MIAMI — Delta will end 2016 with a $6 billion pre-tax profit, in line with hitting similar marks for its FY2015 performance. Its operating margins are expected to land at 16.5%, up 30 basis points from 2015, but below the 17-19% target range that it set earlier in the year. Nevertheless, it is the only major airline to have increased its operating margins year-over-year.
CEO Ed Bastian addressed the question of, “when will the gap close between Delta and its competitors,” given that Delta has had several years of a “lead” against the Big 4, including American, United and Southwest. Now that American has completed its merger with US Airways, and United is making substantial improvements to its operations, financial metrics and products under CEO Oscar Munoz, Delta has been questioned over whether it will maintain its lead in the industry.
Bastian’s response to this conjecture was that analysts need to, “under their models.” He stated that Delta’s industry-leading figures continue to set improvement targets and outperform goals on top of already exemplary standings. In 2016, Delta was up to 234 days of 100% mainline completion, 100 days better than 2015.
Last year, Delta had 11 perfect completion rates. This year, Delta logged over 90 perfect completion days. From a system total perspective, with nearly 6,000 flights per day, Delta had overall 80 days of perfect completion. One of the largest improvements was to extend these completion rates to Delta Connection as well. A14 rates are at an all-time record at 87%, while A0 stands at 75%.
The domestic Net Promoter Score (NPS) is 40% positive, which is the “best in class” among airline hub carriers. In November, the NPS was 44%, “and rising.” Employee morale is at an all-time high, with 89% of Delta employees stating that they are, “positively engaged” with an affirmative opinion of their leaders and the roles in which they perform.
2016 was also the year of several resets, particularly pertaining to labor and organization, cost controls and pricing volatility
Delta experienced a lot of transitions this year involving labor groups and Executive leadership. In early December, its Pilots ratified a new four-year labor contract that includes a 30% raise by January 2019, and maintains an industry-leading profit sharing plan. Other labor agreements will involve a 6% increase for other employees, but Ed Bastian remarked that we should see labor rates, “normalize” in line with inflationary pressures.
The leadership succession for Delta with current CEO Ed Bastian taking the place of Richard Anderson went, “very well” for Delta. It has been a multi-year process to get the team ready to take the reigns. There were some small speed bumps, and Richard left, “some challenges” with the tech outage, but overall, it is a very powerful team. Employee morale has adapted well to the new leadership entity.
Despite the strong overall year, 2016 presented several headwinds with rising labor and fuel costs, and growth in non-fuel costs outpacing unit revenue increases. Interestingly, Revenue per Available Seat Mile (RASM) has been positive in the post-election bump. Initial guidance for Q4 2015 was that it would be down 3-5 points, but instead Delta has seen a rise in 1 point for November, though slightly worse for December.
Pricing pressures in 2016, aided by the currency woes and overcapacity in some markets, created a weak unit revenue environment. Delta plans to cap its capacity growth at 1%, and will maintain that discipline until it can get its margins to where they need to be. Bastian remarked that Delta could attainably operate, “at 3 to 4% growth” if it stretched the system in terms of asset utilization.
However, the carrier will not do that until it gets its unit revenues to where they should be falling.
Delta still believes strongly in international expansion as the way of the future
It is a bumpy road, with currency issues and political challenges, but Delta highly values its long-term partners, including both SkyTeam and others.
The US marketplace is largely mature, and Bastian remarked that, “if we need top-line growth, it’s got to come internationally, as it is cost-efficient and cost-effective to operate through out partners with real brands.”
Europe serves as a prime example of this: the Joint Venture with Air France – KLM and Alitalia, as well as the JV with Virgin Atlantic, is a $10 billion USD business. The JV has created hubs in London, Paris, Amsterdam and Rome. Though Delta knows the transatlantic market has a lot of capacity where supply had exceeded demand, the entity has sustained a 15% all-in margin.
“That is the beauty and power of these relationships,” said Bastian.
In Asia, the landscape is evolving. Tokyo is now a split airport market now that Haneda is opening up more access. Delta plans to continue to move over time to Haneda. Meanwhile, it is increasing the importance of partnerships in China with China Southern in Guangzhou and China Eastern in Shanghai, as well as Korean Air in Seoul.
