Barron's Streetwise - Delta CEO Ed Bastian

Episode Date: June 21, 2024

How the airline is outshining its rivals. Plus, one analyst upgrades Best Buy, but another says “too soon.” Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. Six or seven years ago, customers started to ask me, something seems really different. What are you guys doing?

How are you doing? It seems better. Welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Ed Bastian. He's the CEO of Delta Airlines and he's a member of this year's top CEOs list from Barron's. In a moment, we'll hear from Ed about how and why Delta is outshining the rest of the airline industry. Listening in is our audio producer, Jackson hi jackson hi jack you told me earlier that you

are taking care of some pets temporarily and one of them is a particularly hairy dog how's it going quickly because we're very busy in this podcast tell me in about seven words how's it going with the cleanup effort roomba trying to keep up needs frequent emptying. All right. All right. You're over your allotment, but it sounds like you're doing your best over there. Now, before we get to airlines, I'm excited to talk about airlines and to talk about Delta. But before we get to that, how about a little bit about Best Buy? How about a Best Buy back and forth? Are you going to be the back or the fourth? I'm neither one. I'm staying out of it. This is between two analysts here. I have not been to Best Buy in a long, long time, I must say. How about you? No, I think it's Costco has replaced all those Best Buy purchases for me.

It's interesting because there used to be these big electronics chains and they're all gone and Best Buy is the only one left. And so it does not compete with other electronics chains that competes with Amazon and Walmart and Costco and Target, as you say. And I kind of, I guess, think of the company as a long-term market share donor, but I was surprised to see that UBS this past week upgraded Best Buy stock to buy from Neutral. Now, keep in mind the shares have underperformed over the past five years. Same store sales have been sliding about since Christmas 2021 and management is closing stores. It's closing about 10 to 15 a year. There are still 1100

stores remaining. The stock does have a 4% dividend and I guess you could say it's reasonably priced at 14.5 times projected earnings for the current fiscal year. Okay, so UBS upgrades the stock, and they raise their target price all the way from $85 to $106. Best Buy doesn't get a ton of love these days, so shares jumped 4% in a day after that upgrade. The price target works out to about 15% remaining upside from where the shares traded recently. Fewer than one third of analysts who cover Best Buy are bullish. Is this going to be an AI play?

Maybe. Maybe a little. You know, if you're a good AI player for Best Buy. What's that? Having an AI robot that walks around the store and slaps people's phones out of their hands when they start to price compare on Amazon. I love it. Best Buy, if you're listening. I don't know. We can't speak for the legality of it, but it is innovative. Okay, so here's what UBS likes apart from the valuation and the $5 per share plus in cash that's on the balance sheet. They say there are several potential sources of upside.

First of all, we talked in a recent episode of this podcast about how house listings are up. UBS points out that there's a strong correlation between house transactions and many of the goods that Best Buy sells. You move into a new house, you might want new appliances, you might want a new home theater. Second reason, there was a boom in electronic sales during the pandemic. People took some of that stimulus cash and they put it to work on new home offices. And UBS says that some of those COVID computers could be ready for upgrades. And that feeds into a third reason, which is that there's this new product cycle coming, which might be a big one. I don't know. AI optimized laptops.

You say you have laptops with special chips and they're designed to run these AI assistants like one from Microsoft. And what can that do for you? There are some examples in UBS's report. It can translate audio into different languages in real time. You can create photos and stuff with just your voice. A lot of people are wondering whether this will be a big year for laptop sales because of these new AI features. If it is, Best Buy is in a position to benefit. The fourth reason is that there are new categories at Best Buy. Electric bikes, for example.

So sales in UBS's view should pick up later this year. And it points out that the company has cut employees per store. It had 102 employees per store in 2020. It's down to 77 now, and that would turn any gains in sales into some profit upside. Okay, now that report was last Monday. And on Thursday, Oppenheimer wrote that it's too early, too early to consider Best Buy stock, too early to think of it as an AI play. It says the company is well positioned to sell into a boom in AI products but we don't have a lot of products for now and history suggests that when we do get them the first ones will be expensive and mainstream buyers will probably hold off. They

might wait for prices to fall and they might even forego buying the products that are in stores now before the AI products get there. That could be a further drag on sales. Oppenheimer says that if you look at the guidance provided by Best Buy management, it already implies a pickup in sales later on this year. So if that happens, it might not be enough to pleasantly surprise investors. And while shares are cheaper than the U.S. stock market relative to earnings, they are not cheaper than their own historical average. That's Oppenheimer's pushback on the bull case. Also on Thursday, by the way, UBS came out with its own follow-up note responding to feedback that it has gotten from investors on its upgrade. One of the questions

that it's been getting is the one I asked earlier, isn't Best Buy just a long-term market share donor to the superstores? And UBS wrote, our thought is not that Best Buy will out-compete these retailers going forward, but that it will shine and outperform during the early phases of a product cycle. That to me sounds like, if you're interested in the stock, you should stay nimble. What do you think, Jackson? Does it sound like a convincing case? Assuming not counting the part of your thesis where there are robots slapping phones out of people's hands. Do you think it sounds convincing? where there are robots slapping phones out of people's hands.

