Morning, everybody. My name is Jamie Baker. I cover the North American Airlines and Aircraft Leasing Companies on the equity side at JP Morgan. I'm joined by my good friend and colleague, Mark Streeter, who does the same thing on the credit side. It's our pleasure to welcome you to the 2025 Industrials Conference. I, you know, I keep hoping for a conference that nobody attends because all is right with the world, and Delta's trading at 20 times earnings, and we have to grab research interns to bring the dinner to fill the table. It doesn't appear that 2025 will be that year. Obviously, starting off on a, you know, somewhat somber tone, I'm sure people are caught up with the headlines.
For anybody that isn't on my distribution list or maybe hasn't gotten to read everything, I would point out that both American and United equity recently triggered our proprietary down 30 and 30 trading rule. The old adage is you never want to try to catch a falling knife, but that's exactly what D3030 is intended to help you do. The statement of fact is that in each and every 29 prior instances that the market has come to such a severe conclusion so quickly on airline equities, the market has been proven wrong. We are certainly hoping lightning will strike a 30th consecutive time. Let me turn it over to Mark, and then we'll bring the Delta team up here and get going on the day. Thanks for joining.
Jamie once did a CNBC spot where he spoke about the 30 and 30 rule, and I think Michelle Lee, after he made the pitch, said, "Only in airlines do we have a 30 and 30 rule," where it's happened 29 times, or back then it was 27 times.
These days, I know my colleagues, our colleagues might be.
That was before the Mag 7 and everything. Just today just reminds me of the line from Hamilton, the room where it happens. This is the room where it happens today, folks. If you haven't been paying attention to all the 8-Ks that are out this morning, it's going to be a very, very busy day. You know, this conference now, we're in our 24th year going back to when I started pre-Bear Stearns, a little credit conference back in 2002. Jamie joined me the year thereafter. It is year 23 for Jamie, year 24 for me. Year 25 next year will be somewhere nearby. It will not be in the new building because of some space constraints, believe it or not, we will be taking this conference on the road somewhere in New York. Look for information on that.
Very pleased that everyone can join us here. With that, let's kick off what's going to be a very, very eventful day.
Absolutely. If the Delta team would like to join us, for anybody on the webcast that cannot see, we are going to have four executives up here. Ed Bastian, CEO, is headed up right now. Also at the table, we have Julie Stewart, Glen Hauenstein, and Dan Janki. As is the tradition, I am honored to turn over the opening slot. Thank you.
I'll give a quick disclaimer here. Thank you, Jamie and Mark, for having us. As a reminder, today's presentation contains forward-looking statements that represent our expectations about future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that may cause those differences are outlined in our SEC filings. Over to you, Ed.
Thank you, Julie. Does this video work here? Mostly to see the size, maybe not. I guess you just have to turn around to see it. That is fine. No, do not worry about it, Jamie. I got it. Thank you all for joining us today. Jamie, I am thankful you let us in the building after the news last night. I was a little worried that our badges would have been pulled as we tried to check in, but we got here. It is an eventful time for our industry. There is a period of time where there is some disruption, and, you know, it is disruption, candidly, we are kind of used to, you know, in this industry, and it is something we are built for in terms of being able to take advantage of and be opportunistic in and moving forward.
Our presentation is going to kind of go right to the crux of the matter, what the conversation is around, the weakness that we have seen and collectively across the industry. I have not seen how the other airlines are doing, but my guess is everyone's experiencing some flavor of this. It is a period of time where first quarter is always the most volatile, you know, quarter of the year, it is the weakest demand set of the year. I think I was teasing Jamie last night. I think it is like why he likes having his conference in March of each year, because there is always something going on, not always great, that attracts attention.
When we looked at the quarter, though, as the year ended, the end of December, the strength that we had as we are closing 2024 and looking into the new year, we had a lot of optimism. You know, we had a very significant growth plan. We were expecting to grow revenues 8% over the course of the first quarter, and it was consistent with what we had been seeing, you know, all along as the, as last year ended. As it turns out, it looks like we're going to be closer to 4% than 8%, but it's still growth nonetheless, but not nearly growing with the kind of strength that we, we anticipated. There is a series of factors why. It's not just a single, a single comment that one can easily sum up.
If you allow me, I'm going to just walk a little bit through what we saw over the course of the quarter, you know, give you a good lens on the air travel experience and environment, allow you to draw your own assessment, and we'll certainly save plenty of time for questions. As I said, I'm sure all the questions will go to Glen during the Q&A, so he'll be ready for that. When the year started, we were in a good spot, and then January 10th happened, and we had the worst snow and ice event in Atlanta, actually right through the southeast, in over a decade. The reports, and I saw pictures, I know it was real, 10 inches of snow in certain parts of the beach in the Panhandle.
We had a pretty significant event that fed into another significant snow event a couple of weeks later. We had about $100 million of damage in January. That said, January actually looked pretty good. The revenue environment was pretty strong. The booking trends were healthy. We were confident we were going to be able to make that number up. We had the tragic American aircraft incident that happened at the end of January, and that's what set a spiral of events that I think, while it may not have been the triggering event, it certainly was a causal fact in terms of the trend line that we're looking at. When that happened, and that was, as we all sadly know, the deadliest aircraft incident in almost 25 years, it caused a lot of shock amongst our consumers.
There's a whole generation of people traveling these days that didn't realize these things could happen. They can. That's why safety is our first and foremost priority at all times. We saw a pretty immediate stall in both corporate travel and bookings. Not that they stopped, but the growth rates that we had been on stalled considerably. Consumer confidence, certainly in air travel, started to wane a little bit as questions of safety came. Unfortunately, as we all know, some aspects of the crash were politicized, which did not help matters in terms of restoring confidence in consumers' minds. At that point in time, we were growing our corporate revenues at a healthy 10% clip on a year-over-year basis. That's why, again, we thought the first quarter was going to be a pretty strong quarter.
that dropped into the low single digits quickly. As we started into February and we wanted to see that, you know, recover and people getting through the, through the incident and start to find a more stable ground, it never really happened. It kind of, that, that close-in booking, that corporate confidence, that consumer sentiment continued to stay a bit lagged in, in as we were looking at it. We thought it was a little bit odd that it was taking time for it to recover. Unfortunately, we had our own incident. Fortunately, no one was seriously hurt, but we had our own incident on February 17, and that fed into another round of delay. It became pretty quickly obvious to us too, there was more than just the, the, consumer sentiment coming out of the incidents.
There was something going on with economic sentiment, something going on with consumer confidence. We were seeing that very much in the close-in bookings. We were able to hold our advanced bookings at a decent clip, but it was the close-in that we were having a very difficult time closing. To make matters worse, we were positioned for close-in bookings. Again, if you've got a supply base and a supply balance that we've all felt has been quite favorable, we see a lot of demand in the market. Of course, you're going to be holding out for better pricing, for better yield management, for better inventory. We were in that positioning waiting for a close-in that never materialized.
It took us a few weeks to sort through all of that to get to a point where we started to recalibrate our inventory strategies and get ahead rather than behind the booking curve. We are now in a place, and Glen can talk about this during the Q&A in April, we feel like we are in a pretty good spot. Honestly, in February, and then we saw the same thing happen in March, we were behind, and behind is a pretty tough place to be when close-in was having a hard time with the incidents that I mentioned. Put that all together for the quarter, we are going to be short about $500 million of revenue from what we had anticipated at the start of the quarter. It is about 4% less than what we were anticipating.
I put it into two buckets. About $250 million of that $500 million we really believe is transitory. Those are costs that we saw during the quarter that we are moving through the quarter, and we do not anticipate continuing to repeat going forward. A hundred of that was the ice and snow event, as well as the LA wildfires. We have a very large business in LA, and that also happened in January. There was sentiment related to the aircraft incidents. That was clearly something that is moving forward, and we can see in our advances people are traveling. It is not that they are not traveling, but there was a price to travel, and getting people back, confident in air travel is moving forward. The third thing was the inventory strategies as we were recalibrating and pushing out to try to get ahead of the curve.
There was a period of time that we were a little bit out of market, if you will, on pricing. And that, that those three elements was about $250 million to us in the quarter. So the real impact going forward as we see at Delta, everybody's got their own view, my sense, is about half of that, about $250 million that we feel is going to be something that we've got to address as we move forward into the second quarter and beyond in the year. Now, second quarter, we're still feeling quite good about it. Obviously, there's, you know, the noise is still out there and we're, the sentiment is still not as strong as we'd like, but we've got tools to manage it. We've got our inventory and pricing strategies in place. Our brand is healthy. The operational reliability is very strong.
The commitments that we have to continue to get customers where they need to be on time with their bags is holding up better than ever, leading the industry. We see a corresponding offset in fuel prices going forward that will also help buffet the storm. From the peak in the quarter to where we are today, we're down about $10 in a price a barrel, Brent. At Delta, every dollar is $100 million on an annualized basis. That $10 fall for us on a go-forward basis is about a billion dollars. For the same reasons why you see some of the weakness in the economic indicators and consumer sentiment around travel, you're going to see that weighing also on oil prices, and that's partly what's also going to help buffet us as we go forward looking at the year.
