Unpacking the Challenges and Biases Against Airlines
Mark Fasken: All right. So Andrew, today we're going to be talking about shifting investor bias. As you know, investor biases can come from many different factors and working in the airline industry, there's a lot of biases on a personal level. What are some of the most frequent biases that you run up against from investors in the airline industry and how do you manage that? How do you change those perceptions over time?
Andrew Storm: Well, yeah, thank you. It's a great question. It's, I mean, it's fascinating. It's what makes it really fun to me. I'd start by saying, if you think about the airlines, if you do almost any analysis evaluation against earnings growth, revenue growth, and then P. E., EBITDA. operating cash flow yields, the airlines are almost always a multi-standard deviation outline for how cheap they are. Right? And it's been this way for a long time, and I think there's a lot of good reason for it. I mean, the airlines have had pretty much every decade an almost existential event, right?
I mean, even if you go back to 9/11, the great financial crisis led to a lot of bankruptcies, and there was this growing sentiment that in the teens, the airline industry was finally changing for the better. There was consolidation. Companies were starting to put up double-digit margins, returns on capital were actually decent.
And then you had the pandemic. So you finally had this, “this time is a different” story. And then it wasn't. So, you know, the biases are very, very deep. And we find we'll get a lot of analysts excited and they go to their portfolio manager to pitch us, and they're just like, absolutely not. I'm not buying an airline. Right? And it's all sorts of different things.
I think it starts with the history of just industry wide losses over those periods. I think it's the capital intensity, the labor. It's generally a highly unionized industry, right? And it's a very visible industry. Everybody has an airline experience. We all have a story of a bad time on a flight or something that happened to us. And so we kind of live and breathe it, right? And you see the operational intensity and challenges of it.
So You know, it's difficult. But again, like I said, that’s the exciting part.
Strategies for Changing Investor Perceptions
Andrew Storm: At Delta, we very strongly believe that things are different, and there's a lot of things we've changed, and it's been a, it's been a decade-long effort on our part to shift the business away from a more commodity product.
And so, the way we try to talk about that, the way we try to shift sentiment is finding any and every proof point we can, that people can gravitate to, that they can put their hands, their arms around and really understand, and then sell up to their PM that actually this, this is more than just a commodity fighting over a seat, right?
That people are willing to pay up to sit in first class, that they're willing to get our Delta AMEX cards, and that can change our financial profile. We've spent a lot of time going through the organization. One stat that's really resonated is the Delta co brand card has almost 1 percent of US GDP running on a year.
If you compared us to other public companies, we were actually about the size of Wells Fargo as a credit card issuer. It's incredible the scale of it. And that's really because it's almost doubled since 2019, so again, it's finding those sorts of things that you can kind of hit with someone. And then just trying it over and over and over again, and knowing that, you're going to get a lot of nos, but it's, it's a process.
Mark Fasken: For sure. For sure. And so, just to sort of summarize that, one of the first steps seems to be identifying what those biases are, right? I mean, sitting down and really listening to the investors, getting that feedback from the analyst to say, you know, I spoke to my PM, and here are the issues that they had. So I mean, I'm sure that, that you and the team have a very solid understanding of what are the issues that exist in the investor's minds or those perceptions.
And then it sounds like you sit down and you, you sort of work through each of those to say, well, what are the counterpoints to some of those misperceptions? In addition to that, though, you're seeking out data points that are totally outside of those things to say like, yes, okay, you can say maybe our margins are too low or whatever, but let's, let's look at other parts of the business and things that, investors probably aren't even thinking about.
Andrew Storm: That's right. Yeah, that's exactly right. And I think one of the things that's really hard about IR is you don't get a lot of feedback. You have to listen to the questions. I had the advantage of having been a buy-side investor for over a decade. Julian, our team was on the sell side for a long time. So you get a sense of what's behind the questions, but you don't, you know, when people don't want to invest in you, they don't really tell you all the reasons why or why the PM is saying no. So it's exactly that you got to really sit down and listen and think through, "I understand why people like us, what are the reasons they don't?" And sometimes they're obvious, and some of them aren't always as obvious, right? And then you got to figure out how do I address this?
