Delta Seeks to Improve Margins, Cut Debt as Travel Claims

Delta Seeks to Improve Margins, Cut Debt as Travel Claims

Dan Janki, chief financial officer of Delta Air Lines Inc.,

They had to deal with many pressures in their first year in the airline industry as travel demand was still below the levels seen before the Covid-19 pandemic.

Now, as demand increases, it faces a new set of challenges as airlines struggle with capacity issues, rising costs, high debt levels and fears of an economic downturn.

The executive, who spent nearly three decades at industrial conglomerate General Electric Co., said his approach is to focus on things within his control, such as cutting debt and improving margins while also allocating funds to increase inventory. and reduce time buffers.

Mr. Janki had no airline experience before joining Atlanta-based Delta as chief financial officer in July 2021, unlike his colleagues at American Airlines Group Inc.

and United Airlines Holdings Inc.

Regardless of their professional background, the CFOs of those carriers are facing many of the same challenges, including resource constraints after routes and jobs were cut in the early days of the pandemic in 2020.

Delta is keeping more airplane spare parts to make sure critical pieces aren’t missing when needed, as well as adding time before and after flights, Mr. Janki said. Combined with the self-imposed capacity constraints, these moves have kept the company’s unit costs higher than they were before the pandemic. Excluding fuel, Delta spent 12.76 cents per available seat mile — a metric used to measure unit costs — during the second quarter, up from 11.42 cents a year ago but down from 41.96 cents during the second quarter. quarter of 2020, when a pandemic lockdown was in place. full force. That compares to 10.47 cents in the second quarter of 2019, before Covid-19.

The buffers helped Delta improve service in July and August, after being low in June, and should continue to do so as the year goes on, the Mr. Janki. “It’s still not where we want it to be, but it’s going to keep getting better,” he said, sitting in his office near Hartsfield-Jackson Atlanta International Airport, where he watches planes take off and land. landing Delta in recent months has also reduced the number of flights it operates. September is off to a good start, Mr Janki said at a conference last week.

Consumer demand remains strong and corporate travel — a key revenue generator for Delta before the pandemic — is recovering, Mr. Janki said. Slower economic growth could help the airline’s corporate segment as more companies may decide to send their sales and other executives to see clients in person, Mr. Janki said.

Apart from improving the company’s overall finances, Mr Janki is focusing on reducing debt. Delta’s net debt was $22.9 billion at the end of the second quarter, down from $24.5 billion at the end of 2021, according to data provider S&P Global Market Intelligence. “We are very focused on continuing to strengthen the balance sheet and reduce debt,” said Mr. Janki.

Delta CFO Dan Janki


Photo:

Delta Air Lines Inc.

The company is targeting $15 billion in adjusted net debt by 2024, which would mean a $5 billion reduction in adjusted net debt between now and then. Adjusted net debt was $19.6 billion at the end of the second quarter, Delta said. The airline is looking to pay off debt in a timely manner and does not see a major impact on its funding costs from rising interest rates, as 85% of its debt is fixed rate, Mr Janki said.

Delta relied more on debt to protect liquidity than competitors with weaker balance sheets that used a mix of debt and equity, said Savanthi Syth, an analyst at financial services firm Raymond James Financial. Inc.

The airline is somewhat limited in terms of what it can do with its capital, as it received emergency funds from the government at the start of the pandemic. Those restrictions will be lifted next month, but pending reinstatement of the dividend or share buyback, Mr Janki said.

New labor agreements with Delta pilots – currently being negotiated – will boost the company’s cost base going forward, analysts said. “The US airline industry has a lot of catching up to do,” Mr. Syth said. “You have these upfront costs when the consumer and the economy are slowing down.”

From long lines to delays and cancellations, airports around the world are trying to manage a post-pandemic travel boom with staff shortages. WSJ follows an American Airlines pilot through the disruption to unpack how airlines are trying to resolve it. Composite Photo: Emily Siu

Mr. Janki said he is working to reduce Delta’s unit costs. Part of that effort is to bring nine aircraft back into service that are currently parked, and to train new employees. “As we get a stable operation and you build that experience, you can start to get the efficiency of those teams,” Mr. Janki said.

Mr. Janki held a variety of roles while at GE,

as divisional CFO and CEO of business units, including president and CEO of GE’s power portfolio. “It wasn’t just business,” Mr. Janki said, adding that going from business to business at GE helped him land “a new business that I had no experience with before.”

To familiarize himself with Delta, Mr. Janki said he attended morning meetings, inspected the engine shop, toured the wing operations and spent some time in the reservations department. “Those kinds of things give you a sense of the operation,” he said.

More than a year into the new role, Mr. Janki has made some changes, for example to how the company closes its quarters. The focus was on bringing insights and analytics earlier in the earning process to improve efficiency, Delta said. Mr. Janki also attends a weekly commercial meeting held by President Glen Hauenstein, which was not previously the CFO’s regular responsibility.

Delta uses a rolling forecast, Mr. Janki said, which allows the company to regularly update its spending plans, instead of sticking to a fixed annual budget. “We’re looking within a month, within a quarter, daily, weekly,” Mr. Janki said. The company, which reported earnings per share under US generally accepted accounting principles of $1.15 in the second quarter and $1.44 in non-GAAP EPS, is guiding investors to an operating margin in the teens, more than $4 billion in cash free dry and non-GAAP. EPS of over $7 in 2024. That compares to an operating margin of 11% and $1.6 billion in free cash at the end of June.

Colleagues said Mr. Janki is sometimes seen at 6 a.m. at the cafe in front of his office, reading material. “One of his strengths is, he’s a learner,” said John Krenicki, a former GE vice chairman and CEO of GE Energy to whom Mr. Janki reported as the department’s Chief Financial Officer.

Mr. Janki was known for his detailed knowledge of GE. “It wasn’t unusual for me to call him and ask him what he thought about this or that option,” said Larry Culp, the company’s chairman and CEO, speaking generally. GE is currently in the process of dividing its business into three parts. “He was comfortable in his own skin telling me what he was thinking, instead of trying to guess what I was thinking,” Mr. Culp said. Delta is a customer of GE’s aircraft engine business.

In his early days Mr. Janki participated in GE’s corporate audit team program, a rigorous multi-year rotation through various divisions that the conglomerate used to group future leaders until he decided to retire in 2020. “He collected the parts that he received during his career. for the big chairman,” said Peter Crist, chairman of the executive recruiting firm Crist Kolder Associates.

Mr Janki wants his 600-strong finance team to rely more on data and improve its systems, including streamlining information in the cloud. Part of that effort will be to compile fuel and operational data, as well as information about employees, staff expenses and maintenance spending, he said.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

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