As I look at the slide, because I can't see it very clearly, the other thing that, you know, what has not changed is the constructive industry structure is still in place. If anything, this little bit of turbulence at the start of the year, I believe, should help reinforce that structure and continue to manage supply in balance with demand. We are hopeful that will also continue to hold. We feel good about other parts of the business. There are green shoots we should talk about. Our international business has held up through all of this, and continues as we look into the second and third quarters, continue to see nice advanced bookings for both transatlantic and trans-Pacific specifically.
Our loyalty business, what we see going on with the co-brand spending for both the months of January and February is up double digits. There is not this overarching loss of spending prowess that we saw, may have, you may have expected to see with some of the weakness that we feel. We're not seeing that in our focus. The last thing is the operational and cost execution that we have in place is doing quite well. You know, not only will we get fuel prices down, we're going to have the lowest non-fuel CASM growth in the industry.
We said for the year we're going to come in in the low single digits in non-fuel unit cost, and that's what we expect, as well as what we expect for the full year. That said, feeding into our value creation framework, you can see here the three to five-year targets that we put out in November, you know, aren't changing. We're not changing our full-year, you know, guidance at this point. Obviously, we'll continue to watch, and if we need to make adjustments as we go, we will. We feel good about all these things. There's nothing that we've been through these last couple of months to indicate there's any cracks in any of this. We anticipate margins continuing to expand, and we think margins will expand this year, even with the slower start to the year.
First quarter, even though we just went through a little bit of a parade of horribles, will still be just as profitable as it was in the prior year. We're expecting between $300 million and $400 million of pre-tax profit in the first quarter and $1.5 billion in free cash flow in the first quarter. $1.5 billion of free cash in the first quarter alone, even with what we encountered. The business at the core is healthy. We just need to continue to be able to better reset around demand and what we're seeing in the environment to take proper advantage of it going forward. We anticipate over the next three to five years to grow our EPS by 10% and free cash flow in that $3 billion-$5 billion range. We are very committed to our balance sheet goal.
Many of you that have asked questions over the last few months, every time the answer is yes, we continue to stay very, very committed. Our goal is to get down to one-time growth leverage. My anticipation over the next, you know, 24 months is we'll be pretty darn close to that number. The priority, as you know, you can imagine, is developing a better return on invested capital. Today, Delta is at 13%. We expect to get to 15% over the course of the next year, and that is the goal, showing that durability that Delta is known for, both on its balance sheet as well as its operating performance. This comes through with respect to how we have a better allocation of capital as we look at ourselves relative to many of our peers.
$10 billion of annualized operating cash flow is our expectation per year over the next three to five years, with roughly half of that going back into the business, roughly $5 billion a year in terms of capital to be spent on the business, and the other half to go into shareholder returns prioritized by, first of all, continuing to get our leverage paid down, our debt. We are reminded once again with some of the volatility we've seen in the last two months, how important it is to mitigate what you can, to control what you can, and getting your debt paid down is probably the most important thing you can do. Once we get there, we can explore other means of shareholder return, but we're going to stay very focused on that, on that goal.
With that, that's an update from Delta. Jamie, sorry for having to present upside down here a little bit, looking back at my slides. Yeah, we didn't have your screen. Now you know the screen's working. That's a good thing you're getting out of this building. We are very, very enthusiastic and excited as we look forward to the balance of the year. This is our centennial year. Delta is the first airline in the United States to turn 100. This is the month, actually, we just last week, we celebrated that 100th anniversary. We are committed, as we said in November, to making this the best year in Delta's history. I'm convinced that we're going to be able to continue to do just that. With that, we'll turn it back over to you and the Q&A.
I'm going to take it off. We've got a lot of people in the audience, so if you like Sean, if somebody wants to shoot up a hand.
At a high level, if you could change one single perception that analysts and investors have about either the industry or specifically Delta, what would that be? For example, if somebody asked me the question, like the adage that low costs always win, I never agreed with that, always bristled at that. That's the kind of answer that I'm potentially looking for.
Yeah. I think it's our responsibility. I know it's been quite a while we've been on this journey. I know even in periods of disruption, we get a chance to prove that yet again, that this is a safe place to invest, that this is not just the same old airlines.
Yes, of course, when you see the stocks get hammered over the last couple of weeks, it's easy to reinforce that age-old perception that it's going to be how we recover. My view is going to help us reset at a higher level. We're going to have one more opportunity to continue to prove this is an investable, you know, industry. When you look at the cash that we're generating, when we see what we're doing with the cash, when we're continuing to generate very, very significant gains from a customer standpoint, our employees are on our side, this is a healthy business. It's a vital business. It's a business that will continue to pay dividends into the future for people to say, but it's not necessarily going to, there's, it's not straight up at all times.
When you have these moments of dislocation, this is the chance to move forward, not back.
Do you think you'd ever win back the confidence of Berkshire Hathaway, your former top shareholder?
We try, we try every day. We try every day.
Quick question for Glen, because I definitely want the audience to be able to ask questions. For the last several days, including overnight, I keep getting the question, how much capacity do you think will be cut at the conference? I know you could only speak to Delta, obviously, but my understanding is that the internal bar to make a decision on summer capacity in mid-March is very high. Is that perception accurate? It just seems like you'd have to have a ton of conviction since we know now to start.
We talked about this last night at your dinner. Yes, it is. No, we had a bias to fly whatever we could as we headed into the summer. I think on the margin, we've tempered that down to make it fly what needs to be flown. You know, as we go through the year, and as most people know here, the schedules for the summer, for us at least, I can't talk to the industry, are overbuilt. You will see those coming down over the next couple of weeks. I think our spring schedule load is going to be out on March 22nd. Expect that to be reduced from what's outselling today. I think the bar has gotten a little bit higher.
Okay. Hi.
How much of your business would you say touches government, federal government, and what have you been seeing in bookings from, from that sector?
Less than 1% of our revenue comes from direct government, and 4% of our revenue comes from Washington area. It is the one area of the country that we are the least exposed. I guess that is a benefit at this point in time.
Thank you. Just following on from the last question, if you take the $250 million that you talked about that is non-transitory, are you able to describe what type of customers that was typically, you know, if there is weakness, okay, it is government is not a huge part, okay, but where are there pockets of weaknesses in terms of different types of consumers, different parts of the market, corporate, et cetera? Any color on that would be very helpful. Thank you.
I'd say it was, it's domestic. Certainly it was through partially, corporate, maybe half of that is corporate related in terms of the growth rate coming down against growth. It's not that corporate has stopped traveling. It's that it hasn't increased its travel at a double-digit clip. And we have talked, as you could imagine, we talked to all of our corporate customers, and everyone is ready to go. In the face of the amount of macro uncertainty that's out there, I think people are cautious and they're pulling back a little bit on travel, not in an organized manner, but just kind of waiting to see what's going to transpire, whether it's trade and tariff challenges or macroeconomic, policy changes or just the a little bit of the unsettledness that of, of the market that we, we all see.
The other half is in the domestic, more price-sensitive, you know, consumer. It was entirely, almost not entirely, but largely in the close-in area. You know, we just did not see that walk-up traveler, whether it was a last-minute decision to travel, corporate or consumer, and a little bit of price sensitivity around that as well. That is why, you know, I think our pricing was out of whack with the market. It took us a little bit of time, a couple of weeks to make the necessary corrections on the forward look. You cannot go back and recapture and change, but you, you know, we tried really hard to make certain that our pricing structures were respected and stayed in place as we got back ahead of the booking curve in April.
We also, I think it's fair to say, we'll find out, but we have a sense that March will be the bottom in terms of what we're seeing, that we'll be in a better spot in April.
Glen, you may want to talk to me. Yeah, I think what I haven't done a very good job explaining at dinner last night was the fact that when you have your close-in demand very, very strong, we were saving about 2% of our seats for this close-in demand that didn't materialize. Your choice is to try and fill those seats or to just power through until you can get ahead of the curve. Essentially, those seats went unsold in February and March until probably the last week of March and into April.
As we adjusted the inventory, those seats are now sold at a lower, of course, average fare. Instead of having zero revenue on them, you have revenue at 70% of what you would have had. That is why we are confident that as we move into second quarter, the worst is behind us. Is that a better shout out?
Dan, maybe a couple of questions for you. As we think about the balance sheet goal of one-time's gross leverage, you have a lot of flexibility right now. You have your route, slots, and gates tied up in bonds and bank deals. You have loyalty where the loan to value is very low. You obviously have some aircraft and so forth. How are you just thinking about the composition of the balance sheet going forward as you get down to that one-time's gross leverage?
Are you going to buy planes for cash? Are you going to issue unsecured debt to refinance the government debt coming due? How should we think about all this?
Yeah, thanks, Mark. A few things. One, we've been paying cash for all our aircraft delivery. We'll continue to do that. As you know, our assets that aren't encumbered with debt continue to grow. They're over $30 billion now. We believe they'll grow to over $40 billion. We're in a position where when you look at the vast majority of our maturing debt, it's actually our higher cost debt. It's a couple points above our weighted average cost of debt. That's favorable. You're going to continue to see us do our liability management that we've been doing as it relates to chipping away at that non-maturing high cost debt. We did that with the term loan.
we can accelerate the amortization of that, and we'll continue to do that. I think when we get out an issue, you'll see us go back to where we were, which was more unsecured than secured as we had come through this the past five years. We'll take advantage of that in the market. Ken and team are looking at that. You know, part of that is just where are the markets at any point in time, but we'll take advantage and be opportunistic and take advantage of that upon issuance.
