Delta Air Lines Inc
NYSE:DAL
Earnings Call Analysis
Q4-2023 Analysis
Delta Air Lines Inc
Delta has achieved a notable feat by being named the #1 airline in the Business Travel News Airline Survey for 13 consecutive years, underscoring its dominance in the corporate sector. With strategic moves such as launching Sky Miles for small- to medium-sized businesses, Delta capitalized on accelerating corporate sales at the year-end, evident by significant year-over-year growth in December. The technology and financial services sectors were the main contributors to this momentum, bolstered by media and auto sectors benefiting from resolutions to strikes.
Despite unit revenues being 3% lower than the previous year, Delta is entering the year with promising signs, like recording the highest cash sales day in its history. The company projects March quarter revenue growth to be between 3% to 6% over the previous year, with a capacity growth of 6%. However, expectations for unit revenues range from flat to a decrease of 3% compared to last year, which considers the effects of a higher international mix, normalization of travel credit utilization, and the impact of competitors' past operational challenges. Even with these headwinds, the core business fundamentals are outpacing the superficial trends. The domestic unit revenues are anticipated to see an uptick, and the transatlantic flights, which constitute Delta's largest international market, are expected to see growth in unit revenues as well.
The company is poised for robust growth in 2024, supported by strong indicators such as nearly 95% of businesses in recent surveys expecting to maintain or increase their travel in the first quarter compared to the last. Delta's commercial strategy hinges on leveraging its competitive advantages, which includes optimizing its network to capitalize on strength in core hubs, growing high-margin revenue streams such as premium seats and loyalty programs, and significant investments in enhancing premium travel experiences.
Looking forward, Delta's partnership with American Express is expected to ramp up with a 10% growth in remuneration over 2023. Investments will continue to enrich the premium travel experience, including a next-generation fleet and transformative digital initiatives. The company's focus on its brand strength and leadership position is geared to bolster its lead in the industry into 2024 and beyond.
Delta has almost doubled its performance from the previous year, with a pretax income of $5.2 billion and operating margins improved by 4 points, expected to be industry-leading at 11.6%. The company generated substantial operating cash flow, which allowed for significant reinvestment and debt reduction. Projections for the March quarter include earnings of $0.25 to $0.50 per share on around 5% operating margin. Fuel costs are anticipated to range from $2.50 to $2.70 per gallon. For the full year, Delta expects to post earnings of $6 to $7 per share, with full year nonfuel unit costs up by a low single digit over 2023. The company forecasts $3 billion to $4 billion of free cash flow, benefitting from increasing profitability, moderate capital expenditures, and a higher mix of cash sales.
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Good morning, everyone, and welcome to the Delta Air Lines December Quarter and Full Year 2023 Financial Results Conference Call. My name is Matthew, and I will be your coordinator. Until we conduct a question-and-answer session following the presentation. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the conference over to Julie Stewart, Vice President of Investor Relations. Please go ahead.
Thank you, Matthew, and good morning. Thanks for joining us for our December quarter and full year 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 cost on our balance sheet. After the prepared remarks, we'll take analyst questions. We ask that you please limit yourself to 1 question and a brief follow-up so that we can get to as many of you as possible. After the analyst Q&A, we'll move to our media questions. As a reminder, today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I'll turn the call over to Ed.
Well, thank you, Julie, and good morning, everyone. We appreciate you joining us this morning. Earlier today, we reported our full year and December quarter results, posting Fourth Quarter earnings of $1.1 billion or $1.28 per share on record quarterly revenue that was 11% higher than 2022 and an operating margin of 10%. I want to sincerely thank the 100,000 strong Delta team for their outstanding work in delivering these results. and serving our customers. Delta carried more travelers this holiday season than any other time in our history, and we delivered industry-leading operational performance. with the #1 system completion factor amongst our peer set throughout the December quarter. To put that in context, we carried 9 million customers, a record 9 million customers I'd add on 60,000 mainline flights over the holiday period with fewer than 40 cancellations in aggregate. Our December quarter results marked a strong close to year 2 of our 3-year plan. For the full year, we reported earnings of $6.25 per share, the second highest EPS result in our history on revenue that was 20% higher than the prior year. We delivered an 11.6% operating margin and pretax income of $5.2 billion, a near doubling over 2022. We generated free cash flow of $2 billion while investing $5.3 billion back into the business, and we improved our leverage by 2 full turns and reinstated our quarterly dividend. Return on invested capital was 13.4%, a 5-point improvement from 2022. A tremendous amount of progress, especially if you consider where we sat a short 3 years ago, and I'm so proud of our team across the board. Sharing our financial success is a long-standing pillar of Delta's culture, and I'm thrilled to announce that we'll be rewarding our employees with $1.4 billion in well-earned profit sharing on Valentine's Day. For our employees, the estimated payout will be approximately 10% of eligible 2023 compensation about double what last year's payment was. I expect our profit sharing payments will be more than our 3 largest competitors combined. Our people consistently deliver operational excellence with the relentless focus on raising the bar at every stage of the travel journey to deliver safe, reliable and caring service for our customers. They are the reason our brand and our customer loyalty lead the industry, why Delta was recognized as the world's 12th most admired company by Fortune, and why [ Glassdoor ] named us yesterday as the 13th best employer in the country. In 2023, we made meaningful investments in our people, our operations and our customers. We provided well-deserved pay increases for the Delta team, continuing our philosophy of industry-leading pay, for industry-leading performance. In the operation, the investments that we made supported the best-in-class operational performance that Delta has long been known for. Our operational excellence was recognized by Cerium last week which named us yet again the most on-time airline in North America. Our people and our operational reliability are the foundation of Delta's trusted consumer brand. and we are building on that foundation as we elevate the premium flying experience and grow our SkyMiles members engagement with Delta. Today, we also announced an order for 20 Airbus 350-1000 aircraft with options for 2 more for delivery starting in 2026. These planes complement our fleet strategy and will offer a world-class customer experience for international travelers with more premium seats, higher gauge and great customer amenities. These aircraft are over 20% more fuel efficient than the 767s that they'll be replacing, further supporting our long-term sustainability goals. And with the successful launch of Fast free WiFi and Delta Sync, we are enhancing the in-flight entertainment experience for SkyMiles members. We expect to have these products rolled out globally by the end of this year. On the ground, we are building the airports of the future in some of the