Do you think it sounds convincing? Well, I'm surprised I haven't heard yet about the Geek Squad. Are you familiar with the Geek Squad? I am familiar, yeah. I don't think it's been... My sense is that it has not been a growth bonanza. Oh, interesting. I know there were plans for a while about getting more involved in people's homes and going out there and turning homes into smart homes.

I don't hear as much now about investing there. Well, I just think about Walmart, Costco, Amazon. The one thing they don't have is people that will come into your home and install things. Is that a plus or a minus? I don't know. Yeah, I was hearing from one point at Walmart, they had a service. I hope I'm getting the details right. They were rolling out a new service where you could do grocery shopping and have grocery

deliveries, and they would just send someone into your house while you're not there just to drop off your stuff. Oh, man. I just looked it up on Walmart's website. I know we're getting off track here, but it says you can receive in-home deliveries in your kitchen fridge or in your garage. And it's got a how it works section.

You'll receive a notification when the associate is on the way. When they arrive, they'll get a one-time access code to unlock your door and then they'll start recording. I mean, look, this has got to be a valuable service

for a lot of people out there who are not me. So let's not knock it, right? What if you have pets? They're not going to pick up the dog here. No, leave that to the room. Okay, got it. Okay.

Okay, it's time to get to airlines. You might be surprised at how air travel has bounced back and how well Delta is doing relative to just about everyone, really. We'll come to that and hear from Delta CEO Ed Bastian right after this break. Welcome back. So airline travel is back, like totally back. You get these figures from the TSA, the Transportation Security, I'm going to say administration, and they give you a figure called passenger throughput. In other words, the number of people going through those security screenings. And that tells you how much we're flying and we're flying a lot, record levels. So if there's record flying, you would think that airlines would be at record profits, but they're not. So if there's record flying, you would think that airlines would be at record profits, but they're not. Didn't Warren Buffett say he wished he could go back in time and stop the Wright brothers

from ever doing their thing? I think he said that. I can't remember what letter he wrote that in, but he did buy four airline stocks, including Delta, not recently, but before the pandemic. And he sold them during the pandemic. I mean, you know, when he sells, as he says, he doesn't just trim, he sells everything. And during the pandemic, that revenue went to near zero for a while for these companies. So he didn't stick around to see how things would go.

I think that would make a great movie, though. With a Warren Buffett character? A 93-year-old, a time machine, two unsuspecting inventors. I respect Warren Buffett, but I'm rooting for the Wright brothers in this one. So most of the airline industry is still operating well below pre-pandemic profit margins, but Delta has climbed back nicely. In fact, Delta operates about 20% of the industry's capacity, and it collects 40% of its profits. And there's a heck of a lot of free cash flow. Last year, $2 billion. This year, management predicts $3 billion to $4 billion.

And they call out two things that are doing particularly well. The first is premium revenue. And they call out two things that are doing particularly well. The first is premium revenue. If you look over the past year, that has climbed from $10 billion to $19 billion. That's important because that's where the margin is. The margins for premium passengers, those are 10 points higher than the margins in the main cabin. Also, the Delta Amex card. It's enormously profitable, and Delta, of course, gets money for

that. Last year, it collected $6.8 billion in revenue from that relationship. That has more than tripled over the past decade. So when you put those two figures together, they're 40% of Delta's revenue and they give the company less sensitivity to economic swings and a more affluent customer base. And that all sounds good. I wanted to know three things, basically. First of all, how do you get all those first class customers?

How are you doing so well with the premium folks? Is the brute bubblier? Is that the secret? Is it the bechamel sauce on the lasagna? I don't know. And with the Amex card, there are a lot of rewards cards out there. How do you make yours successful? Are your points pointier than those of your rival?

What's the secret? The third thing I want to know, of course, is about the stock. Now, you can look at Delta stock and see it's just under $50 a share. Earnings per share for this year, they're pegged at $6.66 a share. That estimate has been rising. There are a small number of analysts who have ventured guesses a few years out. And three years from now, they see the company earning $10 a share. So it's not difficult to build a case that the stock is cheap.

