins our industry-leading margins. Combined with our outlook for revenue, we expect the June quarter operating margin to be 14% to 16% and earnings to be between $2 and $2.25 per share. With a quarter behind us and the visibility we have in the summer, we have higher confidence in our full year guidance for significant improvement in earnings and free cash flow. We are reaffirming our full year guidance for operating margins of 10% to 12%, earnings of $5 to $6 per share and more than $2 billion of free cash flow. And we remain on track to earn over $7 per share in 2024 with more than $4 billion of free cash flow. So in closing, I’d like to thank the Delta people for the elevated service they provide to our customers every day. Our people will always be the Delta difference. Now with that, I’d like to turn it back to Julie for Q&A.

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

I have a question that has two parts related to revenue. There's an ongoing discussion about the rate of revenue growth and whether it's slowing down in the domestic market compared to international markets. Glen, you've shared some insights on that, and you've also mentioned a noticeable shift in the booking curve. Can you elaborate on that and how it might be affecting the data? Additionally, regarding Delta and your network, you have significant exposure to the industrial heartland. Considering the ISM number has shown contraction over the past five months, it seems the manufacturing sector might be facing a recession, particularly in an area where you have considerable exposure. Can you provide additional insights into the corporate and discretionary flows connected to Detroit?

Sure, Mike. Let me address your first question. On Tuesday, we experienced our second highest day of cash sales ever. Although seasonality is beginning to decline, which typically happens earlier in the year, this demonstrates the strong core demand for our products and services, both domestically and internationally. This week marked the second highest sales day in our entire history. With this robust consumer demand, we’ve noticed a shift in travel patterns compared to pre-pandemic times. There was significant stability before the pandemic, and now we're adapting to what can be called a new normal, the specifics of which will become clearer over time. During the quarter, materialization rates, which refer to book to flown ratios, decreased slightly. Normally, these rates should accelerate a bit more than usual, which we attribute to the increased flexibility in the marketplace with our no change fee policies. To accommodate this, we are slightly increasing our overbooking levels to capture the higher load factors. We also observed a decline in bookings made within 30 days, while demand remained strong for bookings made more than 30 days out. The challenge lies in managing how many bookings we accept at any given time. For instance, we aimed for a 3 to 4 point lead into the next month but found it necessary to adjust to a 5 to 6 point lead due to the combination of materialization rates and consumer booking behaviors. These are revenue management tactics we are employing to adapt to the new demand environment, which does not suggest any softness in underlying demand strength. Therefore, we feel very confident about the summer season and our current bookings, as well as the real-time demand we are observing. Regarding the industrial recession, we do not see evidence of that. In fact, Minneapolis and Detroit are currently ahead of the curve. While Detroit is slightly lagging compared to the rest of the system, there has been rationalization in competing hubs within the region. This indicates that some industrial hubs are not as directly point-to-point as locations like Boston or New York; rather, they function as connection points across the U.S. As we work on restoring these networks, there is an opportunity to increase flow. While Detroit is not completely resilient on its own, we are leveraging the traffic that connects through it. We find strength in all our core hubs, which are not as fully restored as our coastal gateways, presenting a significant opportunity for the remainder of the year. These hubs are generating exceptional returns and experiencing strong demand.

Glen, as we think about the swing year-on-year in the second quarter from domestic strength last year to international momentum this year. Do you recall what the domestic portion of the international journey contributed to last year’s second quarter domestic revenue, what it’s likely to contribute this year and what the normal second quarter contribution used to be?

The domestic share of international travel is approximately 10% of domestic travel, which is not a significant impact. Last year, it was around 7% or 8%, and this year it is expected to be about 8% or 9%. Therefore, I wouldn’t describe it as having major changes. The summer season is heavily influenced by local demand, particularly in major local markets for our international operations, with New York and JFK being the largest. Generally, if travel can be sourced locally, it is preferred due to higher yields. JFK sees about 80% of its international travel coming from local passengers. Additionally, Atlanta also has significant local traffic, though it has more overall flow.