most important markets and adding new Delta Sky clubs to provide our customers a world-class airport experience. We completed our transformation at Los Angeles 18 months ahead of schedule, including a state-of-the-art facility and a new Delta Sky Club that was named North America's Best Airline Lounge for 2023 by business traveler. We opened the latest phase of our Salt Lake City expansion and will complete the generational rebuild of [ LaGuardia ] this year. Our digital investments continue as we work to increase our agility and provide employees with better tools and customers with a more seamless experience. Customers visited the Fly Delta app over 1 billion times last year using our self-service tools almost 10x more often than 2019 with much higher overall satisfaction. As 2024 begins, our enterprise has moved from a period of restoration to optimization. We are focused on delivering excellent reliability elevating the customer experience and improving efficiency across the company to support continued growth in our earnings and our cash flow. We expect demand to remain strong particularly for the premium experiences that Delta provides. Consumer spend is continuing to shift from goods to services and our customer base is in a healthy financial position with travel remaining a top priority and corporate travel continues to improve with demand accelerating into year-end. On supply, industry growth is normalizing after several years of network restoration. For 2024, we plan to grow Delta's capacity 3% to 5%, below the mid-single-digit range that we discussed at our June Investor Day as we've refined our plan. Domestically, supply and demand are coming into better balance as the industry adjusts to rising cost of production, and we are seeing a positive inflection in domestic unit revenue growth. Internationally, we expect another strong year as we optimize our network and leverage our global JV partners. With that backdrop, we are providing full year 2024 guidance for earnings of $6 to $7 per share free cash flow of $3 billion to $4 billion. Free cash guidance is up to $2 billion higher than 2023, driven by growth in profitability, lower CapEx and an improved mix of cash sales. As we continue to grow earnings and reduce debt, we will further reduce leverage and advance our balance sheet towards investment-grade metrics. Glen and Dan will provide more detail shortly, including our outlook for the March quarter. In closing, the people of Delta delivered a remarkable 2023, and leading the industry operationally and financially, while providing a world-class experience for our customers. Delta is well positioned to build on our momentum in the new year with continued growth in earnings, and cash flow in 2024. I could not be more excited about what's ahead for Delta and our customers, and I am confident that our returns-focused strategy will drive significant value creation for our owners in the years to come. Thank you again for the support you show to our company. And with that, I'll turn it over to Glen.
Thank you, Ed, and good morning, everyone. I want to start by thanking all of our employees for their hard work and dedication this year. For the full year, we delivered record revenues of $55 billion, about 20% higher than pre-pandemic Strong execution on our commercial strategy resulted in significant outperformance against the industry with international delivering record margins and profits. We finished the year with unit revenues 3% higher than 2022, also about 20% above prepandemic levels. Diversified revenue streams, including premium and loyalty generated 55% of revenue, reflecting Delta's differentiated strategy. Premium led all year with record paid load factors and yield growth outpacing main cabin. The rollout of Delta Premium Select on long-haul international is nearly complete and the revenue generation has been above our expectations. As we continue to increase our premium seat mix and segment the cabinet through our 5 product strategy, we have structurally improved the international margins. Our loyalty program continued to exceed our expectations with record SkyMiles acquisitions in 2023. Total royalty revenue was up 19% over the prior year with 15% growth in co-brand spend and increasing mix of premium cards in our Amex co-brand portfolio. In recognition of our commitment to the business traveler, Delta was named #1 in Business Travel News Airline Survey for an unprecedented 13th consecutive year. Delta gained corporate share during the year and successfully launched Sky Miles per business providing small- to medium-sized companies, new benefits to support further growth in the important SME segment. Corporate sales accelerated into year-end, including double-digit year-over-year growth in the month of December. Technology and Financial Services led this momentum for the December quarter with media and auto sector seeing notable traction following the strike resolutions. December quarter revenue was a record $13.7 billion, 11% higher than $22 million. While unit revenues were 3% lower than last year, we are entering the year with momentum in our highest and had experienced our highest cash sales day in history this week. We expect March quarter revenue growth of 3% to 6% over 2023 on capacity growth of 6%, which includes 1 point from Leap Day implying unit revenues will be flat to down 3% over last year. This is a 2-point sequential improvement on a year-over-year basis from the December quarter. Our March quarter faces headwinds from 3 dynamics when compared to last year. These include higher international mix, the normalization of travel credit utilization and lapping our competitors' operational challenges. Looking through these headwinds, the core fundamentals of the business are improving faster than the headline numbers suggest. With encouraging developments in the domestic environment, we expect domestic unit revenues to inflect to positive in the March quarter. The transatlantic, our largest international entity continues to perform well with strong demand through the shoulder period, and we expect unit revenues to grow in the March quarter. In Latin in Pacific, we are rebuilding our networks and improving connectivity with our JV partners, accounting for the majority of capacity growth in the March quarter. These investments are supporting higher short-term profitability but with lower unit revenues. Turning to our outlook for the full year. Premium consumer trends remain strong and spending on travel experiences continues to outpace overall GDP by 2 to 3 points. We expect solid growth in business demand with nearly 95% of respondents in our recent corporate survey expecting to travel as much or more in 1Q than 4Q. This is a double-digit improvement in travel intentions from our last survey. Our commercial strategy in 24 builds on Delta's competitive advantages by optimizing our network growing high margin revenue streams and investing in our future. First, we have a unique opportunity to further optimize Delta's network to capitalize on our strengths in core hubs and JV partner hubs and reflect evolving travel trends. This is the first time we've been able to optimize since pre pandemic as we now have a good set of demand to optimize from. Second, growing revenue diversification through high-margin sources remains an important differentiator for Delta. We have runway ahead as we continue adding more premium seats to our aircraft further improve our retail capabilities and expand loyalty revenues and travel adjacent services. We expect American Express remuneration to grow 10% over 2023 levels. Finally, we are investing in the future to enhance the premium travel experience through our next-gen fleet, generational airport builds and digital transformation. With continued investment, Delta's brand strength and leadership position will extend in the years ahead. In closing, I'm incredibly proud of the team's performance in 2023, and we're entering the new year with momentum. I'm excited about Delta's opportunities to grow our lead in 2024. And with that, I'll turn it over to Dan to talk about the financials.
