The air travel business is a sexy business. It's a business that people pay attention to. My good friend, Sir Richard Branson, says the best way to become a millionaire is to start as a billionaire and buy an airline. They absorb a lot of capital and they can lose a lot of capital fast. We're the number one business partner of American Express and they are number one business partner. Every plane we take today is generally about 25% more fuel efficient than the planes that we retire. Aircraft manufacturers is probably more to the engine that many of their predecessors had and none of them have come out and announced what their new products going to be. What's the next generation going to look like? I don't see the shape of air travel changing much because none of them are investing tens of billions of dollars it's going to take to create all new platforms. We need to continue to keep climbing. That's our tagline is keep climbing. We need to always get better because we know everyone is chasing us.
Airlines are a terrible business. They're capital intensive, unionized, and heavily regulated. There's very little moat. So said Warren Buffett at some point in the past. But is that still true? And if you look at the share price of our guest firm today, you might question that. So the aim here today is to examine the thesis for investability, to understand the direction and shape of flying, the economics, competition, premiumization, the case for a moat or structural advantage, what customers want, and the increase in price tarring and possibilities. And to seek these answers, we're extremely fortunate to welcome the CEO of the world's largest airline, Delta, a leader regarded as having driven one of the most successful aviation stories in what continues to be a fast-moving but fractured industry. Ed Bastian, a very warm welcome to the Money Maze podcast.
Simon, good to be with you.
Well, we met 11 months ago at the Irish Open Pro-Am at the K Club, which is an unlikely venue for anyone who has seen my golf, but Bob Bradway, CEO of Amgen, former guest and colleague of mine at Morgan Stanley, very kindly put us together. I think you might sit on his board or you know each other from board interactions. And in looking at Delta, I think you might be celebrating a hundred years of age this year or thereabouts. And I see that passenger operations began from Dallas, Texas to Jackson, Mississippi. You acquired Pan Am's transatlantic routes. You were the first airline in '97 to carry 100 million passengers in a calendar year. But the airline went through bankruptcy and restructuring in '05 to '07. And you arrived, as we're going to talk about, and the subsequent restructuring and takeoff has been quite some story, which seems to prove the investor conundrum that slogans are easy, but investing profitably is hard. But let's start in the control tower with you, Ed. Background, rise, and reasoning. When did you develop your own flight plan?
Well, it's almost 30 years ago when I joined Delta. I started as an accountant. I was at Price Waterhouse and from there was recruited away by PepsiCo. I spent a lot of time traveling and a friend of mine said, 'You've spent so much time on an airplane, you might as well work for the airlines.' And coincidentally, 6 months later, Delta called and gave me that opportunity, which I gladly took and I've been here ever since. Started in the finance world. I was CFO of the business, led the restructuring after the bankruptcy following 9/11, merger with Northwest Airlines. A considerable amount of work in terms of trying to prove that this is an investable business and it's great that you opened up with Mr. Buffett's warning about an investment, the surgeon general's warning as we like to call it, about it could be dangerous to your wealth. But Mr. Buffett and the Berkshire team just came back into Delta within the last number of months. So I think we're doing a good job.
Fantastic. And I didn't know that. So that's great. So let's start high. I'd like to confirm the Delta data. Just give us a sense of what I've written, the four Ps: planes, pilots, places, and passengers.
Well, we did celebrate our 100th anniversary last year. We're the first US airline to reach 100. There's a few European peers that are slightly ahead of us. KLM I think being one of the oldest. But we have close to 900 planes, over 100,000 employees, 16,000 pilots. We fly to over a thousand destinations and we have about 200 million customers a year that we serve.
Wow. So let's jump to my second vector, the economics of the airline business. And just help me, is this statistic right that only one in five people around the world have been on a plane?