Glen, please don’t drop the mic. A question for you. Can you walk us through why revenues maybe came in at the lower end of the 1Q range, and talk to whether there’s anything in there that was trailing off through the quarter? I ask this because the market is really struggling with whether Delta is limping or leaping into the June quarter. And any color on what drove the source of weakness in 1Q and whether that may carry forward in the 2Q could help a lot. Thanks.

We discussed two key factors. First, we experienced a one-point reduction in capacity due to some weather events and our recovery from those events. Second, there were lower materialization rates in the RM systems as we adapted to situations that we couldn't address in real-time, since we needed to confirm their stability before making adjustments. This is what we are observing for the second quarter. As we mentioned, compared to 2019, we have seen positive momentum from the first quarter to the second both domestically and internationally. While there is considerable concern about domestic demand for the summer, we do not share that concern.

As a quick follow-up, you mentioned that corporate domestic bookings are 85% recovered. Can you discuss the broader perspective on how you expect that to trend for the remainder of the year, based on your research and what your larger corporate clients are currently conveying about their plans?

Our corporate travelers are indicating that they anticipate continued growth. We are not including that in our projections; we are assuming a stable 85% revenue and 75% of traffic.

Maybe switching gears a little bit. It looks like capacity in 2Q is a couple of points lower than you were thinking back in December. Where is that? Is that mostly coming out of the domestic market? And along those lines, as you go into the summer months, how do you kind of think about the four entities? I know you gave a little color on international and domestic for 2Q, but just a little bit further in.

Yes. Our goal is to maintain industry-leading operations, and in the March quarter, we experienced a longer recovery time from weather events than we would have liked. The weather shortfalls primarily affected our domestic narrowbody operations, and we want to ensure that we have all the necessary resources in place since we anticipate similar weather events in the summer. This was more of a setback related to supply rather than demand, as our supply was more constrained than we expected. However, this should enable us to adjust our capacity in the fall based on how the global environment develops.

Understood. And then maybe a question for Dan. There seems to be less kind of cost of prices this year. Could you talk a little bit about what’s leading to that better predictability?

We’re just deeper into the restoration. And I think as we’ve gotten deeper in, we continue to have better visibility to that. We have all the labor dialed in as we’ve talked about, you’re seeing stabilization in the regionals. That was one that we chased last year. As it relates to third-party suppliers, the peak of contract inquiries and repricing was heavy in fourth quarter of ‘21 begin in the first half of ‘22. And if you look at those requests coming in, they’ve dropped up meaningfully for that. So, I think you’re starting to see that stabilization in the inflation component of third-party and coming in very in line with what we expected from that perspective. So just better visibility. I think we’re deeper into the restoration. So, operationally, arms on it related to that. So, our absolute cost visibility is good at this point in time. Certainly, the unit cost metric, as we’ve talked about, is impacted by the ultimate capacity that we fly.

Most of the short-term revenue questions have been addressed. However, regarding corporate, can you share any updates on changes since mid-March, particularly in financial services or banking? Additionally, with all the headlines about technology layoffs, and knowing you are less impacted by that, can you compare the recovery of the technology sector in corporate travel to other industries you serve?

Technology is one of the sectors that has recovered the least. Interestingly, financial services is showing some positive momentum. As we evaluate our geographic reach, we are particularly excited about New York, which did not see much recovery last year. We have significant exposure to this market, and we’re noticing substantial improvements in both origin and destination travel in New York. This bodes well for our upcoming summer season. What’s particularly fascinating is the new connections in yield between corporate and high-end leisure travelers that weren’t present five years ago before the pandemic. While we’re not selling premium seats to corporate clients, we are able to offer them at almost corporate rates to high-end leisure customers, which is creating a solid buffer for our business.

Duane, one thing I’d add to that is that you’re seeing corporately a pretty significant push to get workers back in the office. And we have seen a high correlation between the opening of offices with the return of corporate travel, principally with consultancies, advisers, people being available to take meetings. And so, that underlies the strength. And I think you’re going to continue to see that over the course of the year is going to be, I think, a good tailwind for us on the corporate revenue front.