Thank you, Glen, and good morning to everyone. 2023 was another meaningful milestone in restoring our financial foundation. We delivered earnings of $6.25 per share and pretax income of $5.2 billion, nearly double our performance of last year. Operating margins of 11.6% was up 4 points from last year and expected to lead the industry. We generated operating cash flow of $7.2 billion, enabling reinvestment in our people, our fleet and technology. After gross CapEx of $5.3 billion, we generated free cash flow of $2 billion. During the year, we paid more than $4 billion of gross debt. This included accelerated repayment of $1.7 billion of higher cost debt. We ended the year with liquidity of $6.8 billion and grew our unencumbered assets to $26 billion. Our leverage ratio improved 2 turns to finish the year at times. Return on invested capital improved to 13.4%, up 5 points over 2022. S&P upgraded our credit rating in the second half of last year, we are investment grade rated at Moody's, and we are now only 1 notch away from investment grade with outlooks improving at both S&P and Fitch during the year. With this progress, we reinstated our dividend last summer, broadening our appeal to yield-focused investors. We closed out the year strong, reporting a December quarter pretax profit of $1.1 billion on operating margins of 9.7%, resulting in earnings of $2.28 per share. Nonfuel unit costs were up 1.1% year-over-year, in line with our guidance. Now moving to our outlook. For the March quarter, we expect earnings of $0.25 to $0.50 per share on approximately 5% operating margin. We expect March quarter fuel price to be $2.50 to $2.70 per gallon with a $0.05 to $0.10 refinery benefit. The refinery profit is expected to be down more than $130 million from last year due to elevated crack spreads in early 2023. For the full year, we expect to deliver earnings of $6 to $7 per share. With our reduced outlook for capacity growth, we expect full year nonfuel unit cost to be up low single digit over 2023 with the March quarter unit costs up approximately 3%. The last 2 years were a period of intense restoration with unnatural high growth to rebuild our network. Growth is normalizing, and we've entered a period of optimization. With a focus on restoring our most profitable core hubs and delivering efficiency gains across the enterprise. The intensity of hiring and training has moderated. And investment in reliability are beginning to pay off with continued improvement in operational performance. We expect to deliver efficiencies through the year that will help fund investments in our people, the customer experiences that Ed spoke to earlier. On maintenance, we have a higher number of heavy airframe and engine checks this year, resulting from the timing of new aircraft deliveries over the last decade, and the reactivation of our Flex fleets. At the same time, industry-wide supply chain constraints are continuing, driving higher costs and extended turnaround times. For the full year, we expect maintenance expense to be up $350 million over 2023 as we prioritize continued improvement in operational reliability and reading our fleet for the peak summer period. We expect the majority of this increase to be in the early part of the year. Unit cost growth is expected to improve from the March quarter levels as we deliver efficiency and lap investments we've made in the second half of 2023. Now on to cash flow. We expect cash flow of $3 billion to $4 billion of free cash flow, preluding CapEx of $5 billion. The improvement in free cash flow was driven by growth in profitability, lower CapEx and a higher mix of cash sales. As cash sales are expected to compose a larger percentage of overall bookings as travel credit utilization normalizes. We plan to pay cash for $3 billion of 2024 debt maturities and for approximately 45 aircraft deliveries, growing our unencumbered asset base to $30 billion. We expect to reduce leverage to under 3x, returning the balance sheet to investment-grade metrics, while continuing to invest in the business remains our focus for capital allocation. We'll continue to evaluate shareholder returns with a focus on dividend growth as we reach our targeted leverage. In closing, Delta is well positioned as we enter the final year of our 3-year plan to restore our financial foundation. We are continuing to prioritize the objectives we laid out at Investor Day with an emphasis on earnings durability, free cash flow and capital efficiency. Our industry-leading operational and financial performance is a result of the hard work and dedication of the Delta people. I'd like to thank each of them for what they do every day. With that, I'd like to turn it back to Julie for Q&A.
Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions?
Certainly. At this time, we'll be conducting the analyst question-and-answer session. [Operator Instructions] Your first question is coming from Michael Linenberg from Deutsche Bank.