It is right and it's the opportunity for us in our second century of flight. Here in the states, we are a large airline in the US. About two-thirds of our overall business is done in the US. So the opportunity for us is really not as much continued growth and expansion within the US but continue to move outside the US boundaries. And when you think about that stat that only one in five people have ever stepped foot on an airplane, it tells you there's ample opportunity for us to look to grow and growing in some places that we today are not in. We're not in the Indian region in South Asia. We're looking to expand there, grow there. We're launching a new flight to Riyadh, direct flight from the US, from Atlanta to Riyadh in the next couple of months. We're growing into whether it's New Zealand or back into the Philippines and Manila, Africa, South America. So there's a tremendous opportunity for us to take this brand. And when you talk about moats in business and opportunities, those are real moats because you're able to capture customers early in their flying history or opportunities to bring unique adventure and commerce to certain countries and start to develop a real presence.
So, we're going to talk about a few of those. I mean, I guess the questions I went through aviation history briefly was Pan Am, TWA, Eastern, Braniff, America West, Spirit, People's Express, Laker, Dan-Air. I flew a few of them. You know, where was there one or two reasons collectively that they all aren't around today?
I think there's several. I think one that they are, the air travel business is a sexy business. It's a business that, you know, people pay attention to. They like to enjoy. As a result, it can attract capital. My good friend Sir Richard Branson says the best way to become a millionaire is to start as a billionaire and buy an airline. And so then they absorb a lot of capital and they can lose a lot of capital fast. So you have to be careful as to how you think about an investment strategy. The investment in the US, the model for many many years unfortunately, and I think it's true to this day in parts of Europe, it's a commodity. The whoever has the lowest cost can offer the lowest price is going to win. That doesn't work in terms of building an investable model. You need to have a brand that has a premium offering, an opportunity to have consumers who are attracted and will invest alongside you which will then bring the capital required by your investor base. And when I started at Delta 30 years ago, if you were to ask people in the US, why did they choose a specific airline, over 80% of them would say whoever had the lowest price. Price clearly was not just the number one, was the number one, two, three reasons why individuals chose an airline. Today, if you ask an individual why did they choose Delta, over 80% will say because it's Delta. It's a brand I'm loyal to. It's a brand I have an allegiance to because of the quality of the service, the quality of the performance, the reliability, and the opportunity to continue to build relationships outside, not just your flying, but whether it's loyalty or other opportunities that we bring.
But before we leave the industry, is it fair to say that Delta is a strategically powerful airline inside a still fundamentally troubled industry?
I would say the industry is doing a fair bit better. COVID changed a lot and COVID brought us all to our knees and I think the airlines such as Delta who were consistent with the strategy about investing in a brand on the back end of COVID, not just previous to COVID, those airlines and Delta is the leader in that are doing quite well. We have grown our market cap. When we went through COVID, I think our stock price dropped to about $17 a share. That's when our friends at Berkshire sold. Today our stock price is $90. So if you look at over the last six years, we're up 5x in terms of share price. So I think that's a pretty healthy gain and it tells you that people see that we're disciplined about how we're running the business. We're continuing to pay our debt down. We've got our investment grade ratings back from all the big Wall Street houses, one of the only US airlines that can say that. We are a leading brand, not just in the airline space, we're a leading brand in the consumer space within the US. And our demographic is the upper end, the premium end of the marketplace. We talk about the K-shaped economy in the US a lot. And the upper end of the K belongs to Delta. That's where our people live. So they have the means, they have the discretionary income, and they have the desire to travel.
So I hadn't had the chance to talk to Warren Buffett clearly because I didn't know he'd come and invested in your company. But when you talk about barriers to entry, it is interesting. I think the US beer industry, two corporations run 90% of beer brands. Half of the nation's banking assets are run through five banks. Three out of four US households have only one option for high-speed internet. Would it be fair to say that if not monopolies but regional control has become a hallmark of the airlines that tend to dominate in the US now?