For my follow-up, regarding the core hub restoration and the potential recovery of your RASM premium as a factor, can you update us on the progress of core hub restoration? Additionally, what timeframe do you anticipate for it to significantly impact the remainder of 2023? Thank you for addressing my questions.

No, thanks for that question because I think it’s very important. I think when we outlined back in December, core restoration is one of the highlights of 2023 that is distinctive about Delta’s. What we didn’t say is when that occurred in ‘23 and kind of a mea culpa on that because in the first half of the year, that really wasn’t what happened. It starts right around now and it goes through the fall. So that should be really a key driver for us as we move through the back half of the year, both on cost and revenue.

Yes, revenue and costs. Yes.

So, the range of outcomes on revenue is still pretty wide for the full year. I was just curious if you could unpack the high and low assumptions. Presumably, you have pretty good visibility on the first half. Just curious on the swing factors as you think about the second half for your revenue.

I think we see the same reports that everybody sees. I think Ed outlined very well that we think there is still remaining pent-up demand from the $300 billion that was not spent on airline travel during the pandemic. So, we’ll see how that plays out in the fall, and we have a lot of flexibility in terms of what we offer as we get out of the summer. What we’re saying today is we are confident through the summer. And then, we’ll take another look as we get closer to it, do we see any demand trends changing. I think what we hear from the marketplace, everybody is looking for those lines. We don’t see them right now. So we would tell you if we did. And if we do see them, we’ll make the adjustments that would be required for the fall.

Yes, sure, Conor. We had the 2-point impact on capacity. That had a 2-point impact on unit cost. We’re still sitting here in April. So, we have a lot of the year to play out as it relates to capacity. And as we progress through the year and set that that will ultimately determine it. If you went through the year and you made that up, you pick that up. If not, it would have a corresponding impact on unit cost as you progress. But as we talked about on the point with Savi is our visibility to absolute cost is clear and better than it’s been in the restoration. And as you go through the back half, you get that inflection point, the points that we’ve talked about with core maintenance stepping down from being a headwind to a 2- to 3-point benefit. And as Glen talked about with the restoration of the hubs you start to pick up scale and efficiency associated with that. And the rebuild steps down. So that gives us confidence in the progression ultimately will be where on a unit basis, where do you fall out as it relates to capacity impact that has. But as you know here, we’re focused on running a great operation and the alignment is to the primary financial outcomes, which is margins, earnings, and cash.

I would like to clarify the 10-point cost progression. For the March quarter, is it an increase of just under 5%? Should we expect the December quarter to reflect a decrease of 5%, or how should we interpret that 10 points? Additionally, you mentioned that the improvement is primarily driven by costs, which you have good visibility on. The timing of maintenance events, which you indicated accounts for a 5-point swing, and some benefits from planned training slowing down. If you could elaborate on that, it would be appreciated.

Yes, you're correct. If we consider the 10-point progression from start to finish, it translates to a decrease in mid-single digits. The maintenance factor is contributing around 4 to 5 points, related to the first half being higher and the second half being lower. Another key factor is the costs associated with transitions and rebuilds. We typically incur about 80% to 85% of these costs in the first half of the year, which include aircraft reactivations, training, and hiring. These costs will decline, especially with the introduction of 600 pilots into production; this marks the first time in 18 months that our training capacity will decrease in the second quarter. Additionally, we expect to gain efficiency and scale as we move into the second half, achieving about 5 points of aircraft utilization and making better use of our facilities and personnel.

Great. Makes a lot of sense. Then maybe one for Glen. Can we just dig into the corporate sales international ex-China, 90% recovered? Can you just walk us through how that looks from your different cabins? Are your business class cabins running at a similar level restored? And then by type of trip, are you still seeing a similar number like out and back Road Warrior type trips as you were pre-COVID?