Good. Ed, just a question for you. We touched upon this when we met last, but just sort of thinking about the Delta value proposition, the flywheel, et cetera, the sort of stickiness of your customers and so forth.
Where do you think you stand on that journey? Like how much more is there to go? You know, we made, we were talking a little bit about the comparison to Apple and getting sucked into their ecosystem. It's clearly what you're trying to do at Delta, with the credit card and the in-flight experience and the lounge network, et cetera. But where are you? Like what inning of the ball game are we in right now for Delta in that regard?
Oh, I think we're still in the early, early innings. A lot to do. I don't think it's a race you ever end.
You know, one of the things that, as I look back over the arc of my being in this business now, 26 years, 26 years, I remember growing up in New York and American Airlines was the airline of choice in New York, without question, for both business. Delta was the place you took to Disneyland. Honestly, it's just, just, it's flipped, right? Delta, not talking about American, but Delta's role here in New York is certainly one of great strength. That's how the brand is seen around the world. Our opportunity is to continue to advance that with younger audiences, with younger generations.
We spent a lot of time at our investor day last November talking about how the buying power of our younger generation is actually at a highest level that we've ever seen in terms of comparable generations over time. There's no question that generation is choosing Delta. That generation, whether it's through the free Wi-Fi that works, that we've already implemented in, or the partners that we're bringing into the ecosystem or the live TVs that are ubiquitous around Delta, all of that, the new airports, the lounge designs, all of that is to be an aspirational brand that they want to be part of the loyalty membership. They want to continue to feel great about their choice when they're on Delta. That's where we're going.
I mentioned at dinner last night, one of the testaments to me that says that we're on the path is over the last two years, Delta has been named the 11th most admired company in the world by Fortune Magazine, not airline company. The only one closest to us is Singapore Airlines. They're number 28. It is just a survey, but it is a worldwide survey. There are tens of thousands of people who participate. That is what people are saying about our brand. That is what we're continuing to invest in and go. While we hate the fact that we were going to come out of the blocks a little slow in the first quarter, we're undeterred. You know, the focus is really clear on this team.
It's going to continue to go win the hearts and minds of the next generation of flyers.
Glen, I don't want you to feel left out of my questioning here. You know, we have a big industry announcement this morning with Southwest Airlines charging for bags. You know, have anything you can share insight into? I'm sure you've done your own analysis like the other airlines have about what maybe was there a drag to Delta on the fact that they were, you know, had their prior bags fly free policy and what this might mean, the fact that they're now charging for bags in terms of what that does from a Delta perspective, from a competitive nature?
I think, clearly there are some customers who chose them because of that. And now those customers are up for grabs.
We'll see how that plays out over the next period of time as they continue to implement multiple changes to their products. Some good for customers. I think the assigned seating, of course, probably liked by many business travelers. The premium economy seats, liked and, and clearly, you know, so it's a mixed bag with their transitioning to more of a legacy carrier and they're in that transition.
One for Glen and then one for Ed. And, Glen, I don't want to be labeled as a permabull, you know, by asking this question, but if, if the U.S.
Consumer is delaying their travel planning for summer, and in the event that consumer confidence is restored, you know, by further changes in Washington, I mean, is there, is there a scenario where summer yields are actually higher because of the delay that people are taking in booking summer, or is that just too wildly optimistic?
First, I think the question is a little bit weighted that we think people are delaying their summer travel. I think what I was trying to explain in the earlier question is that we were saying no to many customers who were planning for spring and summer, and now we are saying yes. Okay. Earlier in the curve. As we talked about last night, April is the first month that we will actually go in with a low factor cushion.
Previous to that in February and March, which are, you know, clearly February, one of the more difficult months for general demand. To run, we were very confident on that close-in that we saw so strong into December and early part of January that trailed off after all of the confluence of events that happened in January. Those seats went unsold in February. They went unsold largely in the first part of March and we're catching back up to the curve in late March. I think, you know, when we look at loads for summer, we think that loads will be at or above last year's levels.
Ed, do you, and I do not know how you would analytically answer this question, so it may just be, you know, do you have a gut feel, but at what point does the pain in the stock market begin to drive a change in premium consumer behavior? I do not. How much more pain before, you know, people start trading down? Again, I do not even know how I would answer the question with limited data that I have. If you were. Got a lot more than that.
Yeah, sure. If you recall last November, we put up a chart that showed who our consumers are and the accumulated wealth effect and how that has grown over the last five years post-COVID. It is stunning when you see that growth.
Our consumer is a household, making $100,000 or more, which by the way represents 40% of the households in our country. It is not necessarily an elitist definition. They make up clearly well over 90% of the revenues coming to Delta. If you look at the wealth that that cohort has accumulated over the five years post-COVID, it is in the tens of trillions of dollars. It is more than doubled. It may be close to triple, I believe, from the chart in terms of what their ability. That is the market. That is real estate. That is cash. It is just an accumulation of opportunity. I do not think a modest pullback in the market is necessarily going to change. It does not seem to be obvious it is changing, you know, wanting to go to Europe this summer or wherever they may be.
Honestly, with all the noise, it's all the more reason to get away.
On that, thank you very much. On that advertisement.
Thank you, Jamie. Mark, thank you. It's always great to be with you. Thank you. Okay.
All right. Good morning, everybody. Moving right along. Very excited to turn the stage over to United Airlines next. We've got Scott Kirby, the CEO, and for the sake of people listening in at the table, we also have Andrew Nocella, Mike Leskinen, and Kristina Muñoz. I forgot that I wasn't supposed to wear this blazer today because Scott always tells me that I look like a professor. From this point forward, you have to address me as Captain, my Captain. I don't get that. Yeah. Okay. That was a movie reference.
But mostly what you look is extremely hot to me.
That's like a thick coat and a sweater, and I'm hot standing up here. Anyway, thank you all for joining us today. This is the one conference that I start every year with. Jamie, we go back a long way together. This is one of the highlights of the year. I know everyone in the room is anxious to talk about the short term, especially with all the 8-Ks that came out last night.
Can I give a quick lead?
Oh, you can. Yes.
Today's discussion may contain forward-looking statements which represent United's current expectations based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations.
Please refer to our latest earnings release, Form 10-K and 10-Q, and other reports filed at the SEC by Delta Air Lines for a more thorough description of these factors. We may also discuss Delta's financial metrics on a non-GAAP basis during this web, during this discussion. Please refer to the related definitions and reconciliations to the most directly comparable GAAP measures in our latest earnings release and investor update, which are available on the IR section of our website and are filed with the SEC. Thanks.
All right. Thanks, Kristina. I will talk about the short term given I know it's on everyone's mind. I want to start with the long term because the long term, everything that we've said for several years now, the industry and Delta Air Lines are developing, much like we expected.
There is, there's certainly some short term macroeconomic issues, but that doesn't change what's happening. The structural changes that have happened in the industry are what's happening, in the long term. Nothing that we've seen, in the short term impacts what we think is going to be happening even a year from now. I want to start there and just talk, talk about the long term. There's sort of been two ways to think about it. We have talked about an industry thesis and a Delta Air Lines thesis for several years now that have been consistent, and all the data points seem to be consistent with that.
At an industry level, we thought that cost convergence broadly, all the supply chain issues, all the other FAA challenges, all the things, you know, airport costs going up dramatically, all of those things were going to drive what is effectively a supply response in the industry. That more and more markets, particularly for low cost carriers, were going to become uneconomic. They wouldn't be able to be profitable, and that was going to drive supply out of the low end, in particular of the industry. That is exactly what has happened. That is continuing to happen. I think that the near term economic pressures, likely, accelerate that. I think you'll see another really sizable drop in capacity as we move, past the summer peak.
The second half of August, you'll see that same thing happen again for the exact same reason that we've been describing for years. That industry thesis remains intact. I think that's a lot of what the stocks moved on last year. That industry thesis remains firmly on track, regardless of what is happening in the short term at United. I have described what is happening to United and our movement to the industry leadership, to an industry leadership position in terms of margins and with the customers, as structural, permanent, and irreversible. What I mean by that is really two things. We have two things going for us that are hard to replicate, if you don't already have them. Number one is revenue diversity.
We have international, we have domestic, we have cracked the code on the price sensitive customer with Basic Economy and higher yield. We have cracked the code with the domestic road warriors, elimination of bag fees. There was another big change today that, you know, helps, that's going to help that airline more, but helps with that. The premium we've always been good at and we have gotten better at it. You add loyalty to that and we have a diverse revenue stream that even when there's weakness in some part of the business, as there is now, the other parts can at least cover for much of that. The second, and I think in some ways more important, element is winning brand loyal customers. I want to start this. If you're, you need to think about why customers choose an airline.