This is a question probably to both Dan and Glen. With the new A350 1000s coming in 2026 and knowing that you do have some additional Airbus widebodies delivering over the next few years. Are you still going to be in a situation where maybe you have to extend your 767 fleet. I know that, that is to be fully retired, I think it was going to be by 2025. Will you have enough lift in if not, are we going to see additional investments into maybe some of these older aircraft to keep them running through until you take deliveries of the bigger airplanes.
As we move through 2025, '24 through the back half of the decade, we expect to retire the 767 through that period of time on a pretty consistent basis as you step through while continuing to fly the 400s.
So you'll continue to fly the 400s beyond 2025, Dan?
Mike, I don't think to have the fleet grounded by 25. It was our intent to have them out of international long haul by 2028 and retired by 2030.
Okay. Makes sense. They're a bit younger. And then Glen, just my second question, what was the headwind due to the cancellation of the Israel services in the Israel services in the Fourth Quarter? And is that a good way to think about the March quarter impact if you don't restart those services by the 31st.
So Mike, the initial hit was clearly the greatest because as we move through the quarter, we redeployed the assets to other markets. So I would say it was about 1 point of revenue in 4Q and that really goes to a very little impact in 1Q and beyond. And of course, we're assessing the issues in Israel. Our current intent we have loaded for sale in April. We'll see how that manifests move through, but our priority is always safety first. Safety of our customers and our crews, and that's going to be our priority.
Your next question is coming from Helane Becker from TD Cowen.
So 2 questions. One for -- I think, Ed, you mentioned this morning on CNBC that you were seeing improvement in corporate, especially in the tech sector. So I'm kind of wondering if you or Glen can talk about what you're seeing in corporate by sector and maybe by geographic region?
Well, I'll start and Glen can add his color as well. We are seeing continued improvement in the corporate sector, and we had a number of number of laggards, tech being, by far, the largest in terms of that had essentially not returned to travel. And we're finally starting to see tech companies traveling again. And again, I think a lot of it is to turn to office that is driving some of that the consultancies as well, which have also been laggards. Again, given their clients have had their offices somewhat reduced office hours opening is helping there and we've seen it across the board.
The other thing I mentioned this morning also was the auto and entertainment sectors have rebounded nicely, entertainment clearly and auto is starting to rebound following the strikes in the Fourth Quarter.
That's very helpful. And then just for my follow-up, question. As you think about international, I noticed that in your schedules, you're elongating the season with maybe just January and February in international being seasonally lower. Are you seeing travel move into those months as well so that you would extend or add especially to your coastal hubs more international service going east.
Absolutely. I think we've disclosed this previously, is that we've seen the seasons elongate for leisure travel to Europe and really March through October now is pretty strong. Of course, the shoulder is still not as strong as the peak summer. But in response to that, and again, this is part of our optimization of how we fly is tailoring our capacity to when demand actually exists.
Okay. That's really helpful. Thanks, team. Have a nice day.
Your next question is coming from Jamie Baker from JPMorgan.
Glen, on the pending inflection in domestic RASM, I appreciate we're seeing capacity plans tighten up across the industry. My question is whether you're seeing any revisions in how the growth your airlines are behaving side of nearly cutting capacity. Anything else interesting we should be focused on? Or is it simply a supply exercise that's driving the improvement?
Well, I think, [ Jim ], you've got a couple of contributors to it. One is what Ed just mentioned, the improving conditions in the corporate environment. And it's been a slow and steady rebuild since the end of the pandemic, but we are at post pandemic highs somewhere right around 90% restored to pre-pandemic levels as we head into this year. So that, I think, is an exciting backdrop for a domestic turnaround. Of course, we have some of the rationalization of capacity, but we also have continued improvements in segmentation and pricing. I can't talk to our competitors. I just know how we are working now and years ago, we were only worried about the lowest fares in the market. And now we're worried about the entire ladder and the relativity within those ladders and trying to get people to experience the higher quality products. And I think that's really led to our ability to continue to segment the customers in a more enlightened way moving forward. And that's going to be 1 of the key drivers as we head through this year.
Okay. I appreciate that. And then a second question for Ed. During your interview with Phil this morning, you mentioned you're still holding out hope for the $7 earnings outcome this year. If we fast forward to a year from today, give or take, and that indeed has been the outcome, what do you think the primary driver will have been? I guess the better way to ask is, do you think there is upside based on what Delta can control or do you think it will simply be exogenous factors, like, hey, fuel cooperated or, I don't know, maybe the consumer leaned even further into premium, that sort of thing.
Sure. Thanks, Jamie. I get the question. I think the level of volatility that we see is what causes us to be a bit cautious and prudent in giving that $6 to $7 EPS guide in 2024. And we've been signaling that a bit for the last 6 months, and that's where we sit today. I have great confidence in hitting that guide, which is what I think the Street wants to know where our confidence level is -- there are a bunch of macros that we look at into the year, which we'll have to see how they play out. Clearly, the geopolitical front continues to be quite testing, including the fact that this is a political election season. not just in the U.S. but around the world. Energy prices, we saw this morning just how volatile energy prices are. And to me, the supply chain, both the cost and the constraints that we see in this industry continue unabated. We're not making nearly the progress on the supply chain improvements, if anything, every news we get seems to be a bit worse, not better. So that constrains growth and increased cost. That all said, my internal stretch for myself and our team is to still get to that number this year. I think we have a possibility to get there. But I also think that the macro weighs on that assessment, and I think to be prudent, we should set expectations maybe a little bit lower and hope to overchieve, just by the way we did in 2023. We gave a $5 to $6 guide and came in on the top end. And I'd like to see a year from now that we're reporting that same type of result.