Great question. Most of the international business travel is in the front cabin, so I’d estimate that 75% to 80% is there. This supports the strength in the front cabin. All of our premium products in the long-haul international markets are performing exceptionally well. This is really the first year we have premium economy at scale, with about 85% of our long-haul flights equipped, expected to reach 100% by next year. We're now flying this widely in the international market, and we've seen fantastic results in premium economy, particularly in Premium Select. So, we are very excited about the rebound in international travel, both for leisure and business. Now, what was the second part of your question? I’m sorry.

Yes. Just like on the type of trip, are you still seeing those kind of like shorter Road Warrior out-and-back type trips to the same degree, or are you seeing the length of trip change at all here?

We are seeing the length of trip change and Road Warriors are not staying one day; day trips are down. And that’s really what we’re trying to harness here as we move forward is normally, we would use AP, advanced purchase as one of the big key drivers for separating our business versus leisure. Now it’s really stay. And even with stay, it’s not as defined as it used to be. So, those are the fences we’re trying to rearrange how we think about our pricing systems and fencing. We don’t want to get too much into how we think about that. But clearly, AP is one that we’re leading out of.

I got just a couple of near-term follow-ups and then a longer-term question. So, the 70% booked for Europe and significantly less domestically, how does that compare with pre-pandemic sort of levels entering Q2? And then, the overall unit revenue flat to down slightly, is there a difference domestically, internationally on the year-over-year trend?

We are at about 75% for international long haul, which aligns with our expectations at this point. For domestic, we are close to where we anticipated. It really depends on how much you want to book in advance. When considering a 90-day period, it’s important to note that not all of it is booked at the same time. Within the 30-day window, we aim to be ahead of schedule. That's the key difference. I apologize for the second question.

There was just like the RASM for the unit revenue flat to down slightly for Q2, is there a difference domestically, internationally?

Yes. It’s a mix difference. International is up significantly and domestic is relatively flat versus year-over-year.

I’m not sure what you’re suggesting regarding the second half guidance. We haven’t provided a specific guide for the second half yet. It feels premature to update our 2023 guidance, but our 2024 guidance indicates we aim to exceed $7 per share, and that’s the direction we’re heading. I want to highlight that for our second quarter forecast, we anticipate reaching $2 billion in operating profit, which matches the figure from the second quarter of 2019. This reflects strong recovery signs, especially considering the increased fuel prices, higher labor costs, and that our system is not fully restored. All of this presents ongoing opportunities. We aim to reduce non-fuel CASM in the latter half of the year, which will significantly benefit us. We do not expect revenue declines due to demand strength. While everyone has their own perspective, we can't predict beyond the next four or five months. However, based on the feedback from our travelers, market insights, and agency reports, this recovery trajectory is notably different from what other consumer businesses are observing.

So, the $11 billion air traffic liability, pretty staggering number here versus the $6 billion to $7 billion that you had in 2019. I assume it’s this number that gives you a lot of the confidence in your outlook. But I guess my question, just curious if any of the dynamics within the APL have changed today versus a pre-pandemic where maybe a lower percentage gets translated into revenues because of no change fees or something else? Just curious there.

Yes, there are a few points to highlight. Firstly, the current level of performance gives us confidence in the second quarter and in our revenue expectations for both the second quarter and the summer ahead, reflecting strong results both domestically and internationally. Customers are increasingly comfortable booking further out, leading to longer booking windows. We have seen an increase in fares as well, but our customer-focused policies, such as eliminating change fees, have also helped customers feel at ease with making extended bookings. This trend has been consistently positive in terms of performance. While it represents an increase, I believe it underscores the overall strength and the growing comfort of our customers with the changes we have implemented.

Thanks. As a follow-up, Ed, I know you've been slightly adjusting capacity. What steps have you taken operationally to reduce the risk of experiencing disruptions like those during last year's summer peak? Thank you.

The teams have dedicated significant time to ensuring that we have the appropriate resources, properly trained and positioned. Continuous effort has been made over the past months across our operating teams, focusing on everything from crew activities to aligning our network and staffing in technical operations for line maintenance. We are committed to improving turnaround times for aircraft out of service and related processes. We are also ensuring that we implement necessary capabilities and buffers for readiness. Additionally, we are taking proactive steps to adjust our June capacity to enhance resiliency and recover from storms, which we anticipate will occur in the summer. Our teams are concentrating on these areas to ensure we have a deeper level of resilience.