Broadly speaking, I think there's two ways they choose. There's a large set of customers who typically are infrequent, don't travel a lot, that choose an airline based on schedule and price. That's what we talk about in the industry, a lot of schedule and price. They're much more commoditized customers. There's a large segment of the population that does that. They're important to us. They're two, we can't ignore it. That's what Basic Economy, in particular, has done for us. We've gotten to a point where we win, we're going to win our fair share of brand loyal, of those price sensitive customers. The real game in airlines is to win brand loyal customers. What I mean by brand loyal, these are people that fly a lot. They're typically not out price shopping on every flight. What do those customers care about?
First, they do care about schedule and price. The price is generally on a large level, the same on average. It's the same at all the big airlines. You kind of almost put that aside. They care about the schedule. If you're a brand loyal customer, you're going to fly a lot. You live in Dallas, you may like or dislike things about American Airlines, but you're going to be an American Airlines brand loyal customer. If you live in Atlanta, you're going to be Delta. That typically is number one. In all those competitive markets, and most of the country is competitive, whether you're in Chicago or New York or Los Angeles or Nashville or Grand Rapids, all of the other parts of the country that aren't people that don't live in those big hubs are up for grabs for brand loyal customers.
What do those customers care about? The schedule matters, but the schedule in most of those cases is equal between one or two airlines. Their choice comes down to whose frequent flyer program do I like? Whose club programs do I like? Whose service do I like better? Whose airplanes do I like better? Do I want to be on an airplane that has seatback entertainment? Do I care about the Wi-Fi? All of those things go into the mix. The important point about those customers is that they are sticky. Once they decide to switch to an airline, they tend to stay there for decades or beyond. They get the credit card, they tend to stay.
The best example, or a good example at least, that I can use for brand loyal customers, two of the markets where we've won well into double-digit market share are Denver and Chicago. It's not a knock on those airlines. United has done a lot of things to just win brand loyal share. Those also are two markets where we've had over 100% growth in credit cards from 2019- 2023 to today to last year. In five years, both well over 100% growth in credit card signups because as customers switch to us, they get the credit card, they're sticky. The point of all that is those customers are sticky. You, those customers are typically choosing the best airline in any given market. If you live in Denver, you're trying to choose the best airline.
If you're second place, you don't get a fair share of, you get dramatically less traffic, if you're second place. Trying to be the number one airline for customer choice in each of the big markets we fly has been our strategy for brand loyalty. I have lots of micro data kind of market by market where we've done that. It's the reason that Andrew talks about at our last earnings call, that the difference between our most profitable and our least profitable hub is only six points. We are the only airline in the country for that is even close to true that all of our hubs are profitable. It's because we've won brand loyal customers. All of that, those industry trends and the United trends remain firmly in track.
Now, in the near term, read the same newspapers, read the 8-Ks, this morning. There's certainly, we have also seen, weakness in the demand market. It started with government. You know, government is 2% of our business, government adjacent, all the other, you know, consultants and contracts that go along with it are probably another 2%-3%. That's running down about 50% right now. A pretty material impact, in the short term. I'll talk about what we can do about that in the medium term. We have seen some bleed over to that into the domestic leisure market. Good news is that international, long haul, Hawaii, premium all remain really strong. We have seen government and some low end consumer leisure weakness, which also appears consistent to me with a lot of other data that I look at.
We've had a fuel price benefit from that, but you, and our internal costs are also better. You put all that together, and we now expect to be at the low end of our guidance range. We didn't put an 8-K out, but we expect to be at the low end of our guidance range. What do we do in response to that? At United, we looked at that and said, well, what we're doing, one of the things that we're doing is we've early retiring 21 aircraft. You know, that's something that'll be cash positive this year. We'd had to spend $100 million on engine overhauls this year alone for those airplanes. It'll be CASM positive. Those are our most expensive aircraft. We built a plan.
We told all of you, we built a plan with optionality and flexibility that if we see short term headwinds, we can make short term responses. That 21 aircraft, by the way, sort of correlates with what we've seen from the government. We've already started the process of where that capacity's coming out. A lot of it transborder, big drop in Canadian traffic, to go into the U.S. Some of it's going to come out in government markets, where we've seen less demand. We're also going to cancel red eye flying. Utilization flying is generally unprofitable, at airlines, even in good times. It's really unprofitable in bad times. We are taking those proactive steps further, particularly with the government traffic. There's a short term yield management effect. We see that kind of drop off effectively.
The yield management seat is, you know, management system is saving seats for those customers. By the time we're into April, we're not doing that anymore. The yield management, we've adjusted the yield management system. We're taking more leisure bookings instead of government bookings. So much of that kind of 45% or that 50% drop in government, gets corrected by the capacity changes, and by removing, by, by the yield management system. That's what United is doing from an industry level. I expect that you're going to see probably modest supply changes, in the very near term. You know, as we go through the summer, hope springs eternal and, and it is the summer peak.
I don't think you'll see huge changes, but I think by the time we get to August next year, just like we got to August of last year, there's going to be a huge, you know, every analyst is going to be writing about the capacity cuts and the supply changes. It's just economics. Like I said on the last call, airlines were moving to their markets where they have a comparative advantage. One of the big trends that's happening is there are play, I, you know, I do the P& L's for every airline, for every route. I know them, I probably know them better than some of the other airline CEO's. Where you see people cutting is the places that they've lost money where they have a comparative disadvantage.
You cannot be the number two brand loyal choice with customers in a market and succeed. It's not possible. The industry is evolving to a place where people focus on their comparative advantage, where they focus on the markets where they have the number one position with customer choice, and moving away from others. All of that, I think, is good. I think the short term turbulence is going to do, the only thing it's going to do is accelerate the end point. We're going to end at the same end point from an industry supply perspective, but we're going to accelerate that end point as we go through, you know, what looks like a tougher economic time ahead. We feel really good at United about where we are.
We feel good about our ability to manage, you know, even through a downturn if it happens, you know, having, I think margins that are going to surprise to the upside, even if there is a downturn, and what all of this means for the future outlook. Thanks, Jamie. Thank you guys for having us and Mark as well. If that opens up to comments, questions.
Scott, I think it was, I think it was like three quarters ago that you really started to lean into the permanent structural, structural and irreversible. The irreversible became, you know, part of, part of the Kirby vernacular. I do not disagree with you, but I still, with your help, want to try to push back on that.
For example, is there a scenario where certain carriers could reestablish massive pilot pay differentials that would help some of those airlines like they've had in the past? You know, is there a scenario, you talk about cost convergence, is there any scenario where costs would begin to diverge?
Yeah, that's a fair one. When I talk about permanent structure and irreversible, I'm more focused on the customer side, the revenue side of the equation. Okay. Where customer choice isn't going to change. You'd have to do something to really change that customer choice. I think the structural costs, labor is one where somebody could perhaps do that. Yeah. The structural costs that matter are much bigger than that. Labor, I didn't even list labor in my list because, I mean, airport costs are probably the most important one.
You cannot be a low cost carrier and fly to the big three, the metro, big three metro areas. You can't. Like this is one of the fundamental things that happened with the low, because the air costs got too much. You know, Southwest, which is, was the greatest airline in the history of global aviation, did more to change it than any airline in history. I have immense respect for what they did. One of their foundational planks was we don't fly, we fly to cheap airports that are not crowded. Yeah. By the way, there's still one successful low cost ULCC in the world. It's called, it's Ryanair. They don't fly to London Heathrow and they don't fly to Charles de Gaulle because those airports are too expensive.
In the U.S., low cost carriers just wanted to keep growing. They plowed into New York and plus the LAX, and it doesn't, you can't pay $50 in airport cost and charge $70. You cannot do it. The economics don't work. Look, maybe they'd be better at competing in Akron to Orlando if they had lower labor costs, but they can never compete in the New York metro area, in the Chicago airports, in Los Angeles, in San Francisco. The airports are just too expensive. The airport costs, I see Sean from Dallas, the airport authorities have killed the low cost carrier business model in the big cities. Mm-hmm.
Looking out five to 10 years, do you think there'll be more point to point service by some of those carriers?
No, I, what I, I think five to 10 years from now, you're going to have airlines concentrated in the geography, in the places where they're successful. And so you're going to have, you know, United, you're going to have seven hubs. Like that's, we don't have aspirations beyond that, our seven hubs. Six of the seven, by the way, we're the clear leader now, in those hubs. We've won lots of market share. I talked about Denver and Chicago, San Francisco and New York are our second and, or third and fourth largest increase in credit card signups, New York metro area and San Francisco, San Fran metro area. LA is still a toss up. It's the only one that's kind of a toss up. It's down to two airlines. It used to be four, down to two airlines that are sort of tied for the brand loyal customers.
Our focus is going to be there, for example. I think other airlines, the other network, the big airlines are going to be focused there. There's going to be a lot less low cost carrier capacity. I think there's a niche that works for the low cost carriers, of point to point, but the niche doesn't involve a big city, a big high cost airport at one end. It's just a smaller niche. You know, the reality is what happened to the LCC, ULCC business model is they outgrew their total addressable market size in the United States, and that got exacerbated when we all eliminated change fees. That was a huge, huge market share advantage. In a place like Denver, when United had change fees in place, there were a segment of customers that United was the brand loyal airline.