Mark Fasken: And so you just said earlier, it's sort of a, it's a journey, right? It doesn't happen overnight. It's a multi year process. And then something like COVID happens and throws it all up in the air. But I'm sure there are ways to sort of track progress. And so what, what metrics or indicators do you focus on that to help you to understand, and as a team to understand sort of those changes in perception and whether some of those data points and the conversations you're having are starting to work.
Andrew Storm: Yeah, from our perspective, the biggest measure in our mind is how many active funds own just an airline. Doesn't even have to be us right, and we're trying to look at our addressable market. And so we did a pretty big analysis. We found almost two-thirds of active funds for active capital doesn't own a single airline, right?
And so that's what we really follow. And it's one thing if we can just go talk to all the hedge funds and the investors that are in the industry, but you're really just, you're kind of just moving it around. To us, to get the industry to an evaluation that we think is more commensurate with the long-term value, we need to bring in new capital. And so we're tracking that a lot. We track a lot of, who are the funds we haven't talked to, or if we've talked to them. Have we followed up? You know, what's the interest level? For people who are hard no's, has it ever moved to a soft no? Right. And trying to kind of think through that because I think that's going to have just a higher efficacy than stealing a shareholder from Southwest.
Mark Fasken: So you take that macro view. So, how often are you running that analysis, then? Is it once a quarter? Maybe after 13 F? Or is it maybe just a once-a-year exercise to look at all those active managers?
Andrew Storm: In theory about once a year, in practice, every time the board asks about it, which, you know, ends up being more often.
Mark Fasken: Good answer. Okay. Good answer. Okay, so once a year is probably good. And the second point on that was. Looking at the macro level, but also plugging what we really care about it here at Irwin is also keeping track of all of those investor interactions. Understanding is sentiment changing over time? Have we had 10 meetings and suddenly, this investor or a group of investors have sort of changed their tune? Those are all things that you're tracking as you go along.
The Importance of Storytelling in Investor Relations
Mark Fasken: And so the, the next question is around storytelling. Like, I think that, you know, in our conversations, whether you've used the term or not, it seems like you and your team have done a good job as it relates to, to building a narrative. And so, how do you think about that in the conversations you have as an IR team, like, and how does storytelling play a part in reshaping investor perceptions, and what are some of the elements that you focus on in sharing that narrative?
Andrew Storm: Yeah, I mean, I, I think storytelling is extremely important and I think it, it ties into more than just investors, right? Because the storytelling we do gets leverage for our employees and our employee events, right? You've got DC, you've got suppliers, there's a lot of constituents that listen to it. And it's, I think it's really important broadly to help craft that story and help people understand why this is exciting, why this is something to be proud to be a part of, right?
And why there's something special happening here that we think can create a lot of value over time. And, I think one of the biggest challenges with storytelling is keeping it at a high enough level that is mass consumable but then can also include the financial data and the key kind of proof points that investors are looking for that really connects it for them.
Mark Fasken: That actually raises a good point. It was something that we talked about when, when we were sort of preparing for this, is this idea of, sort of broadening the scope. And so you think about your story and sort of your narrative, and we'll talk about this a little bit more later in the, in the episode as well, but do you have sort of multiple narratives that that you'll go to a meeting with like do you sort of sit down and say okay, we're gonna have these specialist investors, and we're gonna have these generalists. Do we need to have two totally different stories for them?
Andrew Storm: You know, we, yes, I would say we tend to prepare for what's the most detailed, which is the specialist. And then part of our job is helping the team elevate and remember that you've got generalists who may not be as in the weeds, and that we need to kind of focus on what are the most important things to them, that they're not following it day to day. They're just trying to decide what they want to get into the industry or not. And I think going back to your earlier question, persuasion is most effective when you start where somebody is, and then you bring them to where you want to be, right?