And also, just about every analyst who covers Delta says to buy it. I should point out the company is winning a lot of awards, customer service in premium classes, its on-time rate, general awards like Best Airline, that sort of thing. All right, so as Jackson alluded to earlier with his story pitch for Netflix about Warren Buffett and the time machine. There is some hesitation out there on the part of investors with regard to airlines. The group historically is not known for its abundant returns for long-term shareholders, but the stars seem to be aligning for Delta. So that's the third thing I wanted to ask Ed is what's going to take to get the stock really going. And he has an answer for it. And with that, let's get to our conversation.

get the stock really going, and he has an answer for it. And with that, let's get to our conversation. How do you go about making premium travel better than the competition? What is it the customers want? What gets you the best bang for the buck there? Fundamentally, this is a path Delta's been on over 15 years to improve the overall quality of the experience. And that means doing the hard work to deliver the very top on-time arrivals, top scores for all the reliability measures that our customers value. And we did that work over the course of the last decade. And about six or seven years ago, customers started to ask me, something seems really different. What are you guys doing? How are you doing? It seems better. And once those expectations are then set, which our team has done, that enables us then to layer in the premium

experiences and opportunities that people are willing to pay more. And that's where we've leaned into. Is there anything that you can tell me about this long behind-the-scenes work? For example, the on-time rates. You're cited as having better on-time rates than your rivals. What are things that you had to put in place or fix or do to get your on-time rates where they are? We invested significantly in technology, predictive engineering capabilities, leadership, teamwork, whether it was the baggage information, all internal, making sure our people knew where the bags needed to be by when. And then as we started to gain real confidence and strength in that area and competency in that area, guess what? Our service people, our flight attendants, our pilots, our gate agents, all started to first notice the

difference and actually their jobs became a lot easier. They were no longer apologizing for something that went wrong and then using the time they had with customers to serve, to be hospitable, to make sure that we're going above and beyond their expectations. Our partnerships with companies like American Express are more powerful now because premium customers from Amex want to be on Delta and with Delta. So that flywheel has continued to accelerate. I saw a staggering figure that the spending on these cards, your partnership with American Express was around or approaching 1% of GDP.

And that's been a big moneymaker for you. I always think about these cards as you have to give something to get something. So maybe the competition is giving 2%. You've got to give 2% or whatever it is. But there has to be something more to it than that because you're doing better than the others. How do you make that credit card business and relationship more successful than its rivals? Well, it is the most successful credit card that American Express has by a meaningful factor. It's the largest one and it's the one that's growing the fastest of any of the cards Amex, whether it's co-brand or their own proprietary products.

And the reason why is that consumers increasingly want the benefits that Delta has to offer. We talk about 2% cashback. That's nice. But a trip is priceless. And it's hard to put a price tag on it. And so what we get is a chance to dream. And people get a chance to be aspirational in terms of what they're selecting. They can use it to gain access to our clubs.

They can use it to gain free flights. They can use it for a lot of other valuable experiences as well, not just the paying down the flight experience. What are you learning about younger travelers or thinking about future travel? How is the business changing? What do you think is going to have to be different, let's say, 10 years from now? Oh, I think we are, you know, coming out of COVID, obviously there was a strong boom in travel. And guess what? That boom continues. And it's even stronger today than there was a strong boom in travel. And guess what? That boom continues. And it's even stronger today than it was a couple of years ago as we came out of COVID. I think we're into the next normal already.

And it's not just the younger travelers. It's all generations of travelers that are going. Baby boomers are going overseas like never before. Again, they lost some time during COVID. They're going to make sure that never happens again. And guess what? As they're going, they're realizing how much fun it is to get out and experience something different, to reconnect with family and friends or our younger travelers, people that are flying on Delta are starting at a much earlier age to enter into our loyalty ecosystem with our SkyMiles program.

One of the things we've done, as you probably know, is we make Wi-Fi for free on board Delta flights. And we started that last year. We're still rolling it out. It will be coming internationally later this summer. And we're finding the new customers coming to us are younger, a younger demographic. Just customers that signed up on board our planes to join our program have been 2.5 million of them just in the first year. How do you keep workers happy? Now, you mentioned that you bring down customer complaints, and I can definitely see how that would be popular

among the workers. What else do you do to keep your workforce happy? Well, we take the very best care of them. They're the best paid across the board in our industry. We have a unique relationship with them where we call it profit sharing. So approximately 15% of our earnings go to our employees, our frontline, not management, but frontline employees. And this past Valentine's Day, well, let's distribute it on Valentine's Day, we paid them $1.4 billion. That's with a B.