There's a segment of customers. I, I've, I'm not trying to knock on Southwest. I see Doxy here. Hi, Tom. He worked for me for a long time. So he has good training. He ought to do well at Southwest. Southwest had a, a, but those customers, those domestic road warriors, the biggest advantage that Southwest had over United was no change fees. Right. For customers that mattered, that was enough to overwhelm our frequent flyer program at first class and clubs and food and all the other stuff. Now that's a tie. We're not better, but that's a tie and all the other stuff that United wins. The brand loyal customers move, not because Southwest did anything wrong. They didn't, we just took a, what we, we just matched their one competitive advantage. Those brand loyal customers have switched.
That is the point about it. It is sticky. Those customers are sticky. You know, as other airlines incrementally move closer to us, it is not going to be enough that they pass us, and an airline, and a customer decides to switch. They are just, they are sticky at United. Mm-hmm.
A couple of years ago, you made the point that you felt that there was room in the U.S. for two premium airlines, which I interpreted as, you know, a nod to Delta and maybe a swipe at American. The question that I have gotten is that, I mean, is that just something you said at the time, or do you think that the premium market itself cannot actually support more capacity?
The first time I actually remember saying that was December the 9th, 2013, which was the day the American Airlines, US Airways merger closed. At the end of a successful day, I got everyone in the room and said, there's only room in the country for two successful premium airlines. We're going to be up. Here's what we're going to do. We're going to seat back entertainment. We're going to invite all sort of the same playbook. We're going to do all this stuff. We're going to push United out of the Transcom market. Then we're going to push them out of Los Angeles. Then we're going to push them out of Chicago. I said that on December 9th, 2013. I have thought that for a long time. The airlines decided to flip the playbooks. I still think there's only room for two.
It's just the size of the market. You know, you just look at the big metro areas. Like, you know, New York is big enough to have two, but it's really hard to be three. In there, it's hard to have a competitive advantage. You know, here in New York, Delta's bigger on one side of the river. We're bigger on the other. We can each kind of be number one, but it's hard to, the real point is it's hard to be number two. And you just run out of big cities, where you can be number two. You can be really big in a place that's not New York or Chicago or Los Angeles, but it's hard to be kind of global and comprehensive if you can't be number one in those big cities. And there was always, I thought there was always only room for two.
As you just look at the map, and I still think there's only room for two.
Couple of questions from me for Andrew. We already spoke with Delta this morning a little bit about their government exposure. Can you talk about your government exposure and specifically IAD and the Washington, Washington sort of catchment versus the rest of the network and how that's been playing out?
Sure. There's no doubt when a Dulles hub, we have more exposure than they do. So roughly 2%, a little less than 2% of our revenue. And that's true for both domestic and international, the level of exposure. Obviously Dulles has the highest exposure at United. You know, we've seen the fall off, as Scott said, of roughly 50%. It's more in far out bookings than close in bookings. The close in government bookings continue to be rather normal.
It's the far out stuff that has dissipated quite a bit. We'll see where it goes. As we hinted to earlier, our ability to refill the seats as we head into the Easter and spring break time period is much better than in, you know, February or March at this point. We feel bullish as we go forward that we'll be able to recoup some of what's been lost, but it is roughly 4% of our revenue when you take the direct and the indirect impact of what we think the government provides United.
Any observations on other corporate sectors? We spoke with Delta a little bit about, they cited aerospace and defense, autos.
Obviously the A and D has a government, you know, relationship, but just, you know, when you look at, obviously you have a big tech exposure out of the West Coast and so forth. Just any observations when you look at corporate travel trends?
You know, I think we'd reiterate what you heard this morning that as we ended the year and started this new year, the trends were incredibly strong and they have dissipated a bit, but they still remain, I think, relatively healthy in the corporate space, excluding the government part of it. I'm pretty bullish that hopefully we get through this little rough patch and we see that traffic return to that fast pace that was just a few weeks ago when you add it all up.
I generally see similar trends across most of those businesses at this point. There's nothing to point out that's worse or better in my opinion.
A question maybe Andrew for you or for Scott, or Mike, you know, when you think about Southwest's decision to eliminate bag fees, how do you compare that in terms of the impact on United as change fees or some of the other sort of barriers that have fallen to level the playing field?
I think it'll be a really big deal for Southwest. It'll be good for everyone else. It'll make them more competitive, but it mostly impacted the low-end customers. Our customers that have the credit card or the free, in the frequent flyer program get free bag fees. It's the reason we never worried about matching it.
I think it, it'll, it'll raise the tide for Southwest across the board. It'll, the relative margins will be worse in competitive markets because it will cause some customers at the margins to switch to competing airlines. But it'll net be good for, I think the far bigger thing is like, it's the slaying of a sacred cow. It's one of the two big things that gets Southwest back to industry-leading margins, that and stop flying places that lose money. Like if you're willing to slay one, you're maybe willing to slay two. I don't know. But, I, I view it as a big deal because, it's more, it feels more a, a financially driven, results-driven airline than it's ever been before.
And, Mike, I want to ask you a question about the balance sheet because under previous regimes at United, right?
There was never a goal to be investment grade rated. It was always investment grade metrics and so forth. You've changed that up. You have a goal to be an investment grade rated airline. You know, we haven't had a chance to discuss in a big forum like this. I just want to ask you why that's so important.
Appreciate the question, Mark. You know, the best, the best balance sheet to get to investment grade, it's all about playing offense. You need to have strong P&L. You need to have strong margins. Otherwise what you would have to do, the balance sheet would just be exorbitantly expensive to get to investment grade. As we're on this march to double-digit margins, we now have that opportunity that I don't think existed in previous regime at United.
You know, the brand loyalty, the resiliency of the business, the predictability of our margin, and along with having relative, industry-leading margins, all of that is the foundation for investment grade. Now, we think about what we're doing with operating cash and what we're doing with free cash to bring down the balance sheet at the same time we buy back shares. We're on a path right now to get to below two times net debt to EBITDA. I'm not sure if we need to refine that a little bit lower than that. We're going to work to see that. Investment grade is really important for a ton of reasons for this business. The biggest reason is the optionality it creates in times of crisis.
What we're seeing in the market right now is the cost of borrowing unsecured is starting to become really tight with the cost of borrowing secured debt. As that continues to narrow, you should expect to see us evolve how we finance this business. I do think as we roll into 2026, we'll be at investment grade metrics and, you know, it will see how long it takes to get from investment grade metrics to an investment grade rating.
Just on that point, how does that interplay with the fleet strategy? You sort of build up sometimes, we heard from Delta, big unencumbered assets. Historically, there was sort of a move to kind of balance financed aircraft and leased aircraft. How does United think about that leased aspect vis-à-vis kind of the path to IG?
Yeah, it's a great question. You know, the overarching principle is how do we optimize our overall cost of capital, debt and equity capital. As we think about mixing a lease, lease financing, with more traditional WTC financing, it's about what is the most cost-effective at the time. I think that what you'll see more and more of is maybe we'll start to tap into the unsecured market as well. It is really about optimizing overall cost of capital. In the past, it was about minimizing cost of debt in a vacuum. I want to minimize the cost of equity at the same time.
Got it. Thanks.
I've got one for Mike, and then a follow-up for Scott, depending on Mike's answer.
I agree.
I think it was the January earnings call last year that I asked you about the potential to do something with loyalty, some potential form to monetize maybe a portion of the program. I remember I asked the question because it was two years prior that there were some Bloomberg articles on that topic. In any event, you really seemed to lean into that question at the time. The impression that I got in the months after that was that it was something that was being seriously looked at internally. The stock started to work. The impression that I've been left with is that any efforts in that regard were kind of pushed to the side. I guess my first question is, is this a reasonable way to describe history? Is it just kind of a no-brainer?
I mean, with the stock under so much pressure, does that mean you potentially revisit some of those thoughts?
Jamie, you're an astute observer of this industry. Look, I would say that we're trying to optimize our balance sheet, optimize our cost of capital. It was clear to me before I joined United that we had this hidden gem in the loyalty business at United and a couple of other airlines, three or four programs. That's it. In the pandemic, we tapped that to raise liquidity at a time of crisis at reasonably attractive rates. In a time of strength, as the economy is stronger, you know, what does that mean for our equity value? We weren't getting any credit for that. We still aren't getting sufficient credit for that.
The goal when we were talking about monetizing that loyalty program was about getting respect for our equity multiple. Trading at four times was just simply unjustified. As our multiple went from four to eight times, that did not say we stopped the process, but it meant that we could take our time. Everything is, all the work is being done. To the extent our multiple were to contract for an extended period of time, we would take that book off the shelf without question. That is just part of the story though, because the other part of the story is we have got a business within the larger airline business that is high margin and low capital intensity that should be a higher multiple business. We can get credit in the overall business for that.
That business, we ought to be allocating more and more resources to both operating expenses and CapEx. What you've seen is a pretty dramatic shift at United where we're allocating more of those resources to that business to expand that low margin and that high margin, low capital, business. We're not quite ready to unveil all of the details of that, but we have supercharged that business. You're going to see an accelerated growth rate and over time you're going to see additional disclosure. We want to do it right. There have been plenty of loyalty programs, whether or not they've been spun out, where the relationship with the overall airline has been imbalanced and that creates a lot of disruption. We're trying to take our time and do it the right way.