Your next question is coming from Conor Cunningham from Melius Research.
Just on the regions in general. You obviously sound more constructive domestically, but I think you mentioned that you still see a lot -- a fair bit of upside in terms of international. If you could just level set on your overall like regional expectations in '24, I think that would be helpful.
Well, I think we're expecting domestic to continue to improve the comps get easier as we move through the year. So we should see some nice momentum there. We had a fantastic year in the transatlantic. We're hoping to beat that, but there's a really high bar as we move through the year. What we have on the books is really pretty exciting for the month of April, where we have about 40% of our transatlantic bookings in place. We have unit revenue sitting at high single digits up, which I think most people wouldn't expect. Of course, we have a lot of booking to go there, but the early returns for spring and summer are very favorable as we sit today. Pacific where we have an incredible amount of capacity that's being absorbed nicely and we expect that to inflect into a positive territory as those growth rates come down, we move through the year. And last but not least, Latin in our ambitious build in South America with our partners, LATAM, is paying very strong dividends. We're improving our profitability, albeit at lower unit revenue. So I think we're very excited about where South America sits and the beaches, this winter seem a little over saturated that will rationalize itself out as we move through the year.
Appreciate that. And then, Dan, 2024 costs. I was hoping if you could provide some thoughts just on the shape of the cost trajectory. It seems like a lot of it just has to do with timing of maintenance and really that type of stuff. Just any color -- additional color there could be helpful.
Yes. I said maintenance was up $350 million for the year with a focus on the first part of the year. The other piece of it is when you think about efficiencies, efficiencies just build as you progress through the year. One example is we're down on -- we're fully staffed. The one place we're hiring is pilot. That will be down 50% -- over 50% from last year. But again, front half centric with training associated with it as you get ready for the summer. And that really normalizes to historical levels in the back half of the year. So just a good steady drum beat of efficiencies as we pace through the year.
Your next question is coming from Stephen Trent from Citi.
This might be for [ AdorGlenn ], but you addressed it a little bit in an earlier response, but how do you think the supply chain stuff goes. First, we have the GTF engine, now the MAX 9 door plug. Do you think we've kind of reached the bottom? Or are you concerned there could be more to come 6 to 12 months from now?
Thanks, Stephen. This is Ed. I hope there's no more surprises, but I'd be lying to you if I thought that's the case. I mean I think we're continuing to work through the -- in this post-pandemic world, the implications of the supply chain issues that we saw. And the MAX 9 issue is a one-off separate issue. I'm not referring to that. I am referring principally to the engine side of the business. And there's a lot of work on [ Pratt ]. We have a lot of reliance on [ Pratt ] and their challenges that they're facing have been chronicled. One of the things that we see on the engine side is as a lot of the incremental resources that our engine providers and suppliers have put their resources against it also strips away resources from the maintenance work on their existing business with us. So we're working through in a sufficient manner with [ Pratt ] they were in this week and we spent a lot of time with them. roles and gee, everybody in the engine world has challenges, not just on the original build, but more importantly, on the parts and the repair side of the business. And a lot of it's an experience factor level, all the suppliers in our industry lost a tremendous amount of experience due to the pandemic, and it's taking time to get that back to get the term times down to where they need to be and we have higher turn times that not only delays the entry into service, it also causes cost to go up.
All right. I appreciate that, Ed. And as my follow-up, I appreciate as well what you mentioned on the Latin market doing well. Any high-level color respect to with respect to sort of deep LATAM versus short-haul LATAM? I mean, I presume a lot of the uplift you're seeing is from the JBA spooling up, but just wanted to make sure I understood that correctly.
Yes. I think you described it perfectly. There's a little pressure on the short-haul Latin, particularly on the resorts, where a lot of capacity was added by the industry year-over-year. But we're having really incredible performance into Deep South America as our coordination of launching the JV with LATAM, and we're very excited about the short-term and the long-term prospects there.
Great. I appreciate that, Glen.
Your next question is coming from David Vernon from Bernstein.
So Dan, as you think about what happened in 2023 as far as kind of the cost creep that led us to a little bit of a higher cost position than maybe you would have thought in the beginning of the year. Can you give us a kind of run down around kind of what you missed in 2023 and then with that as kind of a backdrop, talk to some of the sources of risk that you might see to that low single-digit outlook for CASM ex in 2024?
Yes, predominantly, yes, David. I certainly 2 drivers. First, we flew less capacity and kept the cost in to invest back into the business. That was one. And the second piece was what we talked about a lot in the second half of the year was the investment in maintenance and the cost associated with maintenance. And those were really -- when you look at where we were from what we got it to where we ended up just over plus 2, those were the single to biggest drivers associated with that. When you think about that as we go into New Year 4 here, a lot different backdrop as we're in a more normalized growth environment. When you're thinking and planning and the teams are executing to 3% to 5% growth versus 17% to 20% growth, the focus really less on this training and hiring and the restoration of the airline, and our operating teams are focused on the operational performance and fine-tuning that. And as you do that, that sets the stage to drive the efficiency and things that -- actions that we took in we are paying off. If you look at the maintenance doing a lot of work and there's a lot to still go, but the Fourth Quarter performance, aircraft out of service down 30%; maintenance cancels down over 80%. So that those actions that they're taking around proactive reliability, getting the touch time on the aircraft panties, but that's really what allows us when you're a net normalized environment, you can really stay after that consistently day in and day out. that sets the stage for the execution around efficiency.