And so we try to recognize that people are in very different places, and what's going to take them there is going to require actually something potentially very different. For some, it's the very, very detailed nuanced data, the quarterly progressions and all that, and others, it's - why is this an investment that you can actually own through, through a cycle?
And there are two totally different conversations, even if you're trying to do the same prep. But you do have to we don't explicitly bifurcate it, but we kind of end up bifurcating it to some extent.
Mark Fasken: What does the team look like that that sort of works on that? I mean, is it really sort of I'm sure that you're tapping into other departments, but if you're like sitting down in a room and saying, okay, we need to think about this year, you know, sort of, how's the narrative changing? Is that, like, you're bringing communications, and CFO, and other members of the team? Or is that really sort of, an IR-specific conversation?
Andrew Storm: I would say we're unique in that we have an investor day basically every year. So there's a few companies that do that, but as a result, it makes it a broader conversation than just IR, right? Because each time, you're just sort of revisiting what's our big long-term story, and you're bringing in all the constituents and going through it.
So I think you have pretty broad buy-in on the narrative and the overall evolution. And Delta does a lot of communication. We have two big leadership events that are internal that we do twice a year that drive a lot of narrative as well. But I would say so you've got that as a bigger-picture work stream. And then, Julie and I on our team will both try to think through what's resonating and what's not, and we try to sit down sometimes and just revisit our materials, and think to that exact point of are we really accomplishing what we need to be?
Are we really moving forward the investment community, as we kind of look back through the investor meetings we have are people disappearing, or are they coming back? Right? And if they're disappearing, what's up? You know, let's reach out to them. Let's figure out why and what are we missing? Right? And so sometimes it's storytelling. Sometimes, it's just the market and the time, but we don't want to miss those opportunities.
Targeting and Outreach in a Biased Industry
Mark Fasken: And so that kind of covers some of the conversation around storytelling, sort of, how do you deal with some of these, these biases, and it gets into another topic that, that we talk about a lot, which is targeting and not specifically like, how do you target and how do you do outreach, but in a world where you're in an industry where there are these biases, how do you think about identifying potential targets and and maybe to add a little bit more context that I mean, airlines are are a great example, but, we speak to, and there have been people on this podcast who, I don't know, they're from, like the biotech industry, and it's like, oh, there's only a handful of biotech investors. You know, how do we approach everybody else? Same thing. Sometimes, people will say about mining and energy. I think it's common in a lot of industries. So, like, how do you think about that in your world?
Andrew Storm: Yeah, well, it's fascinating because I worked in advisory at a bank doing shareholder advisory for several years, and exactly right. It was a very common thing is how do I elevate to the generalist? You know what I mean? Because I want to find more investors to come to the space. I think it's exactly right. It's very common.
So, there's a couple of things. I would say one; the traditional role of the sell-side was to do that. That was what they used to do probably 20 years ago. You know, to be frank, we found it really frustrating. I mean, they're good partners, they're very good with the people that are interested.
But we've only found so much value as we try to get out of those who are already interested in the airline space. And so we have been forced to try to find new ways to go about it, to try to find new ways to pick up Investor interest.
And so we go about it is a couple of things. One, we started by doing an analysis of who doesn't own an airline. And to us, that's our starting point. Right? That's the opening area. And there's lots of analytics. Irwin's got a great tool for trying to sort through people, so you can kind of go through that list. But it's to us, it's, we start doing that. We do a little bit of cold outreach, but we own an airline, so we can go anywhere.
So we try to just set up trips to places and just see if we can get interest. We'll do LA is a great example. Of course, you've got the capitals and prime cap, but there's a lot of other funds, right? And so, can you try to build a day out of that? Same thing with Texas. We have employee events we can go to and try to leverage investor events.