Make no mistake, I want to end on this that, there's a ton of value there. If the market sees that value, then we do not need to do anything more but disclose. If the market does not see that value, then we have an obligation to shareholders to do something more to create that value.
My follow-up for Scott, you have very sophisticated internal systems for monitoring route profitability. You had your competitors. I assume that you've crunched whatever numbers you can on the Citi American deal and you have good line of sight into Delta Amex economics. You've expressed dissatisfaction with your Chase economics in the past. Certainly some of the stories I've heard about you and Jamie Dimon are co lorful, but I think that's all in the past.
How would you describe, I mean, are you operating at an economic deficit to where American and Delta currently are with loyalty return?
I wouldn't describe it that way that we're, that we've not expressed dissatisfaction, with Chase. We have a great relationship. We have a great partnership with Chase. Like all of these deals, they're sort of competitive in the market. Whoever's done the latest tends to jump to the top at least a little bit. Ours is, is the last, you know, ours was signed earlier. I don't think there's anything, it's like pilot contracts. You know, when you sign the next one, you jump to the front.
and, we have a great partnership, with Chase, you know, at all levels of the company from me and Jamie, you know, I'm seeing him later today, to, you know, with Andrew and his team, like all the way down. we have a really, solid partnership, and we know that we win together. and, you know, I, you know, new contract's not up for a few years, but I would not describe it the way you said. I think those are probably a little better than ours, but just because they came after us. Yeah. Okay. Tell Jamie we said hello.
So Scott, you're the only CEO that may give us a somewhat direct answer to this question, which is,
Telling me you're setting a trap and I'm going to walk into it anyway.
I'm trying to exclude with this question here. Okay.
How do you know what it is?
Excluding Spirit and Frontier. Will we see or, and or do we need more industry consolidation? And does United play a role in it?
I don't know. I think it's, I probably think it's less likely than others think. JetBlue's the obvious candidate. Joanna's going to be here later today, so you can ask her what she thinks. She probably, she's not going to answer. That's why we're asking. She's probably in control of that decision. You know, it's possible, but there's a lot of challenges. Like I look at it from United's perspective. We have a great plan that is working and mergers are so hard. They're disruptive. Your technology team spends two years on the sideline just integrating. Like I bet a lot of you use the United app. I bet you all think it's the best app in the world in airlines because it is.
Like that kind of investment just gets harder to do. Like we got some super cool stuff coming for customers this year. That stuff just gets harder and harder to do. You know, at United, when the business-based business plan is working, like the hurdle to go do it, we do not need a deal for sure. The hurdle to go do a deal gets a whole lot higher. That said, you know, at least at United, I would like to have a bigger, I would like to have a presence on the other side of the river at JFK. Man, all the headache, all the brain damage of buying a whole airline to get that, that is a lot to do. You know, I really, I think the ball is going to be in JetBlue's court. They are working, I have a lot of respect for them.
They're working hard. They're also an airline that focuses on brand loyalty. So from the customer's perspective, they have a lot of those sort of core DNA things that I respect, but they're also competing with another airline, JFK and Boston, that has that too. It's a tough position for it to be in. It's sort of their decision on how to sort through that. That's the only one that I think really is potentially in play one way or another.
Any hope that the change in administration in Washington, besides all the noise that's out there right now, leads to some beneficial improvements to United in terms of whether it's air traffic control, FAA, what you're hearing from the Department of Transportation? Two things.
First, I hope, I'm hopeful, like I think all of us think that there's opportunity to make the government more efficient. Like, I might go about DOT a little differently if I, I would go about it a little differently if I was running it, a little more scalpel, maybe a lot more scalpel approach. But hopefully the government, you know, a more efficient government, even if we pay some short-term pain, which we're going to go through some short-term pain for that. Hopefully we're better on that in the long term. I think without question, the FAA is set up to be, you know, to finally fix the FAA. You know, I think that Secretary Duffy is focused on the, you know, I put it out of post.
are three things they need to do to fix the FAA: get staffing back up to full staffing, technology, and facilities, and equipment investment. They have just got ancient facilities. You spend, they spend 92% of their budget repairing and maintaining existing facilities. Like there is no business, your business is the inverse, you know, it is literally the inverse. We fix those three things. They are not that complicated. They are relatively, they are not easy, but they are straightforward to understand. I think Secretary Duffy gets it. The administration gets it. I am up on, I am headed straight from here to DC. I will see a bunch more people, but I have talked to, you know, all the people that, you know, on both sides. Al, this is one that is bipartisan, like Washington, though, just God, it is hard for me to understand it. Like everyone agrees and they still do not do it.
but I think this time it's going to actually get done. I think the FAA, it won't happen overnight, but I think the FAA in a few years, is going to be fixed. That is an absolute upset.
Time for one more from the room. Anybody? All right. Oh yeah. The clock is going the wrong way. Yeah. Okay.
All right. Thanks, Jamie. Thanks, Mark. Thanks, everybody.
All right, folks, moving right along. Happy to turn the stage over now to the third of the big three, which we had presenting in order this morning. Very happy to have Robert and Devin and everybody else here. I think you're going to start out with the, you know, boilerplate stuff, but of course, thanks again for making the trip and taking the stage. Appreciate it. Good to see you.
Yeah. Yep.
Just before we get started, I just want to make a reminder that today's presentation contains a number of forward-looking statements that represent our expectation of future events. Numerous risks and uncertainties could cause actual results to differ from those projections. Information about some of those risks and uncertainties is included in our SEC filings. In addition, we'll be discussing a number of non-GAAP financial measures. Definitions of these measures are available throughout today's presentation. With that, I'll turn it over to our CEO, Robert Isom.
Hey, Brielle, thank you. And good morning, everyone. Thanks for making time for us this morning. I'm going to start off, with a quick presentation and then we'll get into Q&A. Forward-looking statements, as we mentioned. I have to start with this. I've been in the business, 30 years.
There has been a lot that's gone on over those 30 years, but I can tell you that, from a leadership perspective, none has been more difficult than this quarter. It has certainly been a difficult time for Delta Air Lines in regard to Flight 5342, the tragic accident that happened at the end of January. I want to say a few words about this before moving on to anything else, because this has been the primary focus of attention for Delta, you know, certainly since the end of January. Our efforts have been solely to make sure that we take care of the families of those victims, 70 in total, when you include those from the helicopter as well. That means mobilizing, you know, just an incredible force of people.
We train for this and you never think you have to put it into action, but we have been, we've had 200 and more people that have been deployed, through most of February, taking care of all of the victims' families' needs, you know, up to and including, you know, travel and funerals and any other type of needs. Those 200 people have been deployed in Wichita. They've been out in DCA at our care center, and they've just done a tremendous job. I couldn't be more proud of our team and how we've responded. It's obviously taken a toll. We now still have some people that are deployed and are bringing those folks back, now that families have returned to their homes. We're going to continue focusing on that.
One of the things that we've done, because, you know, go back to 9/11, you go back to the Colgan air crash, these, these events, they stick with us forever. So we've actually set up an office of continuing care and we've appointed a Vice President that will be in that role, making sure that we care for families, in their needs going forward. Now, that said, there's an investigation going on. The NTSB, I think later today, will issue a preliminary report. I've been working, you know, almost certainly weekly, if not daily with Jennifer Homendy, head of the NTSB. I want to give a shout out and a thanks to them for the good work that they're doing. We're being cooperative in any way, shape, possible.
With Jennifer Homendy and also Secretary Duffy, we're taking this as an opportunity to make sure that we're doing everything possible to make aviation safe, even safer than it has been, the safest form of transportation. I'm pleased with the efforts that Secretary Duffy has taken, right off the bat. I'm confident and hopeful that there will be some actions taken soon that will further strengthen our air traffic control, and certainly, prevent incidents like this from happening again. At the end of this, it is something that has impacted America, I think more than anyone. That said, our attention has been making sure that we protect America over the long run and our reputation. I believe that we have done that. I do not believe that this incident will have a long-term impact on the industry or American.
Though that said, it has had a real impact on this first quarter. I'll go from there to the first quarter revenue environment. You've heard a lot about this from others. You're probably not going to hear a lot of new news. Everybody was impacted by the wildfires. Sunbelt weather impacted us in some of our big hubs, DFW and Charlotte. It certainly had an inordinate impact on America, I believe, as well. If those were the only two issues, we probably wouldn't be talking about, you know, major adjustments. When you combine 5342 with the uncertainty in the economy right now, and certainly the domestic weakness in March, those are the primary reasons behind our adjustments to revenue. 5342 is a big deal. Economic uncertainty is a big deal.
We have really seen some weakness in March. That has led to the guide that we issued earlier today. You know, you've seen this. Ultimately, it means that we have extended the projected loss for the quarter on an EPS basis. This is disappointing. We had ended the fourth quarter with a lot of momentum coming into this. It is something that, you know, we are certainly focused on addressing as we go forward and improving results from here. That is where I will go. Again, the quarter is incredibly difficult, incredibly difficult for Delta because of 5342 on top of everything else that is going on in the industry. For us, no matter the revenue environment, I believe that Delta is set up very well.