This is, I have to imagine, a meaningful part of their paycheck. Like, how does this come? It comes once a year or how does it work? It comes once a year. It's 15% of the annual earnings of the company. Our average worker this past year, it was 10% on top of whatever they made. Our high watermark before COVID was 16%.

It obviously dropped during COVID. And we're already back and hoping to get back to that number and beyond in the coming years. And it's all good because when you enter the cost of that plan against our results, as we do, Delta is still the top performing airline in the industry. So it shows that when you take care of people and you share the rewards as well as the recognition, only good happens. There is a reputation, not to do with Delta, to do with the industry in general and the past, that it's an industry subject to swings, cyclicality, that when things are very good in the airline business, that's the time to get worried because the next downturn

might be around the corner. Do you think that the investment proposition is changing for someone who wants to put money to work long term in a company like yours, in an industry like yours? Is it becoming more investor friendly, do you think? I absolutely do. Now, I'll speak for Delta. It's hard for me to speak for the entire industry. We went through the most difficult experience of our lives going through COVID. Our revenues dropped down to only 5% of where they were in 2019, within a period of 60 days. And when you can look at where we are today with our highest revenues in our history, profits already starting to approach the highest water mark that we've ever had, and hopefully growing beyond that in the next couple of years. To be able to bounce

back that quickly with that level of sustainability shows that we've built something that has a lot of resilience attached to it. Secondly, we're investing in a differentiated experience. We're not a commodity. The reason why the industry in the past has been exactly what you said it was, was that your product wasn't differentiated. So when bad times came, people equated basically whoever had the lowest fare won. You can't win in that marketplace and that is a bad investment. When you see customers, particularly during the tough time like COVID, invest in Delta because Delta was the premium airline that took care of the wellness. Remember, we're the airline that blocked the middle seats throughout the entire extent of the pandemic. We didn't have to do any of that.

We chose to do that. No one else did that the way we did it. We did not furlough a single employee going through COVID. We had 50,000 of our employees voluntarily take up to a year or two off without pay just to hold on to jobs for other people. And we held their job in turn. It was amazing. So we built a lot of muscle and a lot of strength coming through that. And now that we're on the other side, we see the revenue premiums are really strong. Delta generates somewhere between a 15% to 20% revenue premium versus the competition. Customers continue to flock to our product. Today is a Thursday afternoon.

We'll have a 90-plus percent load factor across our entire 5,000 flights we'll fly today. People really want to be on our product, and our people are happy. So you put all that together. want to be on our product and our people are happy. So you put all that together. The last thing we have to do that we are not quite there yet at is we got to get our investment grade rating on our balance sheet back, which we are getting really close. We hope by the end of this year, it'll be back because we're running the best operation that we ever have in our history. We've got the best revenue premiums we've ever had. Customer satisfaction is at an all-time high. Once we get that balance sheet, which still has some COVID debt attached to it, paid off, watch out. You're going to start to see our multiple run. And I think it'll be a great

investment for many years to come for our investors. Thank you, Ed. Jackson, what's the name of that airline ETF? What's the ticker there again? JETS, J-E-T-S. Let me type it in the machine here. I looked into, when Ed talks about the technology spending that Delta did years ago, one of the things it introduced was this predictive analytics thing where it tracks operations and it can tell you in advance which parts are statistically more likely to need replacing and it helps delta get ahead of the maintenance and have fewer delays and another was that it was early to add these rfid chips to baggage for tracking instead of barcodes that's

done a lot to keep people from losing their luggage so that fed into some of those early gains in customer satisfaction those are two examples okay delta versus the jets if we look at the past five years the airlines are still down from where they were five years ago before the pandemic but with delta you're down nine percent and with jets that etf with a bunch of airlines you're down 33 percent of course you'd have much rather held the s p 500 over that stretch it's about doubled your money where things get interesting is if you look year to date year to date the jet ctf is still limping it's returned about three percent the s p 500 is doing quite well it's returned 15 percent and change but delta shares have returned over 23 percent the shares have returned over 23%. Is that the beginning of a bigger bounce for the stock,

or as Ed says, a longer future of handsome returns for investors? We'll see. Thank you all for listening. Let's keep your Roombas charged out there. It's shedding season. Not a sponsor Roomba, we should point out right jackson yeah it could just as easily be a different sort of generic robot vacuum i had one of those i can't remember the name it started with an e it's probably yuffie it was a yuffie it it was um it didn't last long. It had to be euphonized. That's not good. Definitely take that out. I'm sorry to the good people at Eufy. They don't need that.

Thank all of you for listening. Jackson Cantrell is our producer. You can follow the podcast on Apple Podcasts, Spotify, YouTube, wherever you listen. Leave a comment. Write us a review. See you next week.