So we're trying to just find ways to do that as one part. Another part is you can try to take a big picture view of if I'm an investor and I don't own an airline, what would I have to sell to buy an airline? Right? I mean, I'm probably not going to sell a biotech to buy Delta. I mean, never know, but I might sell a transport or I might sell a capital-intensive consumer company like Home Depot or Walmart or something else. Right? And so then we try to start looking at who are those shareholders, right? So let's not just look at United American and Southwest. Let's look at a broader subset of companies who have financial profiles that are fairly similar. And let's use that as a way to reach out to them and see if we can say, "Hey, look, we're, you know, kind of a similar risk/return or financial outlook, but half the valuation", something along those lines.
Right. And I'd say we've had some success with that. And it becomes cumulative over time. You at least get on the radar of people. The hardest part with it, and this is a bit separate, is we've had a really hard time following up because when you reach out to all these people, you start to forget. Okay, who was interested? Who was not? I've only talked to them once. It's not someone I'm used to seeing, so they start falling off the map. And so it's, it's like, how do you make sure once you've got someone kind of interested that you keep them in your orbit so that you're trying to bring them along.
Mark Fasken: Yeah, I think that's a very common challenge that we hear from a lot of IROs, and something that I think we're trying to solve and, and a lot of people are trying to figure out, because it's your point. It's you have, I don't even know, 500 meetings a year or maybe more, right? Between all the conferences, and to your point, a lot of, maybe not so great meetings, but probably a lot of great ones and trying to figure out how do you keep it all organized.
And so I, I just want to summarize because the way that you think about targeting at Delta, I think is great because it is a little bit counterintuitive in a sense, right? I mean, you talk to a lot of teams who do the peer analysis and people own companies in my sector and subsector and all that stuff. And I think that that is, it is great. I like that you're almost taking the flip side of it, right? Who does not own us, and you're sort of buying into that uphill battle of, like, we're going to find the people who don't invest in airlines and probably have a reason that they don't invest in airlines and we're going to try and change their mind. And I think that's a difficult thing to do, but I'm sure that it bears fruit, and it just takes time.
Andrew Storm: Yeah. I think that, yeah, that's exactly right. And to us, we're the industry leader. So, we think capital coming in will reward everybody, but I think we'll get our share. Right. And to us, that's really the path forward. And I, I think for a lot of industries, I mean, that's, there's a lot of industries that investors have by, strong biases against, right. And so going out and trying to find the people who aren't always calling you, it's hard, but it can, it can make a difference.
Navigating Investor Styles and Engagement
Mark Fasken: And so, the next question I had for you was around investor style, and this is maybe sort of a quick question, but obviously like companies go through this natural evolution and different life cycles. And to your point, I mean, ebbs and flows from a macro perspective, how have the investor types that you engage with at Delta and sort of their investment styles evolved over time?
Andrew Storm: You know, what's interesting is I always thought there would be more of a defined style that we would see. And it's certainly been less so, I mean, during the pandemic, we're certainly more value and special situations, as you can imagine. Right now, growth investors are actually our largest shareholders, but, I, to some extent, it's a bit of a misnomer, I think, because some of the larger firms get classified as growth, like as capital, really growth, or value. And so I would say, I think generally as an airline, we tend to be more value-oriented or, to some extent core, we've re-initiated dividends so we are seeing some of the yield-focused industry starting to come back. We've opened up to that, which has been helpful, but it's interesting because I, I almost think it's more about who's willing to believe in the story than, what their actual style is.
And, we've also found as we look at it you've got some value investors who are like, I'm a quality compounder. Some who are like on deep value and you get growth who have very, I'm thematic like AI. And so it's even within those big groupings we found just a ton of nuance, and it's been more about are they you know, what exactly are they looking for within that, and how are they defining that?
Mark Fasken: Yeah, is it fair to say, not to put words in your mouth, but almost as though you feel like maybe style can almost be a bit misleading at times? Perhaps you could put too much emphasis on it.
Andrew Storm: Yeah, totally.