David, if I could jump in here. It's hard to overstate just how hard it was to bring the full business back up again over the last 2.5 years. and the intensity of that has been phenomenal, and our team has done a great job at is taken every fiber of our being and hiring and resource we have to try to get ahead of it. We're there now, okay? And you see the results in the Fourth Quarter, they were remarkable, the best Fourth Quarter operational results. I think this company has ever posted. And that is, I think, the big opportunity as we enter the year. I don't know that we know yet just how much we have available to us as we start to return to a normalized environment and start tweaking those efficiencies. I think it's going to be significant. And it's kind of hard to forecast because this team has been, for the last 2-plus years in a very different part of the build. But I'm confident we're going to see some great, great opportunities. And that's to Jamie's earlier question, some of my internal expectations of hoping that we can get to that $7 above EPS number. I'm willing to put that number on paper quite yet, but I think the opportunity is there.
Just to maybe kind of follow up on that point a little bit. If you think about the optimization efficiency gains that are ahead of you, I appreciate that it's hard to quantify at all which can you give us a sense for what the driver of some of these things are kind of big picture-wise, is it about utilization of aircraft? Is it about getting the staffing optimized? Or is it more about just working some of the friction costs in the business out and sort of continuously improving and chasing down a bunch of little dogs and gas across the business. I'm just trying to get a sense for kind of what do we look at here? Are we looking at a large set of projects? Or are there 1 or 2 things that are going to be super pivotal around the optimization side?
David, I think it's all of the above. And it's not just what you mentioned on the cost side. It's also on the revenue side. Consumer behaviors have changed a lot. And to this point, we've been using somewhat older models to predict behavioral patterns. And we now have actually a good baseline over the last 1.5 years of what -- how consumers are purchasing, what they're purchasing, when they want to travel which Glen and his team will use to drive better network and revenue outcomes for our business. It's in the cost line. The fact that we have 10% more employees today than we had at this point pre-pandemic, essentially driving the same level of operations, a tremendous amount of opportunity to get efficient. But when the operators know what they can count on and they've got the arms around the full operation I think you're going to see the cash register start to ring with cost and savings efficiency. So I know it's a bet on the come a little bit, but I'm optimistic we'll get there. But it's really hard to quantify at the same time.
Your next question is coming from Ravi Shanker from Morgan Stanley.
I know your commentary on demand sounds pretty good, but can you unpack a little bit more detail on what you're seeing in the forward booking curve through spring break and maybe even the activity through the [ Paris to pick ] over the summer, kind of what kind of forward indicator you have that people might be traveling more?
Well, I think I mentioned it as a response to 1 of the other questions, but we have pretty good visibility on the early bookings for the summer transatlantic season. And we have a higher book load factor as well as higher yields. So those are the 2 things we watch for, and both are indicating quite positive for the transatlantic. The U.S. has, of course, a closer in booking curve. But as far as we can see out through a spring break, things look great for the U.S. And as I mentioned earlier, some of the closed-end beach resorts have a little bit too much industry capacity this year that will probably get rationalized out over time, but still won't be very profitable as we move to the peak winter season. And then as Pacific, Rash, as we continue to lap the buildup of our Pacific as we move through the year, we expect those unit revenues to accelerate demand, particularly strong to the [ Inchon ] hub as well as to Japan in the spring season. So very exciting as we look forward. I hope we can be out to our plan.
Got it. And apologies if I missed this earlier, but did you -- I mean, some of your peers are having issues with the potential extended grounding of some aircraft for inspections -- do you see any kind of spillover benefit for that in the short term? And kind of -- is any of that in your 1Q guidance?
Yes. We see minimal improvements in what we have seen is mostly in Seattle, where they've had to cancel a significant portion of their schedule out of cattle. But we'll see how long that stays out. But right now, I wouldn't say it's a significant number of the grander scheme of things. It's significant for CL but not significant for our whole network.
Your next question is coming from Duane Pfennigwerth from Evercore ISI.
Good morning. maybe just on the cadence of the non-op savings and the component drivers of that? Is it spread pretty evenly throughout the year? Or is it more kind of second half weighted?
It's the driver is $75 million to $100 million, really driven by interest expense. And as we've accelerated the debt reduction action that drives the benefit we expect pension to be flat on a year-over-year basis. The team did a great job. The pension delivered at or slightly above its targeted return, so no headwind associated with that. You get some -- a little bit around some of the equity earnings of our partners, but we expect to be pretty consistent throughout the year due to the interest reduction in savings coming through as you progress through the year.
And then just a follow-up for Glen. You've done a nice job taking some active steps to -- on the capacity sequentially 4Q to 1Q. But could you just speak to seasonality and maybe by entity where is seasonality a lot different than it used to be, where is it kind of normalized. So any sort of key trends you'd highlight in change in the underlying seasonal patterns here into the first quarter?
Yes. I think we're at our new norm and our new norm is different than '19, but what I see mainly is an extension of the international seasons. So we mentioned that in an earlier question that -- it used to be the summer peak was just June, July, August. And now I think we're moving into April through March all the way through October is a very strong season, particularly for Southern Europe, Northern Europe starts a little bit later. And then the other thing I just mentioned, I mentioned in an earlier call as well is that the beach, the Mexican and the Caribbean beaches just seem to have a little bit too much capacity this year and we'll work through that as we go through the year. But it's -- if you look, those are up 20%, 30% across the board and having a little trouble keeping up with that, the demand keeping up with that kind of capacity increase. And I imagine it is people plan next year that will trim on the margin, those back down again or let that demand catch up. So generally, I think we're in a good spot here with supply and demand. As far as the eye can see. we're positive in all the future months and almost all the future -- in almost every entity with the exception of [ lab ].
Your next question is coming from Brandon Oglenski from Barclays.