From that perspective, we came into this year with a measured approach to capacity and one that I think was in tune with projected GDP growth. America has had a focus on making sure that we restore our network, and I'll talk a little bit more about that. We've built ourselves to be nimble and able to adjust to demand environments as they might change. You know, others have taken some different views in terms of growth, but for us, our growth for this year was estimated to be in the low single digits. It's something that I believe that we have the ability to adjust as we go forward. Now, American, I believe, has the greatest potential for recovery as we go forward because of some of the actions that we took.
Everybody is very aware, well aware of our sales and distribution missteps. We're doing very well at recovering. From that perspective, I feel great. As well, America was probably the slowest to build back our network. We prioritized where we were going to build back. It was in DFW and Charlotte, our strongest hubs. We had probably the largest impact from a regional airline perspective due to pilot shortfall. That meant that we had up until, you know, last year, almost 150 aircraft on the ground. Before that, I think almost 250 aircraft. We are working now to get our northern tier hubs rebuilt to back to where they were. I am very optimistic about that, plus our sales and distribution work to get us back in line with expected performance.
On top of that, though, we're set up as well because we've paid close attention to our capital outlays. And from a fleet perspective, we're in really good shape. We don't have extraordinary capital requirements coming up. On top of that, with the debt that we brought through the pandemic, we've done an exceptional job of making sure that that is addressable as we go forward. We don't have debt towers or huge payments that are coming that are of concern. As we go forward, our focus remains the same, and that is an effort to produce long-term free cash flow. Last year, American produced over $2 billion of free cash, $2.2 billion of free cash flow, record free cash flow a year. Feel really good about that. 2025 is expected to be more of the same.
That's allowed us to strengthen our balance sheet with some other actions that we've taken. We're a very different carrier than we were, you know, from debt peaks of total debt of $754 billion. As we came out of the pandemic, we've hit our $15 billion total debt reduction target, and we've set a new target. I feel really good about that. It's made sure that we're in a position to take care of Delta going forward. Ultimately, right now, Delta is focused on margin expansion, profitability. As we look into 2025, how is that, how do we go about that? It starts with building off of what we're really good at. We run a solid airline. American Air Lines has been second to none over the last couple of years in terms of operating an airline in any conditions.
While other carriers have struggled in recovery from some, you know, crowd strike and weather issues. Look, we all get hit, but American, I think, has built a reputation to be able to manage through all of those and do it very well. I'm really proud of the team and the work that they do day in and day out, no matter the conditions. From a re-engineering the business perspective, Devin, when he took on the CFO role, embarked on a path that was, you know, a multi-year effort to reduce expense, make sure we're as efficient as possible, free up working capital. And from that perspective, we've taken out almost $500 million, over $500 million of operating expense, produced $500 million of working capital. Re-engineering the business 2.0 is in the works.
We pride ourselves in being the best in the business at managing our costs. To drive long-term margin expansion, we build off of that, and it really is delivering on our revenue potential. We start with getting back from a sales and distribution perspective, the indirect share that we had back in 2023. We're making great progress on that as well. There are opportunities to fine-tune our revenue management, make sure that we're revenue management systems, that we're merchandising effectively. We have opportunities with our app. All of that is going on right now. That builds a baseline to ensure that we can capitalize on customer experience investments that we've been making. Ultimately, the other points here that you're well aware of, we're rebuilding our network.
The new city deal that we inked last year that comes into play in 2026, and we're well on our path to getting that off to a great start. Delivering on our revenue potential, this is from our year-end earnings report. The progress continues, and I'm pleased with what I see. As we look to exiting 2025, I anticipate that we will have regained the share that we had lost. That's important. It's important right now. Business has been holding up a little bit better than the domestic. And, you know, from a high-end leisure perspective as well, that's beneficial to America right now. That's the game that we, that's a game that we play in as well. From a customer experience perspective, we've made great investments over the years, and we'll continue to do so.
We have a great international fleet, domestic fleet. We were the first with the ultra-premium lounges. The investments in those will continue with our Philadelphia lounge that is opening up. There are ways that we can monetize that and that is the pursuit that we are looking for. It is anchored on, you know, having a hard product that people want to fly. You will see the investment in aircraft for us coming in terms of growing international capable fleet. It is not just that. It is also having an international fleet that has the right mix of premium economy and business class and coach seats as well. I really feel great about where we are headed with the introduction of our flagship suites, new XLRS coming this year, that will first be deployed from a Transcom perspective.
Then ultimately, you know, being able to do some short haul, Europe and, and South America and international overall. We have the new 787-9s that are coming, and we're reconfiguring our 777-300ERs, 319s, and 320 aircraft, that will put more premium seating available on those aircraft as well. That's all good news. We're definitely in that market and poised to excel. Then from a network perspective, again, American has built our network based on a number of constraints that we had to get through. First was getting our regional fleet back up in the air, and also addressing our mainline pilots. Unfortunately, we've been able to put in place a contract two years ago now that has allowed us to grow where we need to.
What you'll see is our growth is primarily in 2025 going to be centered on our northern tier hubs, namely Philadelphia and Chicago. I anticipate great things from the growth plans that we put in place in Chicago right now. We see them booking to levels that we expect. Philadelphia is coming back nicely as well. It's important because American was really hamstrung by the fact that we didn't have a network that, you know, was quite capable of delivering to our most premium customers. I feel good about the growth that we're putting back in place. I've mentioned about the Citi deal, and we've talked about this before as this progresses over the next few years and as cash remuneration approaches $10 billion, we anticipate another $1.5 billion of earnings to American.
It's something that has been a shortfall for us in comparison to other carriers. I'm really pleased with the start here. Citi's a fantastic partner and, you know, really invested in this effort as well. I wrap it up with this that the focus remains the same. From a margin expansion perspective, we're going to continue to operate with excellence, from a reliability perspective. That's the best, most efficient way to run an airline. We're re-engineering the business. Others that may be coming to the, coming to this game, we've already started. We're great at it. We've built labor contracts that are fully embedded into our cost projections. We don't have anything new coming, you know, all the way out through 2027. That cost certainty is, you know, a real blessing right now.
From a commercial initiative perspective, I talked to you about restoring our sales and distribution share, renewing our focus on customer experience and monetizing that, strengthening our network and getting back to having full hub strength, and then enhancing the Advantage program and co-brand cards. Ultimately, free cash flow generation, which we talked about, record 2024, anticipate more of the same in 2025, limited CapEx exposure. Fortunately, we have the youngest fleet among the majors. You know, we invested up to the pandemic over the prior seven, eight years, almost $30 billion in aircraft. We do not have to go through that. Others, you know, have a different path ahead of them.
Ultimately, we've got a much stronger balance sheet and one that's capable of weathering any type of storm that might be on the horizon. I feel great about where American is. It's a difficult, difficult first quarter for so many reasons, but we've got a great team and a path that's clear and certain, and we're ready to go and bring this all to light. With that, I've got Devin and Aubriel, and we'll be interested in any questions you have.
I guess I'll start. We have a shy audience this morning. Look, when Mark and I do these conferences, the goal isn't to engage in tit for tat, he said, she said kind of stuff, but you were in the room, you heard what Scott had to say. He is still, Scott Kirby, CEO of United, for anybody listening, he is still of the view that the market can support two premium airlines, and the implication is that American is not one of those two. I assume you disagree. Why are you right?
I'll just start with this. I work for Scott and with Scott for a long time. You know, I've seen him be right on a lot of stuff. He's a brilliant man. I've seen him wrong on a lot of stuff. In this case, he's dead wrong. You know, the reason for that is American's been around for a long time. American probably had a weaker hand going into the pandemic. Certainly we were hamstrung on the way out. We didn't, again, I mentioned that we had 200 aircraft, over 200 aircraft that we couldn't fly because of regional pilot shortfall. You know, I love our regional network. It flies incredibly well. We've got a great fleet, but by the same token, you have to have pilots to fly it. You know what?
We're back out. You know, Scott says that kind of stuff. I'm sure because he would like nothing better than to not have American as a competitor. He would guarantee he doesn't like us, being a competitor in his backyard in some places. To that end, we're a premium product carrier. We've got a great fleet. We're not dependent on, you know, a lot of, you know, the issues that, you know, Boeing or Airbus, you know, has to deal with. Our growth is fairly metered, as we look back, as we look out. We've grown in DFW in Charlotte. We have an incredible position, you know, Sunbelt position, hub position, enviable relationships. I see Luis Gallego here from IAG. Anyone would love, you know, to have a partner with, you know, Iberia and, and, and BA and their network of carriers.
The same thing holds true across, you know, the Pacific with JAL, and our other partners. American's not going anywhere. American is recovering. And I can guarantee you that, you know, anything that you hear to the contrary is just concerned that we're actually making a lot of progress. Thank you.
Robert, can you talk a little bit more about, you had the bullet up there on DCA and your market share, and can you talk a little bit about performance there in light of everything going on in Washington related to travel? That was also obviously where the accident was. The weakness that you're seeing there, you know, is some of it attributed to the accident? Is most of it attributed to the government, obviously? Just how should we think about that and how is that playing out?