Well, you have four big airlines in the US all who have within the US similar market share. You have Delta, you have United, American, and Southwest. Southwest a little different. That's more of a local, that's more of a US more of a discount model. But all four of us have similar market share. We're somewhere between 20 and 25% market share and the rest of the industry has somewhere between 10 to 20%. So any market that you have four big players that are very competitive that all take up kind of rough size, they have scale and they have all similar opportunities. I'd say that's a, you know, it's not by any means a monopoly or duopoly. I mean it's really what we do with the assets and how we perform that separates us in that if you look at the market cap of Delta today for example, the market cap of Delta is greater than United, American, Alaska, and JetBlue all combined but yet we have a similar size network, our revenue base are all fairly comparable. So what it tells you is the performance of the company, the performance of its people in terms of service. It's what's the differentiating factor, not the fact that we have big moats that we put up with walls around our airports. Yes, we have a great franchise in Atlanta, great franchises in New York and Detroit, Minneapolis, Seattle, Salt Lake, Los Angeles. Those are all important markets for us. But those are markets others can access. You know, in the airline industry, the only thing that separates one airline from another is the people and the culture of the brand of the airline. And that's where we win. Our people are the very best and they do the very best of service and they get rewarded the best. And so there we call it the virtual circle. You take care of your people, they take care of the customers who reward you with the loyalty to attract capital to continue to grow that business.
So the problem for investors is they're often trapped by looking in the rearview mirror and you can, you know, the aviation industry I think has never in aggregate earned its cost of capital but now there are some differentiating factors. So I had a chat with Pete Davis of Lansdowne. You may know one of the UK's most successful investors. I've been with Pete and you know for a long time he has a position in your company. Wrote about it in his quarterly report. He made a couple of really interesting points. He showed some pricing, Pan Am's international fares in the 1950s. So London was $548, Zurich was $615. So, you know, we've had sustained price decreases in real terms for a long time. And are we now getting to the point given where Delta's return on invested capital is and you look at Ryanair for their financial operating model which is very different at a customer level but as an operating model, would you say that we might be on the threshold of a shift to higher returns for the winners?
No question about it. And the reason why is those airlines are focused on the customer and they're focused on their brand and the service quality that they're providing, not just they're a transportation company. Transportation is what we do, but it's the experience we bring that defines who we are. And those companies that have that ability to continue to bust through the commodity aspect of a business so that we're not being shopped on price any longer but we're being shopped on the experience. Those are the winners and we have led that charge Simon for the last 15 years in the US. So this is not an overnight sensation. As I mentioned, the pandemic knocked us back for a little bit, but we've recovered nicely and actually I think it propelled us as we came out the other end. And we've got a consumer base that's hungry for adventure. It's hungry for experience. And that's also a differentiator. You've never had the demand set to travel and the interest in travel at the higher end of the curve particularly willing to invest and spend the money's required to be able to pay for all the service that we deliver. You know, in the past we've discounted it because we wanted to make sure that we were able to fill up the planes. We've moved the geography of the planes around. So, we're providing a more premium experience, a more premium product. Delta One, every new plane we bring was one-third of the entire plane is in the premium cabin sections. Very different than a Ryanair obviously as you mentioned and that premium model, you know, we've had to shift our business model. So when you talk about the past to the present, we don't look anything like what we did 20, 30 years ago when I started in this business.
So this I have written down premiumization and I notice I do fly a fair amount. I've noticed that the BA business cabins seem to be longer. I've noticed that EasyJet allowed you to buy a middle seat so you could put your bag there and not have somebody right on top of you. Even Wizz Air, not that I have flown them, I think have business class. So you mentioned the K-shaped economy, but I wrote down what does the customer want? But I guess you have different customers. So how do you think about those people who use Delta?
Well, the most important thing that customers want is the quality of the experience. They want from, you know, not just an airline, but particularly Delta, they want a highly dependable, reliable service. They want hospitality delivered, not just travel logistics. They want to feel like they matter to the airline and there's a relationship that the brand brings more than just travel. The loyalty perks, for example, our relationship with American Express is a standout around the world. We're the number one business partner of American Express and they are number one business partner. This year alone, American Express will pay Delta $9 billion for use of the credit card and the miles that they put on the credit card. And you talk about a differentiating experience that never existed years ago. It doesn't exist in Europe because of the banking and the credit differences and the regulatory apparatus. So customers want experience and if you can provide a great experience, they're willing to spend the money it takes to deliver that.
I had written down reduced turbulence by which I meant competition. Now in reading your most recent report, I got the impression that the industry has changed and it's much tougher for new entrants now to gain a foothold. Just explain what's been going on. So particularly in the US but I think it's happened around other parts of the world.