Mark Fasken: Yeah, we, we found that too. Obviously, a lot of companies doing targeting, and there's a lot of emphasis on style. And we’ve found that sort of the positions that they hold and the types of companies that they've actually invested in probably plays more of a role than the style does.
Andrew Storm: Well, and, you know, separately from Delta, I worked with one company where the CEO really wanted a growth investor base, and it really wasn't a growth company. I don't want to get into them, but they did it. And the IR went out and put a huge effort into it. And they had success, I mean, the mix of growth investors meaningfully increased, but they weren't able really to sustain the earnings growth. And in very short order, it started to blow up, and then the stock kind of did that. And then it took that sharp hit. And at that point, then really, what you've done is just burned a large group of people. Right. And so, I think trying to get too caught up in those might potentially create negative outcomes.
Mark Fasken: Yeah. Yeah. Understood. Ok great.
Enhancing Relationships with Shareholders and Analysts
Mark Fasken: And so our next question is around just dealing with research analysts. So, we've talked about how you work with investors who are generalists? How do you get them up to speed? We may be taking a bit of a different lens on it and sort of getting coverage. How do you approach that? You know, you're talking to a research analyst who's a generalist and maybe doesn't understand the airline industry. Like, where do you start? How do you start to get them up to speed? How often are you speaking to them, whether it's a current analyst or maybe somebody that you're trying to try to pick up coverage from.
Andrew Storm: Totally, so let's separate current from new, and then I would say, you know, as a large cap, I think we generally have more analysts covering, you know, So it's a bit of a different conversation where you're trying to solicit new cover new coverage versus where we sit.
But you know, the airline industry is a very, very metric-heavy industry. So there's a pretty big learning curve, and there's a lot of opacity in terms of the real drivers, right? And so, if I think about it, our strategy is driven by premium, heavily driven by loyalty and the AMEX relationship, but we actually don't disclose as much information because of competitive reasons.
So, definitely a journey with someone who's newer, right? And as you're bringing them up the curve, part of it, you're just trying to, everybody also comes in with biases based on their own personal experiences and the history. And so, you're trying to work through, here's our story, here's the drivers, here's the high-level financials, here's how the metrics work into it.
Here's how the hedge funds track it, and here's how they tend to trade on the quarterly progressions. Things like that. And then you kind of get lost in that. But for us, it's always, how do we try to pull you back? Because as soon as we start talking, we've got one person who's going to be new, and instantly, you could just tell he's biased against the airlines, right?
And I, and more of a European base where it's a very different market and you can just hear it, right? And so you're trying to help educate them while also continuing to remind them of the bigger picture story that yes, but it's different, right? And here's some reasons why and let's keep throwing reasons why it's different at you.
So for those, it's a fair amount of effort. And what we try to do is we'll have several calls, but we actually recommend they send us technical questions over email so we can address those more thoroughly. I find, if you're putting out like a 30 page initiation report, there's a lot of detail you need.
And rather than spending a lot of time trying to hammer through those details, we deal with that separately. And then that gives us time to really focus on the story with them and help them understand the investor perspective. For our current analysts, we keep, we try to stay in very regular touch. We try to have a conversation with everybody right after earnings, and then mid quarter, at least, and usually just before quarter end. One of the things that we do at Delta that I think is unique that's been really helpful is we actually, the morning of earnings we put out a release at 6, our call is at 1030.
We do calls with the sell side first thing in the morning. So I'm in the CFO's office and we just start hammering through them. But it gives us a chance to work with them and help them understand anything that's confusing and kind of correct that. And I think that really helps the quality of questions on earnings.
You don't get the gotchas, you don't get the, I don't understand this, help me think this through. It kind of cleans up a lot of that. And they really appreciate it, too, because now they've got the story, and the hedge funds go to them, right?