A couple of things. Devin can join me here. First off, yes, you know, the incident had a big impact on DCA, you know, shortly after the accident. DCA is also, you know, a center to a lot of government activity. You know, while corporate, our government contracted business for us is only 1.5% of our total revenues, there is associated, you know, impact to that. Whether it's, you know, 1.5 is just our straight government contracted, but there are government contractors, you know, that have been impacted. Anyone as well in that area, you know, is feeling the concerns of uncertainty.
We know that there's some follow-on effect in terms of leisure travel associated with that as well. I'll note this: DCA historically has been one of our most profitable hubs. We have an enviable position there. Over the long run, I'm confident that it will return to its full share of profitability. Realize that it's actually a fairly small part of our network. Total ASMs is 2%. Yeah, so about 2%. I'd love to get it back to that profitability level that we had seen. We've taken some actions to address capacity. Over the long run, that's going to work out really well for us. You know, government travel has a way of coming back.
And you know, can we take that and lead us to sort of corporate travel recovery on the network, the Vasso unwind, whatever we want to call it in terms of your attempts, from, you know, over a year ago now, right, to disintermediate and sort of bringing back the, you know, direct booked corporate revenue. You're recovering, you're not yet fully recovered. You know, is the expectation that you will get fully recovered? You know, have you seen any, is there any sort of, do you think there's any reason for sort of permanent corporate share shift because of the experience that you've gone through?
The answer to that is no. The reason is I've been out there as much as anybody else on our team talking to, you know, CEOs and corporate buyers and the travel management companies and to a person they all say, hey, we'd much rather have, you know, more competition than less. The door's open, right? You have to come in there with a compelling offering. From that perspective, we've retooled our sales and distribution teams. You've seen that, we've reorganized on that front. I feel great about the progress that they're making. The good news on that front is that you can see as you sign new contracts, as there are new commitments that are made, right? Those take some time.
When we talk about what we're seeing right now, the seeds are planted. I know that we're going to harvest them this, you know, later on this year. As we talked about, as I mentioned in my comments, as I take a look at exiting 2025, I think that we'll be back to full share restoration.
Last one for me, I'm turning it over to the crowd here, hopefully for some questions. Northeast Alliance, there's obviously some legal activity related to that that I know you can't speak to directly, but maybe just bigger picture. Can you talk about, you know, where you stand with that process? How important is it to do something, you know, whether it's what the government allows or whether trying to rewrite what the government said was the path to go forward with that? You know, what sort of thoughts can you add for your presence in the Northeast?
I'll just start with this. The Northeast Alliance, it benefited consumers. Plain and simple, it did. You know, it's disappointing that we had the outcomes from a litigation perspective. Disappointing that we had the judges that were chosen in those cases. I think that, you know, different courts, you know, probably different verdicts. At the end of the day, the reason that we continue to pursue efforts to is just simply because I don't like the precedent. It just, it's wrong. It doesn't benefit anybody. Consumers, you know, had a much better opportunity to get where they wanted to go, at the price they wanted to go with three really strong competitors in the New York region.
For us, in New York, you know, look, we've got a great JFK hub, you know, for us from an international perspective. I mentioned again, you know, the relationship we have with IAG. We've got the premier, you know, New York to London, you know, franchise, and we're going to continue to build on that. LaGuardia will be our largest operation, you know, since the pandemic this year. We've seen some improvement in business there. All carriers have their strengths, and others, and all of us have, you know, areas where we need to shore up. We're going to be focused on the Northeast, and we're going to make sure that we take care of ourselves. If there are partnership opportunities, we'll pursue those vigorously.
If not, you know, you'll see us make sure that we leverage the assets that we have throughout the country and, you know, just enviable domestic position, you know, largest among the network carriers, and especially in those places that are growing, you know, the fastest in the country.
The last time I was at your headquarters was fall of last year. You had not inked the new loyalty contract yet. You were still pitting the two partners, you know, off one another, presumably. One of the questions I asked you at the time was whether it was a priority to also be able to improve and expand the disclosures of the program. You kind of shot me down. You are like, economics first, you know, first and foremost. You have certainly given us high level color on the improvements to the contract. Were there any changes in terms of what you can ultimately disclose going forward that would better allow analysts and investors to actually begin modeling AAdvantage returns? You know, I know Chase still puts a lot of handcuffs on what United could say.
My question is, Citi and American, can you give us more data?
Yeah. I think we gave a lot when we announced the new agreement in December, probably more disclosure than there's been, at least in our business, and maybe with any loyalty program. What we announced in December, when we announced the new agreement is a couple of things. One, we expect this to drive a lot of growth in this part of the business. We'd be growing by 10% a year for that 10-year period. That's just remuneration. What we also disclose, though, effectively is the earnings from that remuneration. For the year-ended third quarter of last year, we had about $5.6 billion of remuneration. For the full year 2024, we're a little over six. That included a bonus in there. Let's just go off that $5.6 billion base. We said we'd grow that by about 10% a year.
As we approach $10 billion, when you do the math, that puts you around the end of the decade, you'd be at around $10 billion of remuneration. That marginal growth would drive an earnings improvement of about $1.5 billion. So 33%-35% type margin on that remuneration growth. I don't know how much more disclosures need to be on that, but it felt like there was a ton of disclosure at the time, more than anything I think that's been done in our business. It gives people a really good feel for just how valuable these programs are. Thank you.
Devon, we spoke a little bit with Mike Leskin and at United before, your presentation about balance sheet strategy, the shift at United from not targeting investment grade to now targeting investment grade. The question I want to ask American about the balance sheet strategy is you've set these deleveraging targets, yet if we run the math on your free cash flow, we've written about this and talked about a little bit, but there's still some wiggle room in there for capital return to shareholders. When you think about the industry environment, you know, how you're thinking about when is the right time to sort of flip the switch and, you know, how are you trying to balance, you know, those debt reduction goals? You're going to have a choice whether to tighten those further or to turn that switch back on and return capital to shareholders.
What's the debate like internally? How are you thinking about it?
It's fun to start talking about it again. Like, we have been solely focused on repairing the balance sheet since we came out of COVID. We, in the middle of 2022, had $54 billion of total debt. We set a target that by the end of 2025, we'd reduce total debt by $15 billion. We did that by the end of 2024. The latest target we put out there is that we would reduce total debt by about another $4 billion by the end of 2027. We had talked about that at our investor day. At that point in time, we said it would be by the end of 2028. We brought that forward by a year. You're right.
If our free cash flow projections are right and we think we're really well set up to produce really nice free cash, given our capital requirements, we should have excess cash to do something else with. We'll have that decision to make. It is something that Robert and I will talk about with our board. Just do we want to continue to accelerate the deleveraging or do we want to do something else with that excess cash? Obviously, first priority is investing back in the business. We think we've made the right investments there, but if there are great opportunities there, we'll continue to do that. We'd like to position where we're in. We have the lowest net debt right now that we've had probably since, I don't know, for sure since 2019.
By the end of this year, I think we'll be in the lowest net debt position we've had since 2016. I feel great about the progress. Excited to have more of these conversations as to what to do with excess cash.
One question we did not get a chance to talk about with United that I want to ask you because you obviously have aircraft on order from both manufacturers, but with Boeing specifically out of Seattle, for you or Robert, you know, are you reacting favorably to the change of regime there and what you are hearing out of Seattle? Obviously, you have had 787s that have been on constant delay. Are you feeling better about Boeing's ability to deliver airplanes to you on time?
Yeah, I think we're seeing progress, for sure on the 737s. You know, we gave a range of deliveries this year of 40-50 aircraft. That's really going to be dependent on how many airplanes Boeing can deliver. I think on the narrow bodies, it feels like they're making nice progress. The wide bodies, we're still waiting on a handful there. We'd like to see progress there. We're really excited about the product, as Robert talked about earlier. Yeah, I think they're doing a nice job right now. The wide bodies maybe are a little bit TBD for us.
Thanks. Good morning. Given some of the pressure you talked about on the demand environment, would you think at all about accelerating any retirements?
We feel really comfortable about the growth we have planned for this year. I'd leave it at that. We're building back, you know, our northern tier hubs, Philadelphia and Chicago. We were already very measured in our capacity growth for this year, you know, low single digits. I think the question comes in is, you know, what does the economic, what economic conditions do we face later in the year and what kind of impact does that have on 2026? From that perspective, I'll let Devon talk. I think we've got a tremendous amount of flexibility to meet whatever demand needs are out there.
Yeah, that's the greatest part about our capacity plan and our fleet plan right now. If we are heading into a softer demand environment, you know, right now we're growing low single digits. If we need to pare that back a little bit, that's pretty easy. It's not like we're growing at some multiple of GDP. As we look out to 2026, we have a fleet that could allow us to grow 5% or 6%. More likely though, we're going to grow in line with economic growth. If that continues to come down or if that is showing any signs of weakness, then we can pull back on that growth through some retirement of older airplanes, return of leased aircraft, or we can work on our delivery schedule a little bit. Our fleet has a ton of flexibility to meet really any level of demand.
Thanks, everybody. Take care.