On Seoul, Delta plans to create, “a great northern Asia hub in Seoul,” according to Bastian. “We’ve had our challenges in the past, but we’ve had some breakthroughs and are optimistic that we will have further breakthroughs in 2017.” Delta will continue to migrate a lot of the hub flying from Tokyo to Seoul, and the restructuring of its Asian network is, “going well.”
In Latin America, Delta is looking forward to the closing of the Aeromexico investment and Joint Venture. People are aware of the challenges that the Anti-Trust Immunity proposal has faced. Delta is looking at the final order and, “it’s too premature,” but it is committed to AeroMexico and that investment.
“If you think about the demographics of that market of 125 million people, which is highly underserved, and bring in Delta technology and its best practices, it is a massive learning opportunity for us,” said Bastian.
Good restructuring signs are taking place in Brazil and also with Gol bouncing back, and the stabilization of the Brasilian Real. As Delta builds the, “airline of the Americas,” from North America all the way down to Argentina, it hopes to be poised for the greatest amount of growth in the Latin region.
Delta believes it is America’s “best run airline”
Delta believes that there is a strong correlation between revenue performance and Net Promoter Score, and with the technology, operational and product investments it is making, it hopes to raise the bar even higher. It won top honors in the Business Travel News survey this year, sweeping away its competitors in ten categories.
On cabin investments, Delta is thinking about the “entire cabin” and conducting experiments on how to improve the performance in the main cabin with the roll-out of new branded snacks and the sunset of Delta’s blue and red peanut and pretzel bags. The branded snacks have showed phenomenal scores from customer satisfaction surveys, which Bastian believes will also improve revenues.
The airline is also experimenting with serving meals in the main cabin on transcontinental flights. Bastian believes the pendulum has swung, “too far” in terms of service cutbacks and there have been positive responses from customers.
On in-flight Wi-Fi, there has been some good progress this year with the overarching coal to make sure that WiFi in the Sky works as well as WiFi on the street. There is also a need to determine affordable price points. Delta is spending time with Gogo on the new 2KU satellite technology to insure that by the end of 2017, airspeed works as quickly as groundspeed.
Delta is also rolling out RFID technology on baggage-tags to allow customers to track their luggage on their apps and bring down the mishandled bag rate.
The carrier also continues to make investments in airports across its system, including LaGuardia, Atlanta, Salt Lake City, Los Angeles and Seattle, worth over $10 billion in improving the airport experience. Working with municipalities is also a huge initiative, such as rebuilding LaGuardia, and consolidating Terminals 2 and 3 at LAX to connect more easily with the Tom Bradley International Terminal. New SkyClubs have also been rolled out in Atlanta, Seattle and Raleigh-Durham, taking a lot of guidance from Virgin Atlantic’s Club House playbook.
Delta believes that 2017 will be a “Transition Year”
The theme will be focused on durability and sustainability, with the #1 goal of getting unit revenues back in line with cost escalation. Delta has not been, “good prognosticators” of unit revenue growth, but Bastian asked investors to not misconstrue this as, “a lack of focus.” Delta had initially set operating margin targets to fall between 17 and 19% this year, but those estimates were based on a prediction that unit revenue recovery would arrive sooner than it did in 2016.
As such, for 2017, Delta will lower its operating margin guidance, but remains committed to a longer-term outlook that its business should be in the high teens. It is hoping that initiatives and planning for 2017, “should be a good setup” to get Delta to that place in 2018 and 2019.
The demands for 2017 will be even higher than 2016 with cost escalation growing even more than the rate it is currently at. This will also test the durability of Delta’s business model. As such, there is a huge emphasis being placed on maintaining a strong brand, keeping highly engaged employees, deriving unit revenue premiums and being disciplined about capital investments.
On the capital investments front, Delta has always adhered to a simple model: for every dollar of cash earned, take half of that and invest it back into the business, and use the other half to improve capital structure either through debt pay down or shareholder returns. Delta will remain committed to using that model.
In summary, 2016 was a good year, despite the fact that Delta experienced the weakest pricing environment that it had seen in a long time, fuel prices rising from $25 in January to $55 per barrel, and the double digit rise in labor expenses. Delta still managed to achieve a $6 billion pre-tax profit.
Overall, Ed Bastian is extremely proud of his team, and everyone at Delta is excited for the upcoming year.