And then the last thing for the sell side that we try to manage is, I mean, it's a business and it's a hard business that's, it's a business that's gotten harder. So they're all stretched thin. They're covering more and more. It's hard for them to do really high quality thought pieces. And so, we view it as on us, that if we have a topic we want them to focus on to get them to focus on it. Right. And so if we want them to see that our loyalty business as something more, we try to bring us outside analysts onto the campus to meet with our whole loyalty team.
It's hard. Kind of almost help them write the report, give them the content they need because otherwise they're just not gonna do it. Right, and so I think it's just the reality of that business. But they're our megaphone, more or less, and so we need to give them what they need to do that.
Mark Fasken: Yeah, I mean, I think that that's that's something that we've heard, and there's a lot of great tips in there. I like that idea of the sort of that earlier morning call. So the regular meetings to kind of talk them through the industry. We know that we've had some conversations with, we actually had, had a guest on the podcast that was a former research analyst, and she had recommended meeting with them, especially some of the newer analysts to your point and going through that model in detail and like really talking it through with them to make sure that they, to your point, in an airline industry, making sure that all the data makes sense, that it's all tied together in the right way. And I mean, there is a lot of detail there, obviously can be a lot of work, but it's worthwhile.
Andrew Storm: I mean, even some of our covering analysts, we've gone through their models. We have to call them and be like, all right, we're going to have some work from FP&A. We're going to sit down for an hour with you, or we're going to walk through because the way you're doing these three things, from what we can tell are not correct. And everybody had to break a lot of their formulas for the pandemic. So it's like, how do you kind of get them back into that?
Mark Fasken: All right. Our last question. And I think it's, it's a bit of a softer one, which is just talk about shareholder engagement and relationship building. I mean, you mentioned earlier that you have so many meetings, you've got these great, whether it's prospective investors or potential current investors that you maybe see as a growth opportunity. What are some of the strategies that you have in place? To retain and, and really grow the relationships with some of those, some of those holders?
Andrew Storm: Yeah, well, I think there's several things we do. I mean, there's the normal course business of meetings, and trying to give your top investors access to management. To me, that's table stakes. We tried very hard to find ways to create experiences. Where you can just have more casual time in a meaningful way.
And a few examples of that: for our investor day, we had a box at the Braves, the Delta box, which is at the front. And so we just invited a few investors and Ed and Dan, so they got to really spend time with them. We have employee events that are really cool all over the country.
We've invited a few investors to it just because we want them to see the energy. We're sponsors of different events. And so, to the extent we can, we see if we can bring an investor. And we'll do tours of our MRO, our maintenance repair facilities. I took a large investment group on a tour of LaGuardia, the brand-new facilities; they got to go behind the scenes, do that kind of stuff.
You know, it's just cool. Right. And it's any way you can kind of go and touch and feel and start to see it. People just remember that right,. And it gives you a lot of time with them to just sort of casually chat. And that starts, you know, and they're going to do what they need to do for their business with owning stocks, But it starts to break that barrier where you're just answering questions and you're always thinking about, you know, what can I say?
What can I not say? It makes it a little more casual, and it Gives you opportunities to also ask questions to give you feedback that you can take back and use, and every company's different, right? If you're a software company, it's a little bit harder to show people, right?
There's usually something you can try to find or do or some kind of event and get people engaged. Because really it's, as a former investor, you spend most of your time working by yourself on Excel. Or making calls or whatever. So whenever you can get out there and feel and touch and see it, it really leaves an impression,
Mark Fasken: Especially if you can get like first class, uh, airline tickets or something like that to go along with it. This has been super helpful. Really appreciate it. I mean, tons of great tips as we went through this episode. And so we're going to have some work cut out for our, for ourselves to summarize it all. But really appreciate your time. Thank you so much.
Andrew Storm: Yeah, absolutely. Thank you for having us and for being a great partner. We've been thrilled working with Irwin, so happy to do it.
Mark Fasken: I hope you enjoyed today's episode of Winning IR. For more winning ideas, make sure to subscribe to this podcast. This podcast is brought to you by Irwin, a better way to manage investor relations. For more information, visit www. getirwin. com.