And a lot of this again is post-COVID is the cost of entry has gone up substantially. Again you can't be a commodity provider if your costs are going up. You look at what's going on in fuel alone. Fuel has gone up dramatically over the last number of years and it's up again with the impact of the war going on, jet fuel particularly. When you look at the cost of pilots and people, the fact that we had in the US a real challenge having enough qualified pilots because a lot of the people retired during COVID and what happened is those pilots that worked at the lower end carriers wanted a better experience after COVID to work for an airline like Delta. So many of them left their jobs and came to work for Delta, the higher-end experience. It brought the not just the overall industry upscale, it brought wages up too across the industry. You look at the cost of airports, the investment required in airplanes. You look at the fact that the OEMs, Boeing and Airbus particularly, but also the engine manufacturers haven't been able to produce as much supply to the market for issues that are well documented. So there's been a bit of a cap on capacity coming in, new capacity to the marketplace. All of those things work to hurt a carrier that is built on high growth, low cost and kind of a lower-end product in the US. Now again, Ryanair is a different model in Europe than in the US. There's not really a comparable Ryanair within the US, but in the US side and as a result, you've seen companies like Spirit go bankrupt and disappear, liquidate just a couple of months ago. So you've got to be disciplined. You got to be able to get your cost met. You got to be able to provide a product that people are willing to pay. And as Delta has been changing the consumer mindset, airlines are trying to now copy Delta to stay up with us so that they can make certain that they're getting the same returns and the same revenue share. And so whether it's United, American, even Southwest are all talking about becoming more premium as a brand.
I got it. I want to go back to that SkyMiles, to your frequent flyer program because it's become such a big, you said you're approaching 10 billion, I know that you've been commenting on that. Just talk us through what was the opportunity you spotted and exactly how it works and why it seems to be quite a sticky asset to have.
Well, the US credit card industry and consumers in the US have a lot of choice for what cards they use to pay. And many credit card companies give you cash back. They'll give you two or 3% off. There's an assortment of goodies that you receive. The thing that we know is that consumers value and want to travel more than just getting 2 or 3% back on their spend or any of the other bundles of things that credit card companies are offering. And our relationship with American Express has been for 30 years. So we've been at this for quite a while. But again, we started the program 30 years ago, 15 years ago, maybe that comparable number was in the 1 to 2 billion range. Just in the last decade, it's gone close to 10 billion. And the reason for that I believe first of all is Amex as a brand is a highly effective brand. It has an aspirational component to it. It's going to younger audiences and all of our young consumers, Gen Z, Gen X, Millennial, all these people that have entered into the work space in the last 20 years feel like Amex is the brand that they want to carry as their credit card provider and they identify with it. They also identify Delta as the aspirational brand, the premium brand in the travel space. One of the things that consumers that are younger is they want to travel. They want to explore and they can use their credit card to buy things and get the opportunity to then go travel. As a result of that, we saw Simon during COVID when people were not allowed to travel when the skies were closed. Yet people were home shopping and buying things and using their credit card. We saw a big pop in our revenue base from the American Express SkyMiles program because people wanted to have that currency to utilize when they returned. The currency is one of the things about air travel and currency is that it's priceless in a certain way is that you can use that currency for whatever you want to use it for. We've made it so that we're agnostic as to you can use miles or dollars and made it very easy for people to use it as a free flowing currency for our brand. And when people think about air travel, they think about the destinations and the places that they want to see or the friends they want to meet or the places they want to go and learn or play golf even in the UK. And they don't really attach that to kind of the cost per se, the dollars, because they have the miles. If they have the miles in the bank, they can go do it. And so it accrues value to them. And many of the people will take those miles and they'll keep it in their wallet. They'll keep it in the bank and not spend it and they're going to save it for a few and then it compounds as they continue to grow and build more and more affinity with the brand. So, it's a very sticky currency. We have many partners that we have provide offerings whether it's Uber, T-Mobile the telecom company here in the US, others that we are working with, Starbucks where you can actually get the currency and use the currency on their brands and bring their customers into our ecosystem as well. So you see this growing sphere of influence that's coming in terms of where travel and Delta sits in the middle of it. And so as a result of that the value, the performance, the power of the SkyMiles are much bigger than what Delta has, that's all the brands and by the way you can also use it on our international partners Air France-KLM, Korean Air, Mexico, LATAM, go across the world, Virgin Atlantic, it will all, well you can use the SkyMiles on so it's something again that has changed versus the old model and it's one of the reasons why investors look now at Delta and say, 'Hey, this is not just an airline. This is also a loyalty play.' And the loyalty play has real sticky value. And we've seen that the stickiness even during COVID when we were having a hard time getting raising capital for the business because of what was going on. We were able to go and raise a substantial over $10 billion against the currency, against the SkyMiles themselves, which the first time we have done something like that. And at that valuation I think they put the value of the currency at close to 30 to 40 billion currency alone.