If I could add to Dan’s comments, one major thing in addition is that our team has another year under their belt of experience. We have a very young team out there and leaders as well as frontline employees and getting through another year gives you a lot more confidence in terms of what we’re seeing. Secondly, we are pretty much through the hiring. We’ve been still hiring, but the hiring rates that we’re at now are just normal hiring rates for normal attrition, not the massive bulge that we needed to go through to restore the business. And so not only are we able to reduce the focus on getting out and hiring people we can take the people that have been doing the training and put them back in the business because our employees train and we have some of the very best employees that do the training. So getting them back focused into the business for the summer will also be a very nice benefit as we go through this. But there’s a list of 50 steps and 50 things that we’re doing that we review in great detail. And we’re confident it’s going to be a very, very strong operational summer for Delta customers.

Glen, I’m going to ask kind of a nerdy one, but your load factor did seem to step down sequentially in the first quarter. Did that have an impact from this actualization factor that you’re talking about? And I guess, can you expand on how you control for that in the future with your RM system? Do we even get to like backwardation on yields or no?

I think there are two main points I want to address. First, even though it wasn't part of the question, we need to improve in two areas next year. One is better harnessing the demand that constitutes the new normal in the post-pandemic world. We're currently analyzing this in real time and will make necessary adjustments. The materialization rate is relatively straightforward to manage as it pertains to our overbooking model. For instance, if you're averaging 103% and see a demand increase of two percentage points, you'd adjust to 105% for capacity. However, there's some risk involved, so we may not increase to 105% immediately; instead, we might move to 104% and monitor how that goes, possibly landing around 4.5%. It's essential to continuously evaluate actual events since these trends are evolving quickly, and we aim to avoid overshooting and causing disruptions. The second area is enhancing our overall network next year. We’ve observed that travel patterns now differ significantly from pre-pandemic times, including where people are flying to. One of the reasons I’m optimistic about improvements next year is our performance in January, where we can optimize the placement of our capacity. I’m excited that we now have a clearer understanding of post-pandemic travel patterns, including the increasing flights from New York to Florida, driven by people choosing to live in Florida while working in New York. These are insights that we are integrating into our planning as we move forward, and they inspire optimism for the future.

Appreciate that, Glen. And then very quickly related to the ATL being close to $11 billion in your free cash flow guidance for $2 billion this year. Does that guidance incorporate the payment to the pilots? And how do we think about free cash as the year progresses now?

Free cash flow, as we mentioned in December and the first quarter, the one-time ratification payment made was not categorized as a special item. You can see in this quarter that it’s not included in the free cash flow. Looking back at the ATL, the overall cash performance concerning operating cash and our position in free cash flow gives us confidence that we will exceed $2 billion for the year, including the first quarter and through the half. Thank you.

Ed, you mentioned productivity improvements, and I had a question about that. Given that many people have a year or more of experience, can you or Dan provide some numbers to quantify that, such as a percentage improvement in CASM or cost?

There are a variety of benchmarks utilized, and we analyze these across every operating group. Conditions have evolved since we used 2019 as a reference point for performance. While it serves as a baseline, the dynamics of our operations and team execution have shifted. We evaluate each operating group based on their previous standings and current progress. We have specific metrics for each group and a clear understanding of our current position. When considering the overall picture and assessing our run rate—excluding the rebuilding component—there's an opportunity for 2 to 4 percentage points of improvement in efficiency as we advance through the latter half of the year. Each area will progress at its own pace, with regional operations likely experiencing the slowest recovery. Currently, we are underutilizing regional aircraft capacity by nearly 30%, and we anticipate improvement in this area throughout 2024 and into 2025. Other areas will progress at different rates.