I guess, Ed or Dan, I mean, looking back from your prior 2021 targets, you guys are guiding at the top end here to effectively reach that. And I think not a lot of people give you credit. So that's the context of my question. But that said, valuation in your stock is still pretty low. I think investors are just concerned that we've seen peak airline profitability and your guidance would effectively say about flat profitability this year in '24 versus '23. So maybe coming back to some of these prior questions, what is in your control that can get profitability higher, maybe looking beyond this year that can give investors comfort that this business should be earning mid-teens?
Thanks, Brandon. And you're right. When you think about when we set that target, it was in December of '21. I'll never forget we were at the exchange. I believe you were there. and Omicron was just being announced as the newest [ Perion ]. So the level of knowledge that we had to the future and where this thing was going, it was candidly kind of may be a bit crazy for us to put out a 3-year plan, but I thought it was really important and instructive for us as well as our investors to let them see how we're thinking about the progress. And the great news is through the first 2 years, we are at, if not ahead of plan along that way. And I think if I was to go back and say what has changed that maybe has given me a little bit of pause for 7, not longer term, but just in the short term. I think it's the higher cost of labor, certainly was not known back then, the higher inflation rates were not known back then. And most importantly, the supply chain constraints. The full extent we're not -- clearly not known -- have no knowledge of the challenges we face. So when you think about all the macros we encountered, I think we've done a very good job of controlling those things that we can control. And as you've heard from several of the questions, I still internally am targeting us to get to that $7 number this year. And I think we can. I really do. But I think it's also prudent that we give a nod to some of those macros that we're facing. I think the optimization opportunities, as I mentioned, are significant, and they run across every single part of this business. And all of our leaders are working hard to ensure that we're delivering an excellent quality product, which unleashes that optimization benefits I think the work that we're doing on the balance sheet with all the debt reduction is derisking and taking that down is important. We're on track with our free cash flow guidance, $3 billion to $4 billion this year. And we're still looking at a $10 billion target between $23 million and $25 million for free cash. So I think there's -- you're right, there's a lot of noise that we're lowering guidance. I don't really look at it that way. I think it's giving not to some of the macro realities. And I wanted to give you a prudent estimate to what we are confident we can deliver this year with a nod towards -- there's some real upside here.
And then, Dan, the maintenance issues have been present now for probably over a year, if not longer. I guess what are you doing longer-term planning to maybe mitigate that and is there any favorable offset longer term here in your MRO business?
The One is we continue as we get into a period here where we're more normalized in growth. It's allowing us to extend our planning horizon, where we're able to look out on a rolling not only 12 but 18, 24, 36 months. And I think the more visibility and stability that we get from that allows us to better plan as it relates back into how we run our fleet and how we balance that capacity with cost. And I think that will continue to give us more certainty around that. The other piece is just the heavy lift that our entire tech ops team has in working closely with the supply chain and with all our partners across that, getting clarity in regards to the things that they need to do, and we can do on their behalf as it relates to Delta in regards to continuing to improve the execution of that over time. And we've got to work closely with those partners to continue to improve that. And then to the last piece on MRO, yes, there will be an opportunity to continue to grow, I think, as we've talked about before, we're well positioned on all these platforms. The focus has been, and we'll be right here, making sure that we've got strong foundation on Delta and Delta's fleet, but we also do have an eye to continue to grow the MRO business, and you'll start to see that start this year, but really in earnest in the years 2 and 3 years out.
Your next question is coming from Andrew Didora from Bank of America.
A question for Glen. I think you started ramping up your core hub growth in the middle of 2023. Is there any way you can quantify what the benefits of this build out were to your kind of revenue performance over the back half? And what share of your capacity growth this year will be growth in these hubs?
I think we've just alluded to, a majority of our growth will be in our core hubs or to partner hubs. So probably 75% to 80% of our growth will be in those locations. We feel that we accelerated the coastal gateway growth earlier in the process with our once-in-a-lifetime opportunities to become the leading carriers in markets like Los Angeles and Boston and those are paying huge dividends for us as we head into '24 with Boston, for example, leading the unit revenue ascension for this quarter. So we're really, really pleased with the way it gets shaked out, and we still have some more rebuild to do in our core hubs. It will probably take us through this year and into next year given the lower growth rates that we have. But that's what we're working on for the next 18 to 24 months.
Got it. That's helpful. And then just, Dan, in the $3 billion to $4 billion of free cash flow, are you assuming any sort of cash taxes this year? Or when do you expect to become a cash tax payer? I thought it was a number of years out, but just curious if there's any update there.
No, we don't expect cash taxes this year. and would expect that potentially cash tax payments starting in 2025 and beyond.
Matthew, we'll now go to our final analyst question before then going over to the media.
Your next question is coming from Savanthi Syth from Raymond James.
Maybe a quick 1 for me. Just you talked about pilot hiring being down 50% year-over-year, and you heard similar comments from the industry. Just curious what that means for your kind of regional operation. And if that was much of a drag in 2023, either to cost or to revenue from that operation and what you can expect this year and next year?
So thanks for that question. And I think that plays well into some of the other themes that we've talked about are what are the potential upsides to our plan that could get you towards the $7. We have planned for stability in the regionals after years of really instability where we didn't know how many hours we had really 3 to 4 months ahead of time. And what we've seen is that there is a lot more stability. What we haven't accounted for the full utilization of our fleet. So we still have 50 to 100 airplanes and less of utilization than we are -- than we have on the ground in our fleet. So should that lower hiring at the mainline translate into more availability in the back half of the year, that would be potential upside to our P&L.