So that's very clear. Thank you. And if we get back to this international trajectory that you're on, there are a lot of places that you fly to. I've taken the Virgin which I think you own 49% of. I've taken Delta from LA to New York. You're competing with some operators that don't appear to have the requirements of financial returns. I'm looking at thinking about the Middle Eastern carriers, you know, particularly because they're operating with other aims and ambitions. How do you prioritize where you want to allocate capital internationally?
We want to go where our consumers and principally US consumers want to go since we are a global brand, but we're principally a US brand. Our principal consumer base is US. 75% of our international travel is purchased by US consumers and that means they want to go places that they know and they've heard about. So Europe for the last number of years continues that. I was over in Europe a couple weeks ago visiting a lot of Americans and I was in Croatia. I was in Portugal. The American health of the dollar and the strength of the US economy continues to push people out. People want to go to Asia. Asia is a place that I think a lot of Americans are starting to discover. Going to Australia, going to New Zealand, going back to you, we went, we're going back to Hong Kong. We launched back into Hong Kong recently. South America is another place there's a lot of interest going into. Whether it's Argentina or Brazil or Peru, Colombia, and we have partners that we work with and we fly directly to all those markets. So, those are the markets. The Middle East is a white spot for us. We're going to be launching into Riyadh. Tel Aviv, we do serve and I think India is probably the next spot in that. We used to be in there. We haven't been there for a number of years. I think we're going back and we do watch, we go look at places where the Middle Eastern airlines, for example, that are owned by their governments. We used to fly to Dubai. We don't fly to Dubai any longer because they ran us out. They just raised the cost of entry by lowering prices so deeply when they saw Delta come in and they could absorb it and so we had to pull out. Which is, by the way, a good thing and also a challenging thing about the industry. Our means of production moves. It's not like we have a storefront or a hotel on a block or a factory in a certain market. All of our assets move around. So, if we see something that's working, we go there. But guess what? The competition sees that and they try to move their assets there. So, there's always this constant network game going on as to who can build a stronger local presence, who can get there first and sustain itself. And when you have governments competing against private capital, that misbalance we try to stay out of those markets.
So if we take the specific example, I think I'm right you own 49% of Virgin, correct me if I'm wrong and other partners like KLM etc. What have you learned from those partnerships?
Oh we've learned a lot. First of all, we're US and we have a view as to what the US consumer wants. But learning how to serve an international audience, a British audience, a French audience, a German audience, a Korean audience requires culture and learning and training that we do with our partners so that we can adapt our international service models. Still going to be a US airline and a US carrier, but have better understanding as to how to sell on the market, how to deliver the experience, whether it's on board or in the marketplace. And they learn from us as well because their local consumers want to go back to the US because that is the healthiest economy in the world and that's still where they want to pull the Chinese for example. We spend a lot of time, we've got an ownership stake in China Eastern, one of the big Chinese airlines. We've learned a lot how to serve within the Chinese market and vice versa. You don't have, these partnerships are not there to try to replace one another. We're never going to try to copy what Virgin Atlantic does. Virgin Atlantic has its own unique brand, but they have to complement what we do so that we, you see the Delta brand, you see the Virgin brand. I get it. It makes sense because we transition and transfer customers back and forth. Virgin will fly x number of routes to the US. We'll fly x number of routes to Heathrow. And many times a consumer may take Virgin over to New York and Delta back. We provide that opportunity.