Helane, couple of added points. We mentioned in past calls, the amount of incremental training that we’re doing is in the hundreds of millions of dollars a year. Obviously, a lot of that’s going to dissipate now that we get into a more normalized pattern. We’re going to get the employees not just the cost of the training, but the instructors are doing the training back into the operation and providing that leadership. The other thing is that, as Glen mentioned, the network is continuing to evolve. And what we’ve seen is the staffing has been a bit lumpy during this recovery from the pandemic and getting your employees and your shifts to the schedule and understanding what the schedule looks like. There’s a lot of opportunity in there at the airport level and efficiency across the board. So, I think efficiency is certainly a big part of the reason why we expect in the second half of this year to bend the trajectory on nonfuel CASM and start taking it down relative to prior year versus the continued upward push we’ve been seeing.

That’s hugely helpful. Thanks, Ed. And then just for my follow-up question, as you know, being in New York, the FAA asked you to cut capacity by 10% this summer. So, that adds to your inability to be back to where you really want to be. Does that continue into the fourth quarter? And then, have you talked to them about getting more experienced controllers in the region? A. And B, is this something we need to look forward to every single summer? I mean, don’t they have to do their part too in terms of improving their infrastructure?

Hi, this is Peter Carter. Thank you for your question. It's good to hear from you. The release is effective until September 15th, so it won't extend into the fourth quarter. However, I hope this will only be a necessity for this summer, as we are in continuous discussions with the FAA regarding their staffing in New York and our national air system as a whole. One significant point from the FAA granting this waiver is their recognition of the issue that needs addressing, which is a crucial acknowledgment that allows us to collaborate on finding a solution. We have the most efficient and safest air traffic control system in the world, and it's essential that we keep investing in it.

Thank you, Peter. Thanks, everybody.

Thanks, Helane. Now, we’ll go to our final analyst question.

Thank you, Julie. And just to remind everyone, we’ve got time for one question and one follow-up each, and we’ll get to as many as we can in the time remaining. Matthew, if you could please reiterate for the members of the media, the instructions for joining the question queue.

I was wondering if you could discuss the recent near-miss or safety incidents we've been experiencing. Has Delta reviewed your own data? Have you identified any concerning trends or potential causes behind these incidents?

Hi, Ali, it’s Ed. We discussed this a few weeks ago during the FAA summit. We viewed it as a positive move to gather all stakeholders to address current issues and ways to improve our world-leading aviation safety system. Although we have experienced some unusual incidents recently, the safety systems effectively managed those situations. We must remain vigilant and continually seek improvement. There is nothing alarming; aviation is still the safest mode of travel. However, we want to ensure that all stakeholders are aligned as the industry navigates the FAA's infrastructure rebuilding and the airlines' responses.

And then you mentioned sort of like the relative newness or experience of the workforce as a factor in the operational issues. Do you think that that has played a role in kind of that uptick in safety incidents as well?

There’s no evidence that that is necessarily the case. Listen, we have the world’s foremost safety management systems and risk mitigation focus in the aviation community. And we knew that we have younger people. And so, we get out ahead of that. We don’t wait for something to happen. We are on the front end of that with training and added procedures, added buffers, added focus in the operations. So no, I would not lay it necessarily at the hands of experience.

I wanted to get one quick clarification, and then I have a quick question. When you were talking about corporate recovery, and you were saying you’ve recovered 85% of revenue, 75% of traffic in the second quarter, is that like total overall domestic and international corporate, or was that a segment of that?

That's the system.

Okay. Okay. And then the second question I had was on high-end leisure travelers continuing to buy up. Are you seeing these folks buy up into what you would normally see business or first-class seats? Are they buying up only to the top premium economy level? And if it’s the former, is that something that you expect to continue long term where these passengers are buying up into your ultimate highest classes?

They are purchasing all the way up to domestic first and Delta One on long-haul international flights. This is a trend we've noticed as we've made our offerings more accessible. It's been a key part of our long-term strategy that we've discussed for many years. Our goal has been to make these products more attainable for customers, and we've seen positive results during and after the pandemic, indicated by a strong attachment to these offerings. Once customers experience flying in those premium cabins, they often don't want to return to lower classes. Absolutely.