Yes.
All right. That will wrap up the analyst portion of the call. I'll now turn it over to Tim Mapes to start the media questions.
Thank you, Julie. Matthew, if we could reiterate for the members of the media, the instructions with regard to accessing the call and follow-ups, please.
Certainly. At this time, we'll be conducting a Q&A session. [Operator Instructions] Your first question is coming from Ted Reed from Forbes.
It's for Glen. I just wondered if the Delta passenger in 2024 looks different in the passenger in 2023. And I'm also asking whether the [ age of revenge travel is over and are we pass to events travel. ]
Well, I mean, this is all an opinion, right, is that [ revenge ] travel, I think, has years to go, particularly in long-haul international. When you look at the aging of the demographics that people in their retirement years, want to travel, and they were involved with the ability to travel for 3 years, and we weren't able to accommodate them all last year. I think that we continued a combination of that for the next several years, we still material. I think domestically, we've done [ once ] travel was early in the process, and we're kind of in our new equilibrium, and that gives us the opportunity to optimize as we move forward.
As for destinations, are we more in a unique -- is it more unique transatlantic that they're looking at or more the traditional transatlantic or something else?
I think it's more the traditional Italy, Spain, those are 2 of the Italy, Spain those are two of the -- Italy, Spain, Greece are tourist hotspot [ portal ] as a hotspot. I think during the peak summer, we're really excited about the prospect of bringing SAS along with us and now having hubs in Copenhagen and Stockholm that will allow us to have even more destinations in Europe than we serve today.
Your next question is coming from Kelly Yamanouchi from Atlanta Journal Constitution.
Ed, you mentioned having 10% more employees today than pre-pandemic and essentially driving the same level of operations and the opportunity to get efficient I was wondering if that means growing operations with the same number of employees or potentially cutting the staffing level?
Kelly, no, there's no plans just to cut staffing levels at all. This is about our people being able to garner more experience because a lot of the new employees that we've added over the last few years are adding to that 10% and continuing to be a bit more efficient in productivity and the staffing levels. But no, we have no intention to make any reductions in people.
Your next question is coming from Leslie Joseph from CNBC.
Wondering if you were seeing any increased bookings since United and Alaska has had to ground the [ MAX ]9 and then separately, maybe this is a question more for Glenn. But do you think you're done with the measures that you had to take last year in terms of the SkyMiles program and lounges to sort of combat crowding since this year is going to be so busy. And if you have enough premium seats to offer the market currently.
Well, I'll take the second question, first is we made some serious changes to our programs that were designed to really put the right people in the right category so that we could deliver industry-leading premium experiences. And as you know, while they were announced in the fall, most of them don't take into effect until 2025. And I think what we've estimated is that should -- we should be done with that those kinds of major changes to our programs. Of course, those programs are always changing. But I think the changes moving forward will be much more minimal. So I think that's behind us. We'll see how that plays out at the end of -- by the end of this year and into '25. And your other question was?
[indiscernible] bookings.
We've seen a small uptick specifically in Seattle, but Seattle is a small portion of our entire system. So it's kind of minimal in the grander scheme of things, but it's relevant in Seattle.
Your next question is coming from Mary Schlangenstein from Bloomberg News.
Yes. My question was asked.
Your next question is coming from Alison Sider from Wall Street Journal.
I was wondering, do you still think Delta still has the same advantage over rivals just in terms of reliability in its operation? And is that something that you're kind of working on?
Ali, this is Ed. The 1 thing that we've seen over the last couple of years, which has been great for our customers is that the overall reliability in the industry has improved. And carriers increasingly are competing over operational performance rather than other -- some other things in the past that people may have been focused against. And I think that's great. And I think it pushes us to be even better. And I think it's a great outcome for the industry as a whole. So yes, the competition is definitely more focused on reliability than ever before, and I still expect Delta to maintain its premium lead in that sector.
And then if I could ask about sort of labor shortages. Are you concerned at all or starting to feel the impact of the shortage of maintenance workers. Is that something you expect to come to a head this year?
We are not experiencing any issues around labor shortages, maybe in very small isolated places. We still have some additional people we'd like to bring in. But we are at where we need to be. And for us, it's less about the shortages, it's more about the new people that we brought on, continuing to gain experience. And that's a big deal, particularly in the maintenance area.
Thank you, Ali. Matthew, we have time for 1 final question, please.
Your last question is coming from Robert Silk from Travel Weekly.
Glen, you mentioned that you all had gained corporate share this year. I'm wondering if you could elaborate on what caused that, you think, how you gained it? And there was an some of it might have come from the removing fares from the traditional GDS channel by other -- your main competitors?
Yes. I think 1 of the issues where we were very inventory constrained in 2022 as we were behind the industry in our rebuild. And in 2023, we caught up back to basically a pre-pandemic level of capacity. And those additional seeds were enabled more corporates to get on the aircraft I'd say what's different about now versus pre-pandemic is that before the pandemic and before the segmentation of customers the differential between the yields on corporate and the yields on noncorporate high-end leisure were significant. And these days, those have closed. So now you have competition for the premium seats between those 2 categories that didn't exist pre-pandemic. And that's exciting for us as we manage them, but I think getting more seats available is 1 of the key priorities in the premium sector so that we can accommodate all demand.
Okay. So what about seeing any sort of share shift based upon your strategy of leaving all your fares available in a traditional defect GDS.
Yes. clearly, we think that our strategy is more customer friendly, and I'm sure that's part of it, but we don't quantify it.
Matthew, that we'll wrap up the call. If you want to close it up.
That concludes today's conference. Thank you for your participation today.